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Date Posted
01/07/21 15:13
Reading Time
5 minute read
Posted By
Stephen Hambling

Why Do Large Once-Successful Companies Fail?

Why do large companies fail? The reasons are numerous; the world and its problems are more complex than ever. In March 2020, some 21,000 more UK businesses collapsed than in the same month the year before. Coronavirus, coupled with Brexit and the stalling economy, is taking its toll on companies.

In this article, we examine three key factors - leadership, financial and differentiation.

Many large companies have failed. Some have gone bankrupt; others have substantially reduced in size and fallen from an industry leadership position.

These include Thomas Cook, Jamie's Italian and Carillion. What caused their downfall, and what lessons have we learnt?

The world has changed dramatically since many well-known and trusted 'rocks' of business were born. However, reinvention, improvement and the ability to disrupt the market is required at such a rate that many companies can't keep up.

Leadership, Financial & Differentiaion 

Are the habits and traits which built such mighty empires still relevant today? The answer is not as straightforward as not keeping up. The mechanism and people behind the business that makes the decisions create the failure to keep up.

This article examines three key areas: Leadership, Financial and Differentiation Factors.

Thomas Cook took years to hit the iceberg. They had already manoeuvred around several icebergs, but ultimately, even millions of pounds of cash injection could save them from sinking.

Avoiding the icefield in the first place is the answer, continuous fresh thinking not just about avoidance, but about the ability to drive directional change.

"It's not only about steering the ship around the iceberg but about questioning the whole scenario. Why are we on a ship, and where are we heading?"


Let's take a look at leadership in the first instance.

1. Leadership Factors

Leadership Failures

Businesses fail because of poor leadership. The leadership must make the right decisions most of the time, from financial management to employee management. Leadership failures will trickle down to every aspect of your business; with businesses becoming ever more complex, how do we know that leaders make the 'right' decisions? Experience, of course, but knowledge is based on historical findings. In a daily changing business landscape, success or failure can come down to analytics, which helps to drive informed decision making. 

Lack of Focus

Without focus, your business will lose its competitive edge. In addition, as companies grow, they add more products and services to the portfolio, making the offering increasingly confusing. Focus is the art of limiting your scope to the key area that matters for the majority of customers. Startups are a great example as they are baggage-free and can focus on a specific matter.

 

Inability To Learn From Failure

We all know that failure is usually bad, yet it is rare that businesses learn from failure. Realistically, companies fail for multiple reasons. Often business leaders are oblivious about their mistakes. As a result, learning from failure is difficult.

 

Underinvestment In Technology 

All businesses should continually be reinvesting in themselves, and this is especially true to tech improvements. New technology generally allows for things to get done quickly. One of the most important reasons you invest in new technology is that it will give you an advantage over your competition. Most businesses are continually expanding, so it is crucial that you do whatever is necessary to allow for continued growth.

 

Poor Management

Examples of poor management are:

  • An inability to listen
  • Micro-managing, lack of trust
  • Working without standards or systems
  • Poor communication
  • Lack of feedback.

 

2. Financial Factors

Lack of Planning

Businesses fail because of the lack of short and long term planning. Your plan should include where you want your business to be in the next few years. Include measurable goals and results. The right strategy will consist of specific to-do lists with dates and deadlines. Failure to plan will damage your business.

 

Lack of Capital

It can lead to an inability to attract investors. Lack of capital is an alarming sign. It shows that a business might not pay its bills, loans, and other financial commitments. Lack of money makes it difficult to grow the company, and it may jeopardise day-to-day operations.

 

Mounting Depts and Pension Deficit

Spiralling debts and a huge pension deficit signalled the extent of the problems and ultimately proved Carillion's downfall. The company's debts soared by more than 50% to £900m and had a pension black hole of about £580m.

 

Premature Scaling and Overexpansion

Scaling is a good thing if it is done at the right time. To put it simply, if you scale your business prematurely, you will destroy it. For example, you could be hiring too many people or spend too much on marketing. Don't scale your business unless you are ready. It is easy to make the mistake of expanding your business into too many verticals. Before you enter new markets, make sure you maximise your existing market.

 

Lack of Profit

Keeping your eyes on profitability at all times is essential, as profit allows for growth. Unfortunately, according to Small Business Trends, only 40% of small businesses are profitable, 30% break even, and 30% are losing money.

 

Poor Financial Management

Having complete visibility and a deep understanding of an organisation's finances and responding to constant change is critical. Poor financial management is why so many big businesses have failed. Poor decisions are driven by 'gut feel' rather than sophisticated modelling and analysis - steering many large companies on the path to destruction. Organisations need to rely on numbers in a rapidly changing market so that they can respond fast. Modern cloud-based financial planning software Workday Adaptive Planning is one solution.

The failure of Carillion raises many questions. Firstly, how did it manage to conceal the dire state of its finances right up to the end? Even in the final talks, Carillion management was still pretending that the problem was simply liquidity. If only the UK government coughed up some short-term funds, the restructuring plan announced in June 2017 would solve all their problems. But no company that has liquidity problems would file for compulsory liquidation. Carillion's problems were, in reality, the surface indication of deep and long-standing insolvency.
Secondly, it was evident that Carillion was in trouble when the 2016 full-year accounts revealed growing cash flow problems and a dire balance sheet. Short-term debt was rising sharply; there was a massive liability to trade creditors, a significant deficit in its corporate pension schemes and a massive gap between its tangible assets and liabilities.

 

3. Differentiation Factor

Unique Value Proposition

It is not enough to have a great product. You also have to develop a unique value proposition. Without it, you will get lost in the competition. What sets your business apart from the competition? What makes your business unique? It is essential that you understand what your competitors do better than you. If you fail to differentiate, you will fail to build a brand.

 

Market Disruption

Disrupt or die may sound dramatic, but the competition is fierce. The number of private startup companies is rapidly growing. If there isn't a startup disruptor in your industry today, there soon will be. If you don't disrupt, you are likely to be disrupted. Once a disrupter has a foothold, they seek to penetrate the medium and a higher quality portion to increase profit margins. Eventually, the disrupter will challenge the most profitable part of the sector by offering a new alternative to the established market favourite.

 

Competition

You provide quality products and services to your customers, and that's great, but do you forget something? While your organisation is excellent at what it does, it's unlikely to be alone. Competition is growing and can surprise you anytime. It's essential to pay attention to what they're doing. It may sound relatively easy to pay attention to your competitors' actions, but it can be overwhelming with life as it is today. Your competitors could be taking advantage of every resource available at their disposal, and you would need an extra set of eyes to follow them all.

 

Ignoring Customer Needs

Every business will tell you that the customer is #1, but only a tiny percentage acts that way. Companies that fail lose touch with their customers. Keep an eye on the trending values of your customers. Find out if they still love your products. Do they want new features? What are they saying? Are you listening?

The troubles at Jamie's Italian reflect the broader market for casual dining. Business boomed as the economy picked up after the 2008 financial crisis, and consumers spent more on eating out. But a glut of new openings led to intense competition, combined with rent rises, higher business rates and increasing food prices.

Peter Martin, vice-president at the food and drink consultancy CGA, says savvy operators such as Nando's and JD Wetherspoon have remained successful by adapting to changing tastes. The court documents for Jamie's Italian paint a picture of under-investment, complex menus and ill-judged branch openings.

 

Lessons to Learn

Understanding these three factors is essential to ensure that your company is not the next headline. Fundamentally leadership has the most significant impact on an organisation as it is from this that all decisions and financial success for the short, medium and long term.

So how can finance leaders make better decisions and be more effective?

To ensure more effective decision making in a rapidly changing environment, forward-thinking finance professionals are now implementing cloud planning software Workday Adaptive Planning for their forecasting, budgeting, analysis and reporting. 

Find out for yourself by reading some of case studies.

Topics: Reporting, Growth, Adaptive Insights, forecasting, cfo