The purpose of this article:
Help board of directors, CEOs, and founders understand:
- Whether or not they have a plan for their company to fail.
- How to address the two critical issues in plans which enable the company to fail.
You may download a PDF of this article from: Is your company planning to fail
There is overwhelming evidence that most companies are successfully executing their plans to fail.
Few major companies survive:
- 16% of major companies in 1962 survived until 1998.1
- Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index. An investor who put money into the survivors would have done worse than someone who invested only in the index.1
- 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.2
- 52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.3
- 50% of the S&P 500 will not be on the list in 10 years’ time.4
Most public companies will not survive.5
- A Fortune 500 company will survive an average of 16 years.
- The typical half-life of a North American public company is 10 years.
- Global public companies with $250 million+ market cap have a typical half-life of 10 years.
Companies do not recover from crisis.6
- 20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
- At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.
Few major companies have sustained value creation:
- McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations. This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.7
- Less than 13% of global companies had sustained value creation in the 1990s.8
- 12% of public companies had sustained value creation from 2002 to 2012.9
- Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”10
Most Venture Capital backed startups fail
Three quarters of venture capital backed firms in the United States do not return all of the investors capital.11
What are the 3 greatest contributors to startup failure?12
This research study analyzed 101 startup failures and identified the most frequently cited reasons for failure. Usually there were several reasons for failure.
- 42% of the time built a solution looking for a problem i.e. No market need. The is a clear indicator of not understanding the customer.
- 29% of the time running out of cash.
- 23% of the time, not the right team.
What do I mean by “A plan to fail”?
What is a plan to fail?
- Boards of directors, CEOs, and founders make decisions as to what is, and is not, in a plan.
- They two factors which ensure company failure are:
- Not having a deep understanding of the customers and users. Who is buying and not buying? Why are they buying or not buying? What are the urgent problems they want to open their wallet for? If they are already a customer/user, why are they staying, or not staying, with you? If they are not a customer/user, why aren’t they switching?
- Having leadership talent which is not competitively differentiated. The board of directors, CEO, and founders need to have competitively differentiated skills, experience, knowledge, networks, morals, and ethics to succeed in the scenarios which may occur in the next 2-3 years. You need to have the right talent at every point intime. There is little value in having talent who only know how to solve yesterday’s problems with the day-before’s solutions.
- “A plan to fail” usually excludes a deep understanding of the customer. The plans often include a superficial customer understanding.
- “A plan to fail” usually excludes ensuring that board od directors, CEO, and founders have competitively differentiated talent. What usually happens is that the talent issue is only addressed when the company is in crisis or failing.
The evidence regarding not understanding the customer is clear.
- As noted above, poor business results are one of the critical indicators of not understanding the customer. You cannot succeed if you don’t have customers who have a need that your company can solve better than the competition.
- It’s hard to understand customers if companies don’t listen to them. The 2017 Edelman Trust Survey for Canada showed that only 36% of people believed that companies listen to customers
There is significant evidence regarding the lack of appropriate talent in the boards of directors, CEO, and founders.
Lack of talent is clearly demonstrated above, with the facts regarding the degree to which most companies are successfully executing their plans to fail.
Most company directors do not understand: the strategy; how value is created; and industry dynamics.
- A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.13
- A survey of board directors asked how many directors agreed that their members collective skills and backgrounds are appropriate for their organization’s needs: 54% of directors of high performing companies agreed, 40% of directors of low performing companies agreed.14
94% of large company executives site internal dysfunctions as their key barrier to continued profitable growth.15
The board of directors and CEO often lack the capabilities to align HR and IT with the strategy and ensure that most employees are working to achieve the strategy.16
- 67% of HR and IT organizations are not aligned with business unit and corporate strategies.
- 60% of organizations do not link their financial budgets to strategic priorities.
- Incentive compensation is not tied to achieving strategy (70% of middle managers, over 90% of front-line staff).
- 95% of employees are not aware of, or do not understand the strategy.
The board of directors and CEO lack the talent to plan and oversee major changes.
- Major changes almost always fail. 12% of change programs succeed. 38% produced less than half the expected results. 50% diluted the value of the company.17
As noted above, few board of directors and CEOs have the talent to identify that their companies are heading into crisis and to successfully recover from the crisis
Founders are often the cause of start-up failures18
65% of the failures of high-potential start-ups are due to people problems: relationships, roles and decision-making, and splitting the income. More than 50% of founders are replaced as CEO by the third round of financing. In 73% of these founder replacements, the CEO is fired rather than voluntarily stepping down. The founder’s passion, confidence and attachment to the start-up is initially a great strength. Founders often refuse to revise their strategy and business model, underestimate and misjudge the need for additional skills, and make decisions that don’t reflect the current situation.
Your next steps:
Review your current company plan to identify the degree to which it’s a plan to fail.
- Determine the breadth and depth of your customer understanding, based on direct input from customers and fact-based analysis of their behaviours and actions.
- Identify the gaps.
- Gather your company’s future scenario’s regarding customer’s, the customer’s ecosystem, and the company’s ecosystem. If these don’t exist, make assumptions and use your strategic plan.
- Outline the competitively differentiated talent requirement’s for your board of directors, CEO, and C-Suite to succeed in the scenarios for the next 2-3 years.
- Identify the gaps.
Determine the changes required to your pan.
- Differentiate between aspirational changes and practical to achieve changes.
Identify who will be accountable for achieving the results.
The results are:
- The board of directors and CEO understand the customers.
- The board of directors and CEO have the competitively differentiated talent to enable company success over the next 2-3 years.
The further reading sections provides guidance for your planning of your next steps.
1 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan
2 “Unstoppable” by Chris Zook, 2007, page 7
3 Accenture 2016
4 “2018 Longevity Report” by Innosight Consulting
5 “Corporate Longevity”, Credit Suisse, February 7, 2017
6 “The founders mentality”, by Chris Zook and James Allen, 2016
7 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds
8 “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed. Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.
9 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015. Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million. Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.
11 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal, https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012
13 “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018
14 “A time for boards to act” McKinsey Survey 2018 March
15 “The founders mentality”, by Chris Zook and James Allen, 2016
16 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton
17 “It’s 8-to-1 against Your Change Program”, Bain website, Managing Change Blog, 2017 June 23
18 “The Founder’s Dilemmas”, by Noah Wasserman.
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