Your company will fail

Overview

Your company will fail.

  • Few major companies survive.
  • Few major companies have sustained value creation.
  • Many company directors do not understand: the strategy, how value is created, and industry dynamics.
  • Most HR and IT organizations are not aligned with the strategy. Most employees are not working to achieve the strategy.
  • Major business changes almost always fail.
  • Crisis results because the assumptions on which the company has been built and is being run no long fit reality.

This document provides historical facts to challenge the thinking of: boards of directors, CEOs, and advisory boards. Any discussion should first start with facts.

This document does not provide a prescriptive solution as to what your company should do to survive and beat the competition.

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
  • 30%-40% of high potential U.S. venture capital backed start-ups result in investors losing most or all of their money.5

 How much time is your board of directors, CEO, and advisory board devoting to the future?

How much understanding do they have regarding causes of failure and of success?

What experience does each individual director have in driving long-term success during their career?

 Few major companies have sustained value creation:

  • Less than 13% of global companies had sustained value creation in the 1990s.6
  • 12% of public companies had sustained value creation from 2002 to 2012.7

 A story is starting to emerge.  The companies that do have sustained value creation either acquire poor performers or put them out of business.

Many company directors do not understand: the strategy; how value is created; and industry dynamics.

  • A survey of board directors showed that many believed they had little or no understanding in the following areas: 13% company strategy; 25% how company creates value; 23% industry dynamics; and 29% of the risks the company faces.8
  • 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.9

Three things for you to consider:

  • The above statistics were based on self-reporting. People sometime overestimate their own capabilities.
  • Does the board have a consensus approach to decision-making? A consensus approach often results in the decision being based on the views and capabilities of the least capable person.
  • You can start to see why large companies have problems with survival and value growth. Many directors with little or no company knowledge: set/approve strategies, appoint CEOs and approve major change such as M&A, etc.

 Most HR and IT organizations are not aligned with the strategy. Most employees are not working to achieve the strategy.

  • 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.10

 How often have you seen standalone IT Strategies? Are all investment decisions, projects and initiatives going through the same process, from the board down, or is IT treated in a silo? How can frontline staff deliver a competitively differentiated customer experience if they do not know the strategy and are not compensated for achieving the strategy?

It’s is very hard for a company to succeed in the long-term if the employees are not working towards a strategy and IT is not aligned – especially in today’s world of technology disruption.

Major business changes almost always fail.

  • 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.11

This should not be surprising.  Many directors are not qualified to make major decisions. Employees don’t know the strategy. IT may be in an unaligned silo. The board and CEO may not understand change management – without change management, major changes are guaranteed to fail.

74% of global CEOs say their company will be a disrupter.12

59% of CEOs say they will continue to exploit the success of their current business model; 23% say they are starting transformation or innovation; 18% are actually being disruptive.13

The statistics above remind me of the following parable. 5 frogs were on a log which was about to go over a waterfall and kill them. One of the frogs decided to jump to safety on shore.  How many frogs were left on the log going over the waterfall? 5 It’s easier to make a decision than it is to actually do something successfully.

Crisis results because “The assumptions on which the company has been built and is being run no long fit reality.”14

  • Why do companies find themselves in crisis? “The assumptions on which the company has been built and is being run no longer fit reality.”14

An understanding of historical facts is key to ensuring that you don’t make the same mistakes. But avoiding past mistakes is not enough to succeed against current and future competitors.  Your board of directors, C-Suite, and advisory board must all be learning and changing continuously. Otherwise you’ll be focusing on yesterday’s customers, using yesterday’s solutions to win again yesterday’s competition.

You cannot predict the future.  Risk is probabilities based on historical fact. Uncertainty arises when there are no historical facts or historical facts are not an appropriate basis for forecasting the future.  Scenario planning  is one way to address this issue.

What is the basis for your assumptions regarding your strategy and your strategic plan?  How much is fact vs risk vs uncertainty?

Strategy and strategic planning is an ongoing process, not a yearly event. Every board of directors meeting should start with a validation that the assumptions regarding the future are still valid.  The CEO’s executive committee should do this same validation monthly.

Conclusions

Why do most companies fail or underperform?  The issue is talent.

How is you board of directors competitively differentiated?  What makes you think your board will make better decisions than the competition?

How is your C-Suite competitively differentiated? What makes you think your C-suite will make better decisions than the competition?

How is your CEO’s advisory board competitively differentiated? What makes you think your advisory board will better at challenging and coaching the CEO than the competition?

I believe the two key aspects of talent are: the ability to change actions and behaviour by being able to learn, combined with values and ethics.

Your Next Steps

To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:

Your company will fail

 How do you obtain facts regarding your specific company situation?

  • A third party collects information.
  • Survey directors regarding their opinion of: their personal knowledge, and the board’s collective knowledge of areas such as company strategy and how value is created.
  • Ask each individual director to describe: the company’s strategy, how the company creates value, etc.
  • Survey the C-Suite to obtain their opinion of the board’s knowledge of: strategy, how the company creates value, etc.
  • The third party then provides the collective information back, without identifying any individual names.
  • With this basis of fact, there can then be a discussion of implications, followed by an action plan.

 Footnotes

 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 “Why Companies Fail”, Shikhar Ghosh, Harvard Business School, 2011 March 07, his study of 2,000 high potential venture capital backed companies receiving at least $1 million in funding from 2004 to 2010.

6 “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.

7 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.

8 ”Improving Board Governance”,  McKinsey Quarterly, 2013 August

9 “A time for boards to act” McKinsey Survey 2018 March

10 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton

11 “It’s 8-to-1 against Your Change Program”, Bain website, Managing Change Blog, 2017 June 23

12 2017 Global CEO Outlook – KPMG

13 “How can you be both the disruptor and the disrupted?” Ernst & Young 2017

14 Peter Drucker, Harvard Business Review, November 2009, Page 90