Why will your company fail?

Overview

  • Most start-ups will fail.
  • Leadership is the underlying cause of start-up failure.
  • Most companies will not survive.
  • The board of directors is weak.
  • Corporate leadership decisions and actions are not fact-based.
  • Corporate leadership has poor decision-making behaviours.
  • Values, morals and ethics are not understood or agreed up.
  • The corporate leader selection and development processes are flawed.
  • Two sets of leaders are critical for success.

Most venture-backed start-ups will fail.1

  • Three quarters of venture backed firms in the U.S. don’t return investors capital.
  • 30-40% of high potential start-ups lose all of the investors money

Many start-ups do not have any venture-backing.  The overall start-up failure rate is very high.

Leadership is the underlying cause of start-up failure.

The top nine reasons for start-up failures were identified by CB Insights. 2 I’ve shown below my point-of-view as to why leaders and leadership were the root cause.

  • 42% no market need – not obtaining facts as to customers and their needs.
  • 29% ran out of cash – poor management of cash flow and poor reputations with investors.
  • 23% not the right team – unable or unwilling to assemble the right team.
  • 19% get outcompeted – not aware of the competition and customer needs.
  • 18% pricing/cost issues – not aware of customer needs and the competition.
  • 17% poor product – poor ability to design and build a product meeting customer needs.
  • 17% need/lack business model – not understanding that a business model is needed or unable to define one.
  • 14% poor marketing – poor marketing skills.
  • 14% ignore customers – fatal flaw.

 Founders are often the cause of start-up failures3

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 strategy4 and business model underestimate and misjudge the need for additional skills, and make decisions that don’t reflect the current situation.

Narrow focus and too much funding can lead to start-up failure5

“Start-ups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realize that the base assumption of the business plan is wrong.  They believe they can predict the future, rather than try to create the future with their customer.  Entrepreneurs tend to be single-minded with their strategies – wanting the venture to be all about the technology or all about the sales, without taking time to form a balanced plan.”

“The predominant cause of big failures versus small failures is too much funding. What funding does is cover up all the problems a company has. ….it enables the company and management to focus on things that aren’t important to the company’s success and ignore the things that are important.”

Lack of an advisory board

The above points illustrate the need for an independent advisory board to challenge the thinking of both the CEO and board of directors. Many founders are not willing or able to create and work with a group of challenging advisors.

Most public companies have a short lifespan

Most public companies will not survive.6

  • 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.
  • 50% of all U.S. companies survive for 5 years.

Companies do not recover from crisis.7

  • 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.
  • 94% of large company executives site internal dysfunctions as their key barrier to continued profitable growth.

The board of directors is weak.

The board of directors lack the knowledge to make decisions.8 A McKinsey survey of 772 directors revealed a lack of comprehension of their companies. Only 16% said directors strongly understood the dynamics of their industries; 22% said directors were aware of how their firms created value; and 34% said directors fully comprehended their companies’ strategies.

The board of directors lack the background and experience to make strategic decisions. I’ll use a car analogy.

  • People learn to drive cars. People join companies and learn to use processes.
  • People have a problem with the car and go to the mechanic. Management runs into problems and brings in consultants/advisor to fix the problems.
  • A small group of people design cars and figure out how to build cars. People join the board with no experience in designing or figuring out how to build a company, yet make decisions regarding who the CEO should be and what strategy to adopt.

Corporate leadership9 decisions and actions are not fact-based.

  • Corporate leadership does not talk about reality.10
  • Leadership cannot learn from other organizations.
  • Leadership is focused on internal vision and metrics rather than customer needs and external benchmarks.
  • There is no questioning of strategies and plans.
  • There is no personal accountability.
  • Crisis decisions are driven by liability lawyers and public relations experts.

Corporate leadership does not have three critical sets of facts, and does not believe they need these facts:

  • Who are the target customers?
  • What are the target customers needs?
  • Why are the target customers buying from the company rather than the competition?

Without facts on the current situation and external trends, corporate leadership cannot define a fact-based strategy.

  • Who will be the target customers?
  • What will be target customers needs?
  • Why will the target customers buy from your company rather than the competition?

Corporate leadership does not understand the difference between risk and uncertainty.11

  • Risk-based decisions are determined by probability determined from analysis of historical facts.
  • With uncertainty, there are no historical facts from which to derive a probability.

The confusion between risk and uncertainty results in leadership believing they are making fact- based analytical decisions when the decisions are actually based on guesses and hopes.

Corporate leadership has poor decision-making behaviours.

Good analysis done by good managers with good judgement produces poor strategic decisions.12

Only 28% of executives thought good strategic decisions were frequently made.  53% of business improvement is due to the quality of the decision-making process, only 8% is due to the quality and detail of the analysis. The strategic decision-making process is much different form the normal day-to-day decision-making process.

Corporate leadership has five biases resulting in poor decision-making.13

  • Insufficient thought before action.
  • Tendency towards inertia, if uncertain.
  • Misaligned incentives, misunderstanding of strategies and objectives, and emotional attachments to personal perspectives.
  • Preference for harmony over conflict, leading to group think.
  • Recognizing patterns that do not exist.

Companies that have financial success develop behaviours leading to their decline.14

  • Success leads to entitlement and arrogance, believing success will occur no matter what happens.
  • Corporate leadership neglects focus, understanding, and renewal of the root causes of success.
  • “What” replaces “Why” (“We’re successful because we do these specific things.” replaces “We’re successful because we understand why we do these specific things and under what conditions they would not longer work”. Corporate leadership is no longer inquisitive and learning.
  • Corporate leadership believes success is entirely due to their superior capabilities, and that luck had no role.

VME (Values, morals, and ethics) are not understood or agreed upon.

  • VME guide corporate leadership decision-making, especially regarding the large number of conflicts of interest within corporate leadership, and with stakeholders15 and third parties.16
  • People do not understand or agree upon the VME, which results in misaligned decision-making.
  • Mergers and acquisitions often fail because the VME of the two organizations are different, with little effort to reconcile the differences. People often refer to this as “culture”, or “the way things are done here”.  Often the underlying reason for the way things are done are VME.

The Corporate Leadership selection and development processes are flawed.

Poor selection of corporate leaderships leads to company failures, as shown above.

Executive leadership development programs are also broken.  A survey of more than 500 global executives showed that only 11% strongly agreed their leadership development programs achieved results. What were the program flaws?17

  • Not specific to the companies’ strategic plans and drivers of business performance (e.g. turnaround, multiple M&As, organic growth, etc.).
  • Not organization-wide and not at all levels within the organization.
  • Not using digital learning embedded in day-to-day work flows (too much use of the old teacher and classroom model).
  • Leaders did not use social media (blogs, video messages, etc. to communicate with staff)
  • Senior leaders did not act as sponsors, mentors, and coaches.

I do not have facts regarding director development programs, but the degree of business failures would indicate director development programs also have issues.

Two sets of leaders are critical for success.

  • In a successful start-up, the founder creates and leads teams (internal and external) with the right sets of skills, experiences, values, morals, and ethics. As the company grows, teams will change and often the founder is not the long-term CEO.
  • In a public company the CEO and board chair create and lead teams with the right sets of skills, experience, values, morals, and ethics. The facts show this is very hard to do.  I believe the board director selection process is often fundamentally flawed.

In both cases, a founder or CEO should have the self-confidence and learning ability to create an advisory board to challenge and coach the CEO.

What do you do if you are a SME (Small Medium Enterprise)18

All of the points made above apply. A SME will have fewer internal resources and funds to engage external resources.  It is critical to create an advisory board to assist the CEO.

Conclusion

Most start-ups and established companies fail or do not survive.

The CEOs and boards of directors have fatal flaws in terms of customer focus, creating and leading teams, skills, experience, values, morals, ethics, etc.

Competitively differentiated business success requires competitively differentiated corporate leadership, based on competitively differentiated selection, assessment, and development processes.

Your next steps

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

Why will your company fail?

What is your current situation?

  • If you do not have an advisory board, create one.
  • If your are a start-up, collect and analyze facts regarding the nine reasons start-up fail (described above)
  • If you are a public company, assess each individual on your board of directors regarding their knowledge of the company’s strategy, industry dynamics, and how value is created.
  • Appoint potential future directors as board observers for a period of time, and then assess them as to their suitability for nomination to the board.
  • Document and assess whether or not corporate leadership decisions are fact-based, and the decision-making behaviours appropriate.
  • Document and assess VME. (Go to Why are values, morals, and ethics important?)

Footnotes

1 “The venture capital secret : 3 out of 4 start-ups fail”, Deborah Gage, Wall Street Journal Small Business, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

2 “Top 20 reasons start-ups fail”, CB Insights, Oct 7, 2014

3 “The Founder’s Dilemmas”, by Noah Wasserman.

4 Strategy definition: What your successful company will look like in the future. What does future success look like to: customers, shareholders, other stakeholders, third parties, and society? What will be the future business model? What are your facts, assumptions, and scenarios?  An integral part of this strategy definition is: What will be the roles and capabilities of corporate leadership, i.e. board of directors, CEO, advisory board and C-Suite? The CEO and board chair each have a part of the strategy and must co-ordinate their integration.

5 “Why companies fail – and how their founders can bounce back”, Carmen Nobel, Harvard Business School, March 7, 2011

6 “Corporate Longevity”, Credit Suisse, February 7, 2017

7 “The founders mentality”, by Chris Zook and James Allen, 2016

8 “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018

9 Corporate leadership definition: Board of directors, CEO, advisory board, and C-suite.

10 “Why smart executives fail”, by Sidney Finkelstein

11 Adapted from “20/20 foresight: Crafting strategy in uncertain times”, by Hugh Courtney

12 “The case for behavioural strategy”, McKinsey Quarterly, 2010 Number 2

13 “Think again: Why good leaders make bad decisions”, by Sidney Finkelstein, Jo Whitehead, and Andrew Campbell

14 “How the mighty fall”, by Jim Collins

15 Stakeholder definition: Stakeholders have an economic interest in the corporation: shareholders, non-equity capita, customers/ users, employees/unions, suppliers, partners

16 Third-party definition: politicians, regulators, third-party standard setters (e.g. proxy advisory firm, accountants, lawyers), society.

17 “What’s missing in leadership development?”, Claudio Feser, Nicolai Nielson, and Michael Rennie, McKinsey Quarterly, August 2017

18 SME Definition: Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further reading:

Principles, by Ray Dalio, 2017

“Your company will fail”, koorandassociates.org

“What is the value of a for-profit advisory board?”, koorandassociates.org

“Why are values, morals, and ethics important?”, koorandassociates.org

What will be the board and C-Suite talent requirements?

Overview

  • Future corporate leadership (board and C-Suite) talent requirements will drive talent selection, development and succession planning.
  • Corporate leadership must deal with stakeholders and third parties.
  • What is the purpose of governance?
  • What are your strategy and strategic plan?
  • How will the future corporation be different?
  • Describe the future roles.
  • Outline future talent requirements.
  • Make talent management sustainable.

This article (supported by a one-page slide) is intended to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. The approach and action plan will be unique to the specific situation of each corporation.  There is no one-size-fits-all answer.

Future corporate leadership (board and C-Suite) talent requirements will drive talent selection, development and succession planning.

For-profit corporate leadership includes: the board of directors, CEO, advisory board, and C-Suite.  Shareholders, if they make major decisions, such as in a private company with a shareholders agreement, would also be part of corporate leadership.

Future talent requirements are based on:  your strategy (i.e. what your successful company will look like in the future) and your strategic plan (i.e. what is the plan to build and achieve the strategy).

Succession plans often start with the current situation as a given and try to move forwards.  I recommend you start with a successful future and figure out how to get there.

The advisory board plays a key role in the future success of the corporation.  The advisory board relieves the board of directors from devoting time to coaching the CEO, and helps the CEO think through the recommendations before going to the board of directors.  The advisory board also contains people with skills and expertise who are not appropriate for, nor required on, the board of directors.

Corporate leadership must deal with stakeholders and third parties.

Corporate leadership must have relationships with, or deep understanding of, the following stakeholders (those who have an economic interest in the company):

  • Shareholders;
  • Non-equity capital;
  • Customers/users; (Dominic Barton, McKinsey’s global managing partner, meets with two CEOs a day.1)
  • Employees/unions; and
  • Suppliers, partners.

Corporate leadership must also have relationships with, or deep understanding of, third parties who can impact future success:

  • Politicians;
  • Regulators;
  • Third-party standard setters (e.g. proxy advisory firms, accountants, lawyers); and

Corporate leadership must make a conscious decision as to whether or not to have relationships with, or deep understanding of, society.  Not making a conscious decision is actually making a decision.

What is the purpose of governance?

What is the purpose of the corporation and why does it exist?

Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.

Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”2

 What is your written definition of corporate governance?

Corporate governance is often talked about.  What is your written definition?  I use the OECD definition: “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.  Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. “3

 What is the purpose of corporate governance?

Now that you have a written definition of governance, what is the purpose of corporate governance? Is it only to grow and preserve the value of the corporation?  The OECD governance definition starts with relationships: within corporate leadership, as well as stakeholders and third parties.  Any relationship has the potential for conflict of interest, because parties may have different or conflicting interests.  For example, how should the potential to generate value be allocated among: CEO, C-Suite, shareholders, employees, other stakeholders, and third parties including society, especially in cases of poor profits or losses.  The concept of potential to generate value addresses conflicts such as: whether to replace employees with lower-cost offshore staff or retain the employees in order to sustain local communities.

The U.S. perspective on the relationship between the corporation and society has changed radically in the past 37 years, as shown below by publications from the U.S. Business Roundtable.

 In 1981: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.  The well-being of society also depends upon profitable and responsible business enterprises.”4

In 2016: “Core guiding principles: The board approves corporate strategies that are intended to build sustainable long-term value.”5 There is no mention of responsibility to society.

There are many conflicts of interests between the corporation and society.  For example, should the corporation lobby to put in place laws which benefit the corporation but harm the broader society?  Should the corporation be extracting value from society (i.e. causing harm in the short- or long-term), be neutral, or provide value to society?  The point-of-view adopted by corporate leadership illustrates their values, ethics, and character.

Managing conflicts with society is not the same as CSR (Corporate Social Responsibility).

CSR often has a business case, which links doing-good with a combination of building reputation and supporting the wealth creation aspects of the strategy.  Sometimes a senior person in corporate leadership has a pet personal cause which the corporation then supports.

Managing conflict of interest with society requires dealing with situations where benefiting society reduces the wealth created by the corporation in the short-term (i.e. 5-10 years).  There is no business case.  The general public will have little awareness of what the company is doing, because there may be no advertising about what the company is doing.  The employees should be aware.

What are your strategy and strategic plan?

My definition of strategy: What will a successful future look like? What does future success look like to: customers, shareholders, other stakeholders, and society? What will be the future business model? What are your facts, assumptions, and scenarios?

An integral part of this strategy definition is: What will be the roles and capabilities of corporate leadership, i.e. board of directors, CEO, advisory board, and C-Suite?

My definition of strategic plan: What is the plan to build and achieve the strategy?  This includes the plan to build the future corporate leadership.  What will be the process, roles, and principles used to define the roles, appoint people to those roles, develop or recruit those people, and exit those who are not appropriate?

The CEO and board chair each have a part of the strategy and strategic plan and must co-ordinate their integration.

 How will the future corporation be different?

The strategy describes a future corporation different from today.  What are some of the issues corporate leadership must deal with during the timeframe of the strategy?  What will be the:

  • Major accomplishments?
  • Major changes?
  • Major challenges?
  • Major risks and uncertainties?

Describe the future roles:

What roles will be required in the future, and on the way to the future?

You need to understand (and document) the value of each role within the corporate leadership.  This is different from the typical job description. What roles will have the greatest impact on achieving the strategy?

Which roles make which decisions? What are the decisions made by each role which have the greatest impact on long-term value growth and preservation?  For example, which votes by each member of the board of directors have the greatest impact on the corporation’s long-term value growth.  Is it the appointment (or termination) of the CEO?

Which roles will have relationships with other roles?  Relationships among the corporate leadership are key to the smooth operation of the corporation.  Relationships with stakeholders, third parties and society can be critical for long-term success or even survival.

How will your corporate leadership roles be differentiated from your competitors’ and enable you to win against competitors?  Or will you have similar roles, and your competitive advantage comes down the to talent in each role?

Outline future talent requirements:

At this point, you have developed an understanding of:

  • The strategy (excluding future corporate leadership).
  • The strategic plan and associated challenges, changes, and risks.
  • The roles within corporate leadership, and how the decisions and relationships associated with each role are necessary to achieve future success.

All of the above then enables a discussion of what type of people are required for each role.  What should be their ethics, values, character, skills, experience, etc?

Let’s use an example.  Perhaps you’ve concluded that one of the decisions made by each board director having the greatest impact on long-term value growth is the appointment (or termination) of the CEO.  What capabilities must each director who votes on the CEO have in order to make a sound decision? What ethics, values, character, skills, and experience must each director have? What level of person, if any, must the director have terminated in the past?  What decision-making process did each director use when appointing someone in the past, e.g. approved a recommendation by a third party; or assessed several candidates and selected?

How will your corporate leadership talent be differentiated from your competitors’ and enable you to win against competitors?

If your corporate leadership roles and talent are weaker than the competition or have fatal flaws, how can you expect to win against the competition?

Make talent management sustainable:

  • Integrate corporate leadership talent management into the process for developing and managing the strategy and strategic plan.
  • The most important question is: “Who sets the strategy?” Sometimes, the board of directors sets a high-level strategy. Then using this high-level strategy, determines the type of CEO required.  The CEO can then flush out the strategy. Sometimes, the board expects the CEO to set the strategy, with some input from the board. In either case, the board is also involved with the development of the CEO’s strategic plan.

What to do you if you are a small company?

If you’re less than $3 million of EBITDA, your corporate leadership might be a handful of executives with no board of directors.  You have very limited talent and resources.  The three most critical actions are:

  • Being crystal clear on your strategy. You don’t have the resources to head off in a vague direction or pursue multiple directions.
  • Having a network of ad-hoc advisors (i.e. people you can ask who don’t charge money).
  • Having an advisory board, who understand your business in greater detail. Your ad-hoc advisors will have limited time and will have limited understanding of your company.

Conclusion

Corporate talent management is the pre-requisite for long-term success.  The corporation will not succeed if it has poorer talent than the competition.

Corporate leadership will develop and achieve the strategy.  The roles and characteristics of the people in each role must be defined. The people will both grow and preserve the value of the corporation, and also manage a broad range of conflicts of interests, including conflicts of interest with society.

Your next steps

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

What will be the board and C-Suite talent requirements?

Understand and assess the current situation:

The action plan begins with the description of the future state of corporate leadership. Then you outline the steps to get there.

  • How does your business performance compare against your competitors’ (market share, growth, return on capital, etc.)?
  • List which corporate leadership decisions, stakeholder relationships, and third-party relationships are most important and enable you to win against the competition.
  • Review your formal corporate leadership governance documents. This includes board approved position descriptions, mandates, and policies.  There could be informational documents (i.e. not board approved) which provide additional clarity, e.g. who makes recommendations.  A crucial document is the Delegation of Authority.  Often the board delegates all authority to the CEO but reserves specific decisions for the board.  This document is called the Delegation of Authority.  Note that it is not called Delegation of Accountability.  The board still retains ultimate accountability for the performance of the corporation.
  • Based on the document review, list who makes which decisions and has which relationships.
  • Compare the two lists.
  • What are the differences and gaps?
  • What are the implications?

 Footnotes

1 “McKinsey’s head on why corporate sustainability efforts are falling short”, Harvard Business Review, 2018 March 13

2 “Peter Drucker on Marketing”, Jack Trout, Forbes, 2006 July 3

3 “G20/OECD Principles of Corporate Governance”, 2015

4 “Statement of Corporate Responsibility”, Business Roundtable, 1981 October

5 “Principles of Corporate Governance 2016”, Business Roundtable

Further reading

 “The four tiers of conflict of interest”, Professor Didier Cossin and Abraham Hongze Lu, IMD Global Board Center

“Beyond corporate social responsibility: Integrated external management”, McKinsey, March 2013

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 disruptor.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

 

Will your company be successful in the future?

Strategic plans often focus on the short-term actions to move your company towards the future.

To validate your thinking, take a different perspective: picture yourself in the future, looking back in time.  Can you tell the story describing what your company will look like in 5 years time and why it will have been successful?

There are 5 areas to the story.

#1 Will your company have capable board directors and C-suite leaders?

  • What new and different competencies, skills and experience were added to the board?
  • How did character, ethics, and value play a role in success?
  • How committed were the directors to the company and success?
  • What role did the directors’ judgement play?

The above questions help you describe a board which will be competitively differentiated in growing and preserving the company’s value.

#2 Will your company have a strong strategic position?

  • Will your company be a market share leader or in the top three?
  • Why will your market position be defensible? g. Intellectual property? Strong brand?
  • Will there be steady market demand fundamentals, or will your products and services be a “fad” or “fashion”?
  • Will you have had a history of strong, recurring cashflows?
  • Why will your margins have been sustainable? Why was no competitor able to reduce your market share via lower pricing?

#3 Will your company be competitively differentiated?

  • Who will be your target customers?
  • What will be the problems or needs of your target customers? Are their needs so urgent they will seek out a solution and seek out your company?
  • How will you solve their problems or needs?
  • How will you be marketing and selling to your target customers?
  • In the hearts and minds of your target customers, how will your company be competitively differentiated? In other words: why will customers buy from you rather than the competition?
  • How will your delivery model
  • (business model) be competitively differentiated, and what will be your benchmark scores?
  • How will your management and staff be competitively differentiated?

With all of the above, describe how over time things changed: the customers, suppliers, partners, and the ecosystem.

#4 What will be your potential for further growth?

  • What will be the growth potential? Or will growth flatten out?
  • What will be the room for performance improvements? Or will you have reached limits such as technology?
  • What is the potential to further improve the capabilities of your board and C-suite? These sorts of changes can not only take more than 5 years but may be ongoing.

#5 Have you sustained growth and performance?

  • Have you had continuous improvements, year-after-year, in products, services, and costs? Or were there a few major one-time events?
  • Have you been regularly developing new products and services, and entering new markets?
  • How did your respond to unexpected problems and crises? Some companies are destroyed by unexpected problems and crises. Others not only survive but continue to grow.
  • How did you monitor emerging external developments and respond to them?

To enable discussion with your board and management, download the following one-page slide:

Will your company be successful in the future?