12 January 2014

The Real Reason Big Businesses Fail

Inspired by holiday reading, i've decided to address a complex issue in a relatively short script (in the vein of Malcom Gladwell's latest opus). For leaders at large conglomerates, the risk of failure should turn heads. Only one of the original 12 Dow members still remain as does only a handful of the initial Dow 30 from 1928. And these were the best of the best. While there have been numerous explanations ranging from poor management execution to the Innovator's dilemma to explain this phenomenon, there is one simple commonality amongst all the companies gone bad. They stopped selling stuff that people wanted.

Blockbuster missed on mail order. Yahoo missed search. The list goes on across industries around the globe. These companies were acting complacently as new competitors were ramping up. But even had the incumbents acted flawlessly, they probably wouldn't have succeeded. Sure Yahoo had a chance to buy Google early on; but it was so focused on advertising that the company missed the fact that search mattered more. Someone with that insight would probably have outseated them anyway. There have been countless case studies on Blockbuster's miscues, but the bottom line was that its bricks and mortar offering failed to meet new customer demands. Its' half baked home DVD offering was too little too late compared with Netflix's execution. When a company is generating signficant cash, it is difficult for them to have enough foresight to recognize their offerings will soon become outdated.

Sometimes overall shifts in consumer demand dooms companies. Coke and Phillip Morris have a real problem as overall consumption of their products continue to slide. Price increases and international expansion can only mask this reality for so long. Incumbents also often miss subtelties of the markets they dominate. In the early 1990s, Walmart took a huge cut of the grocery market as its competitors relied on a loss leader strategy that consumers ultimately shunned. Today, Tesla is on the brink of taking material share from its rivals who have sat on high fuel efficiency technology for years. They didn't think people wanted it.

Large companies that use its position of power to stimulate market demand are the ones that succeed in the long-run. People did not know what they wanted out of portable stereos or smartphones until Apple educated them. IBM's customer-centric approach has helped it seemlessly moved from hardware, software to services (and also remain on the Dow from the original 30). IBM is spending a significant effort today teaching its customers how to implement Watson-based big data analytics to drive their businesses forward (albeit with only modest success so far). Facebook is doing a similar thing for clients who are new to social advertising.

The numerous texts designed to help corporations build their organizations are helpful playbooks. However, the fundamental problem that companies face as they grow is that they shift focus inwardly instead of on its customers. Things like stock price, hiearchy, and motivation saddle companies and mask the importance of the one thing that matters most. If companies simply keep up with consumer demand, everything else usually will fall into place. Successful new entrants are often singularly focused on what customers really want. With business cycles increasingly shortening, market share shifts are occuring more frequently and more rapidly. Successful organizations that fail often do so by not keeping up with consumers' tastes as internal deficiencies are usually symptomatic of them missing this critical point.


  1. To quote Peter Drucker, “Business has only two functions — marketing and innovation.” Yours in an excellent reminder of his insight.

  2. Well done! I think, as you (and Christensen) have said, it becomes increasingly difficult for any company (but especially large ones) to adapt, as they turn inward and focus on operations rather than on market and innovation shifts.

    BTW, I would not characterize Tesla as being any where close to taking "material share" from automotive incumbents, as they only manufacture 2000 cars a month. At this stage, they are as likely to be a Fisker as a GM. I will say that the Tesla is now THE status car in Silicon Valley - can't throw a rock in the Cupertino area without hitting one.

    1. Good point re: Tesla (an interesting situation that probably warrants an article on its own). Market cap certainly implies market share, but agree you never know how it will end up. Point was that incumbents missed out building a mass in electric cars setting up opps for companies like Tesla.