Why Do Good Companies Fail?

Plenty of research has looked at what makes companies successful, but what makes good companies fail? Jadgish Sheth has done some research, and thinks he has an answer.

In my research, I identify the six externalities that bring about a change. They are regulation, capital markets, competition, technology, globalization and customers. When any of these external contexts changes radically and the company is either unable or unwilling to change, it often results in failure.

I began to learn that most companies come into existence by being opportunistic—call it entrepreneurial opportunity. They take all the credit, but it's partly the environment and partly the individual. Company success is very much like human behavior—a result of nature and nurture. But managers refuse to say that they were blessed from above, and so they take all the credit for themselves. They succeed as long as the environment doesn't change. The underlying theory is that many people in business succeed by accident and not by plan.

When you succeed by accident, you often latch on to your belief system much more than before. You become superstitious in a way. Next to baseball players, the most superstitious people in the world are entrepreneurs. They pull out the rabbit's foot and the special pen. Some of that is good in a way. Superstition gives you an inner strength. You are able to psych yourself up much easier, just like an athlete does before a major event. But, unfortunately, people end up believing what they do will succeed forever, and then they become resistant to change. They get locked into one paradigm or one way of life, like Digital, for example. The founder destroyed the company himself since he was bent on his belief in the continued success of the mini computer. He held on to that belief even when the personal computer became the standard, and he destroyed the company in the process. Similarly, many airlines failed after rapid deregulation in the late seventies because they could not change fast enough to meet or resist competition. Examples include Pan Am, TWA and Eastern Airlines.

He makes the point that the corporate lifecycle is declining. No company has ever managed to dominate for more than a few few decades, which is why I don't worry about the Wal-Marts of the world. The market will take care of them in its own time, insuring that they do not get too powerful.