We all love working with healthy companies, which enjoy reasonable margins and a solid financial position. But such a reality is not obvious, as many of them overlook organizational decline, and do not respond to declining sales, gross margins, or operating profitability in a timely manner. The question is, what prevents such companies from responding earlier? If we could manage to understand the chronology of failure, we may be able to fight the decline in corporations we care about, sooner, whenever such decline sneaks in – and it’s only a matter of time. So here is a refined description of that chronology, based on no less than 27 related, academic studies. Furthermore, the same chronology also clarifies how it can be avoided. Some of the stages may sound familiar to you. Hold tight:
- Top managements are prone to overlooking evolving challenges, for being more focused on the size of the business, and growth, and less focused on negative indications, operational or strategic.
- Even when focus on both growth and negative indications is maintained, long-serving managements may be too fixated on courses of action that are no longer optimal. Such fixation prevents them from admitting that a change is necessary.
- Alternatively, information may not be processed effectively. Early signals of an upcoming decline are weak, and routine business analysis practices may miss them, or interpret such signals as merely temporary ones.
- Even when such early signals are detected, they may be ignored, as a part of the perception that the actual situation is much better than presented on the slides. That is also known as a self-deception or a “reality gap”.
- Even when top managements view trends realistically, trends may be perceived as impossible to fight or require high-risk decisions to cope with.
- Even when top managements are, basically, ready to take tough decisions, there may not be a readiness to take responsibility for such decisions or get into tough conflicts over such decisions.
- Even when top managements are ready to take responsibility for such decisions, they may not be backed up by their Boards. Boards of directors may be ready to support such moves only after losses increase, cash becomes scarce and a crisis becomes obvious.
- Even when Boards support tough moves, individual officers may try to fail recovery efforts which threaten their personal position, power, or status.
- Even without such attempts, aiming at failing recovery efforts, business-routine managements are neither experienced with the different type of management required for coping with a crisis quickly and effectively.
- Even if managements align with the different type of management, tools, and capabilities required, they may lack internal consensus over the actions which must be taken. Without such a consensus, actions taken may be limited, weak, and ineffective.
- Even if such consensus is reached, the set of actions it includes may be wrong. Business-routine managements are not experienced with turnaround-management decisions, and there is no room for mistakes and lessons learned now.
- Even if the right turnaround strategies and tactics are identified, there may not be enough cash or time before such steps take effect.
- Further deterioration and stronger downward spiral get the organization into a paralyzed decision-making process.
- Desperate steps that are eventually taken are traumatic, driven by survival consideration, compromise medium and long-term ones and often involve management changes.
- Even when interim-management steps in, statistics are not in favor of successful survival.
How can you avoid that chain of failures?
The chain of failure described above can be avoided by amplifying weak, negative business signals, as a routine. To do that, high-resolution analysis of business performance should be maintained, across operations and segments. When such signals are identified, red flags should be raised in real-time and brought for executive discussion and decision making. Such a setup is similar to the installation of a radar, to detect events requiring a response.
Such a radar should ultimately be designed and maintained by an external, independent party, who is not prone to adopt business axioms and does not integrate with an organizational culture that preserves inertia. That party should be accountable to the shareholders, or the board of directors, or the CEO – as the case may be – and feel comfortable with presenting data that put existing assumptions and beliefs in question.
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