Why Companies Fail

There was one sure way that Peter Drucker knew that an organization or a company was going to fail. And even though absolutely counterintuitive, this indicator was an important element in his consulting practice: 

If any organization continued to do what in the past had made it successful, it was certain that it would eventually go under.

That sounds pretty strange, but if you think about it, it's not completely illogical, and the “failures of success” are numerous throughout history.

The Bigger They Are, the Harder They Fall

In the mid-1980’s, the entire billion-dollar vinyl record industry vanished almost overnight, and vinyl record manufacturers lost millions when they failed to prepare for the growing threat from compact disc technology.

Slide rules–once a product that an engineer wouldn’t be seen without–went the way of the buffalo and are no more except for very specialized roles and in museums.

You might think that senior executives easily anticipate and readily prepare for change. This is rarely the case for several reasons.

Most executives are where they are because they were promoted under the old paradigm of the organization’s success. Their prior actions made them and their organizations even more successful.

Most are comfortable with the old way, not some new, usually unproven, idea. Even though they may not realize it, they're apprehensive about leaving what they know and are comfortable with. They invested heavy in the old modus operandi and tend avoid anything that says that they must invest again and start over.

It takes an exceptional individual to do this, or even utter to the words that imply that anything will change. However, the truth is that the new model may hardly be rocket science once you accept the fact that there will be change, like it or not.

Yet, almost every day one can read of a company failing due to failing to heed Drucker’s warning. Not long ago I read a headline in the Wall Street Journal: “Fat Lady Sings for Columbia House.” The owner of Columbia House, Filmed Entertainment, Inc. filed for chapter 11 bankruptcy. 

Columbia House was founded as a division of CBS Inc. Do you remember the mailings offering the clubs offering, records, than tapes and finally DVDs by this famous mail order recording house? As an inducement to join their club, you could buy a tape or CD for as little as one cent. 

Their operations brought in as much as $1.4 billion dollars a year. That’s billion, with a “B.” It wasn’t technology alone that did Columbia House in. It kept up with and improved their basic product. It was the way that consumers purchase and listen to music and other of the company’s products.

On folding, the company still had 110,000 members, but it had years of declining revenue. The basic changes needed in marketing and distribution had never occurred. 

Stopping Success From Leading to Failure

Avoiding failure requires innovation, and innovation is one of two primary tasks of any business, the other being marketing. As a consutant, Drucker understood that innovation means something different and maybe something completely new. But he also understood that resources in time, talent, capital and facilities are needed every time an innovation is initiated and exploited. This led Drucker to a very important concept which has come to be called “abandonment.”

The Revolutionary Posture: Abandonment of Profitable Products

Drucker’s two questions to Jack Welch, which contributed significantly to his phenomenal success as GE’s head were: “If GE wasn’t already in a particular business, would you enter it today?” and “If the answer is 'no,' what are you going to do about it?”

These are questions leading to abandonment of successful businesses. However, according to Welch, Drucker’s questions led him to shed profitable but underperforming businesses which streamlined GE into its extraordinary success. Welch mandated that any GE business that was neither number one nor runner-up in its market, would be sold or liquidated. 

Abandon With Finesse and Logic

Drucker saw that logically this meant that an organization must be prepared to abandon everything it does at the same time that it must devote itself to creating the new. So that abandonment must simultaneously be executed along with continuous improvement, exploitation of past successes and innovation.

Drucker insisted that any proposal for a major new effort must always spell out what old effort must be abandoned and that all of these processes must be systematic, and not to be done in a haphazard or ad hoc fashion. He thought that this process must start with his client’s rethinking what they were doing.

Drucker warned clients to institutionalize the process, and he even recommended the period by which the process should be repeated: “Every three years, an organization should challenge every product, every service, every policy, every distribution channel with the question, 'If we were not in it already, would we be doing it now?;” 

This last question assumes that conditions have changed and that perhaps even more importantly, the organization has learned something new since the original action was initiated three years prior, or in the interim.

Drucker emphasized that if the answer to the above question was “no,” the reaction must never be for additional study, but always, “What are we to do now?” Drucker was no fan of unnecessary study or research, but rather of action.

With Drucker, the emphasis in his consulting was always on action. He knew that only through action could failure be avoided and success be attained. Throughout, he emphasized that abandonment was a necessity, but it was also an opportunity. 

When a product, business or service is abandoned, it frees up resources: money, personnel, facilities, equipment and time for necessary resources for new opportunities, or to take advantage of older ones that have a higher potential which has been ignored. These were “push priorities” which were easy to identify because the results of the push, if successful, produce their additional investments many times over.

But there are other advantages to abandonment, even if it's unknown where the freed up resources are to be applied. Psychologically, it stimulates the search for a replacement to take the place of the old “something” which is no longer present. He also thought abandonment necessary to ignite a “ho hum,” existing business “to work today on the products, services, processes and technologies that will make a difference tomorrow.” 

Finally, he told clients that abandonment even helps change management since another of his beliefs was that the most effective way to manage change is to create it yourself just as he recommended “predicting” the future by creating it yourself. 

A Specific Criterion for Abandonment

Drucker simply didn't provide specific criteria for abandonment. No four-ornine-celled matrix, no equations, nothing. Once again he recommended thinking. The potential products, processes or businesses that might usefully be abandoned and the criteria for their selection are unlimited.

However, he did provide a few guidelines. For example, in decision-making, he recommended looking at what he called “boundary conditions.” These are specifications regarding intended objectives, minimal attainment goals and other conditions that must be satisfied.

He felt that clear thinking regarding the boundary conditions was needed to know when something must be abandoned, and by inference their understanding was also necessary for development of criterion for abandonment. 

Though he cautioned clients and those who help them had to beware “the tyranny of numbers,” he also commented that budgeting, the most widely tool of management, did provide a forum evaluating and analyzing the existing situation and along with other measurement and controls as well as organized information needed to be reviewed as candidates for abandonment were sought.

It follows that quantitative criteria for deciding what should be eliminated and what should remain could be determined, but again, beware "The Tyranny of Numbers.” 

To Abandon or Not to Abandon, That Is the Question

It would be foolish, even dangerous to abandon successful products, organizations, strategies or businesses while they are still very profitable and have significant potential. When are new ideas for the future to arrest the inevitability of failure without change about forward thinking, and when is it a costly waste of time and “not sticking to one’s knitting?”

Drucker agreed that tactical improvement of success works until the point that change is so needed that not changing will make failure inevitable. How then can we recognize the possible onset of environmental conditions of significant magnitude that we must prepare for revolutionary change? Sorry. That’s where the judgment of the manager comes in and that (actually generously compensated or not) “why managers are paid the big bucks.”

*Adapted from Peter Drucker's Consulting Principles: And How to Apply Them for Business Success published by LID, June 2016.