The Real Reason Big Businesses Fail

by: atmabus

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 (NASDAQ:YHOO) 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 (NASDAQ:GOOG) 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(NASDAQ:NFLX) execution. When a company is generating significant cash, it is difficult for them to have enough foresight to recognize their offerings will soon become outdated.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 (NYSE:KO) and Phillip Morris (NYSE:PM) have a real problem as overall consumption of their products continues to slide. Price increases and international expansion can only mask this reality for so long. Incumbents also often miss subtleties of the markets they dominate. In the early 1990s, Wal-Mart (NYSE:WMT) took a huge cut of the grocery market as its competitors relied on a loss leader strategy that consumers ultimately shunned. Today, Tesla (NASDAQ:TSLA) 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 their 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 (NASDAQ:AAPL) educated them. IBM's customer-centric approach has helped it seamlessly move from hardware, software to services (and also remain on the Dow from the original 30). IBM is spending significantly today, in an effort to teach its customers how to implement Watson-based big data analytics to drive their businesses forward (albeit with only modest success so far). Facebook (NASDAQ:FB) 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 customers. Things like stock price, hierarchy, 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, marketshare shifts are occurring 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.

Disclosure: No positions