Why Companies Fail?

Inspired by the book “Why Nations Fail?” by Robinson and Acemoglu, I decided to write about failure, but this time in a different context. Failure of corporates resembles failure of nations in many aspects. In the next few articles, I will feature a list of reasons why companies fail; a list that is not comprehensive but fairly broad, and hopefully insightful. Significant and catastrophic causes of corporate failure tend to be interwoven, and may in a way or another lead to one another. Isn’t this the essence of Murphy’s law? Indeed, everything that can go wrong will go wrong. This is essentially because in a rotten corporate environment, all unforeseen issues surface. Challenges are no longer hidden behind rosy sales figures, and conflicts are no longer veiled behind social masks.

Significant and catastrophic causes of corporate failure tend to be interwoven, and may in a way or another lead to one another. Isn’t this the essence of Murphy’s law? Indeed, everything that can go wrong will go wrong.

Poor Institutional Structure

Nations fail because of the extractive political and economic institutions that are essentially the creation of the monarch or the elite. They are, as opposed to inclusive economic and political institutions, designed to extract and accumulate privileges while excluding non-members. Similarly, companies fail when their structures, systems and processes are exposed to extractive power of management, commonly known as the agency problem in management literature, which is a direct consequence of poor governance over the actions of directors.

Poor institutional structure is the reason behind the failure of many family and entrepreneurial businesses to successfully move beyond the founder’s stage. This phenomenon is not limited to family businesses, but can be observed across many organizations during transfer of control from strong leaders to mediocre executives. Competent leaders, with an exceptional entrepreneurial drive,  tend to organize the firm in a way that maximizes efficiency rather than structure. In transitional periods companies are required to find the right balance between structure and flexibility, aligning corporate strategy with internal and environmental conditions. This proves to be a challenge except for few visionary, but simultaneously alerted leaders, who  master the skill of tightening, or alternatively loosening, structural controls, and can nimbly change strategic formations. Few leaders master this skill because management of a company that quadruples in size, or swiftly slides from boom to bust require different leadership style or attributes.

To be continued.

Image By Flickr Walt Stoneburner

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