Lessons From Failure Of Firms

Have you ever wondered why companies fail? Why do thousands of firms die every year? Such an event leads to massive pain for employees and communities. But that is only one reason for you to step back and ask this question. A bigger reason is that what drives the death of companies can also affect your business. This is why everyone needs to learn some powerful lessons from failure of firms.

Two Types of Firms Deaths

The question why do companies fail has intrigued scholars for decades. And this is why we have over eighty years of research on this subject. There are two types of deaths of firms. First one is when a company has not yet established itself. For example, a new restaurant opens in your neighborhood but shuts down in a few months. Hundreds of thousands of such businesses die every year around the world. The issue for such firms is often an inability to establish a viable business.

The second type of firm death involves the death of a well-established company. For example, the death of Kodak or Symbian. These companies ruled their markets at one point but then disappeared. I spent a lot of time reflecting on this issue and wrote a paper on the subject. My peers selected it for publication in the best paper proceedings of the Academy of Management. For those interested in that article, you can read it here.

The Death of Established Firms

Out of all types of firms deaths, I have been most intrigued by the failure of established business for the longest time. The earliest project I recall doing on this topic was back in 1994. I was an MBA student at Indian Institute of Management, Bangalore. I chose to study a company going through bankruptcy. It involved visiting the office and meeting with the only employee left there. When I came back to pick my motorbike, someone had stolen the side cover of my only possession back then! A small price for the enormous learning I received from that experience.

There is a big reason why the death of large firms is critical to understand. When a start-up dies, it leads to a major blow to hopes and dreams of the founder. But when an established company dies, it affects thousands of people. Kodak employed over 50,000 people. What happened to them when the firm marched towards bankruptcy? What happened to Rochester, the headquarter location of Kodak?

The headquarters locations of dying firms often suffer. When I visited St. Johnsbury in Vermont, I couldn’t help but notice that the town had several run down buildings. When I asked a local about the reason, he told me the story of the death of a firm. The town was built around a company that was big in scales. As the company and industry went downhill, the city followed. The result was devastation for many.

The Cost of Failure of Firms

Firms do not die suddenly with little notice. The telltale signs appear a lot earlier. Even during that period of struggle when a company tries hard to stay alive, employees pay a hefty price. Employees live through an environment of negativity and fear. They also face a lack of opportunities for career progression. Over time, job losses begin to mount, and it affects families of affected employees. It is not a pleasant picture.

How Can Firms Prevent This Fate?

The big question is “how can businesses avoid this fate?” And more importantly, the question you should be asking is “can I prevent my business from such a fate?”

If you are a business leader and do not spend time thinking about it, you are flying blind. When firms go through a near death experience, it is the leaders who are responsible for it. It is the job of a business leader to ensure that the firm is protected against all dangers. This is why what keeps most great leaders awake are the questions around the sustainability of their business. Even after Microsoft had become a successful company, Bill Gates often used to say that some start-up in a garage somewhere can put Microsoft out of business.

One of the best things business leaders can do is to spend time thinking about business survival Click to Tweet

One of the best things business leaders and those aspiring to be business leaders can do is to spend time thinking about business survival. They need to spend time thinking about how to prevent such a fate for their business.

Why Must You Learn About Business Survival?

The most scarce resource in a firm is the attention of senior managers. Leaders do not always see everything that is going on. They sometimes miss critical early signals of impending trouble for their business. This potential miss is why middle and senior managers must learn about the art of business survival.

The best way to learn about survival is by learning from firms who faced death. It will help you see the signs of trouble that many miss. It will help you think about securing your business.

A Sixty-Minute Guide to Disruption

How can you learn from the mistakes and successes of other managers and companies without reading thousands of books and research articles? To help you learn about why businesses die, I wrote the book “A sixty-minute guide to disruption.” It covers some of the most valuable lessons on business survival from decades of research. It is aimed at a busy business manager who can read it during the morning commute or a short flight.

You can read more about the book here. Although the print edition will arrive in a couple of weeks, you can get the ebook edition from Amazon now.