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Why do well-to-do companies fail ?

Posted by Ramamurthy, Raman at Tuesday, 05/08/2012 12:08 am
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3.3 from 45 votes
In recent times, I was reading a review of the book “Serial Innovators – The firms that changed the world” by Claudio Feser, Director, Mckinsey & co. : where he talks about the need of serial innovators in the corporate world and presents several tips on survival. Interestingly, he talks about creative destruction (paradoxical term?) here in his book and reminds us of how legendary companies are going bankrupt and getting gobbled up by the competition. Yes, emerging markets are globalized now; at least in India it is ! No company can rest on past laurels and cool their heels. In fact, neither can an individual in a fast-paced company do too. What is the market requirement or what is needed to adapt to new conditions, then? Why do leading well-to-do companies fail? How is that companies fail after reaching a ‘seemingly’ irreversible state of success.

Claudio writes, “Firms die when they develop organizational rigidities that prevent them from adapting to dynamic markets. Companies that succeed in their early years get locked into mental models. They codify their success through rigid organizational constructs such as hierarchy and standard operating procedures (sic!). It unfolds like a natural biological process like cell death in organisms, but these rigidities are actually man-made. They originate in the human brain and in organizational constructs made of human beings.”

Yeah! Anyhow, I am coming to that. About a year and half back, the well-to-do profiteering HP Printer supplies division in Kores India closed shop. I was not even aware of it since I was abroad and really I never thought that something like that could happen. Incidentally, I started this division from the scratch in the year 1998 and took it to No.2 position among the distributors in Mumbai by the year 2002 and then I quit to pursue something else of different interest. So, I was naturally shocked, puzzled and disappointed. I asked myself, How can a well-to-do profiteering division close shop?

Organizational rigidity was the main reason and it was in the promoter’s mind. But, the rigidity was always part of the organizational culture in Kores India. Such an approach had its own merits and more fallacy. In older days, about 50 years ago, most companies believed in bottom-line growth (read profit margin), but that has changed totally now ! With growing globalization and emergence of free markets in India, there are too many players in every field or industry. Hence now, the focus has shifted to building better top-line sales turnover to gather more market share/ revenues for your company. This top-line growth policy or strategy to build increased sales turnover is actually a fall-out of the present market conditions and severe competition. But, building sales turnover involves more deployment of funds, better control of inventory and payment receivables and more sales manpower. Also it calls for more market awareness and responsiveness to dynamic market conditions. In such market situations, companies cannot be rigid in its thoughts and actions. And in Kores India, the rigidity in individuals’ mind and consequently in the organization led to closure of a well-to-do promising business option. No explanation was required to be given to anyone. It is a management decision! Period.

If individuals have in-built rigidities in their minds, so do organizations. As firms grow bigger and become multi-layered as well as complex, bureaucracy looms large with inefficiency setting in. Such Organizations will react late or slower to the ‘rapid’ changes in the market conditions. In some companies, the management or the policy/ decision makers live in the proverbial Ivory Towers. They are cocooned into their plush ‘comfy’ cabins by self-serving psychopants. Market reality is thrown far away and made invisible to them. In such organizations, most employees lose their sense of purpose. Need I say anything more?