Why Do Companies Fail?

We have seen countless instances wherein seemingly invincible and indestructible companies get destroyed by others in a short amount of time. For instance, IBM was the computer company in the 1960s, dominating the industry with 80% market share by 1964. But things changed with Apple’s entry. While Apple I model was a moderate success, Apple II left its competition in the dust with wide success.

Why does this happen?

One major reason for these large-scale failures is because the top management becomes over-bureaucratic, and arrogant, setting off a negative tone in the work culture. Sometimes, failure happens because organisational behaviours lead to the companies becoming irrelevant due to missing future trends. This is could possibly be followed by decline and death.  

Watch Jeff Bezos explain his take on this in the video below.

So, how can companies avoid this? The top management of the company should set the tone for embracing adversity, failure, and change. This will foster a risk averse and innovative culture while ensuring the right things are done to maintain its relevance and success in the future. Eric Schmidt, Google’s former CEO and Alphabet Inc’s Executive Chairman, says that the best way to foster an innovative culture is to manage chaos. The 20% time and free food may seem like perks to attract brilliant people to work for them but the actual reasons are a little different.  The 20% time allows employees to spend 20% of their professional time on pet projects or solving creative problems, which allow experimentation while they did their jobs. Google Maps was created at this time. The free food program promotes a sense of community and emotional bonding among their employees, which facilitates interaction between all departments and leads to a greater probability of original ideas.

Another measure that companies need to take to ensure that they stay successful is to rapidly invent rather than innovate. In this context, innovation is the process of successively creating incremental improvements, whereas invention is the process of examining an unexplored or underexplored problem and finding a solution that is a leapfrog improvement over its predecessors. Inventions have a greater probability of failing in comparison to innovations, as many of these inventions may seem far-fetched and irrelevant. The best way to create a successful invention is to work backwards from real human problems and figure out the invention and the technical workings of the invention around the detailed understanding of those problems. For example, Google Search was a project about how searching the internet could be a much richer and fulfilling experience. At the time, search engines were highly inaccurate and were solely focused on keeping the users on the websites advertised by the search engine. Search engines were also easily manipulated to promote certain websites. Google focused solely on making the search much more accurate. Google did this by examining individual websites and the number of websites the original website was linked to. The greater the number of websites to which the original website is linked to, greater the ranking.

The final measure is proper financial and resource management. Many times, startup companies focus their attention on doing demos, marketing and raising funds instead of building a good company or product. Let’s take contrast the approaches of Amazon and Theranos. Theranos focused on aggressive marketing campaigns, raising funds and gaining positive publicity. They marketed a primitive and dysfunctional technology as a measure that could change the way syringes would be used. Amazon however made heavy investments to ensure the website’s technology worked and a strengthened position as an online retailer through the development of expansive supply chain networks. Theranos failed and Amazon thrived.

In the end, it’s all about solving human problems.

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