A recent study published in the Journal of Financial and Quantitative Analysis (a rip-roaring read!) suggests that more than 50% of companies won’t survive to age 16, with the highest corporate mortality occurring in the fourth year.
The Boston Consulting Group’s 2015 report, Die Another Day: What leaders Can Do About the Shrinking Life Expectancy of Corporations, involving 35,000 companies publicly listed in the US since 1950, claims that today almost one-tenth of all public companies fail each year, a fourfold increase since 1965. The “five-year exit risk” for public companies traded in the US now stands at 32%, compared with a five per cent risk 50 years ago.
Since this one-in-three chance of not surviving the next five years falls within typical CEO tenures and investor time horizons, we decided to analyse four companies that suffered early demise to learn why they “prematurely” failed.
The Rise and Fall of a Comet
Electrical retail chain Comet Group started life in 1933 as Comet Battery Stores, recharging batteries for customers’ wireless radios.
In the early 1950s, demand for wireless radios grew fast, and founder George Hollingbery changed the name to Comet Radio Rentals, opening his first retail store. More stores followed quickly.
Following the Resale Prices Act (1964), Comet expanded beyond its Yorkshire heartland, becoming a national discount retailer. Predominantly a mail-order business, Comet advertised stock and prices 45% lower than the manufacturers' recommended retail prices. Few pure-play electrical retailers could compete.
Comet went public in July 1972 and expanded its range by purchasing Gas Trend, a discount retailer of gas appliances. By the end of 1976, the group had grown to 50 outlets.
In May 1994, Comet received a takeover bid from Harris Queensway followed by one from Woolworths. The latter succeeded but was regarded as a big mistake by some marketing analysts .
Enter Wal-Mart into the UK with the takeover of Asda. The world’s (then) largest retailer effectively wiped close to £700m off the value of UK chain stores with its announcement that it would discount some goods by around 60%. To survive, Comet had to – at least – match Wal-Mart’s like-for-like discounts.
Another, slightly bizarre, problem emerged. With similar-sounding names and both companies’ logos white on a red background, consumers confused Comet with Currys (owned by rival Dixons). Despite a £20m rebranding campaign in 2005, Comet continued to lose market share.
Even with its substantial experience in the mail-order business, Comet was left behind by the explosion in online retailing in the early 2000s, despite establishing its own e-tail business.
The global economic crash of the 2007 was the final straw. Increasing levels of unemployment, wage freezes and stagnation in the property market combined to keep consumer spending on discretionary purchases rock bottom. It was simply impossible for struggling Comet to improve its appeal to customers whilst closing stores and axing staff.
There are, in the end, two generic marketing strategies: cost leadership and differentiation. Operating in a fiercely competitive market characterised by very low margins, Comet was never going to be able to sustain a cost-leadership position. Yet it continued to focus (almost solely) on price. A poor in-store experience and lack of customer service, the inability to differentiate its offering, and little acknowledgement that it’s essential to inspire customer inspiration when shopping for electrical products, ultimately led to Comet’s demise.
In this digital era, retailers must provide compelling reasons to buy in-store and convert that intent into sales. Purchases on the internet may be growing but the ‘bricks and mortar’ retailers are far from dead. To survive, however, they must develop an integrated multi-channel approach – Ikea’s structure has eliminated silos and barriers by establishing cross-functional teams that collaborate across all channels – view their operations from the position of the consumer (looking from the outside in), and develop an engaging environment that actually enhances brand loyalty. Apple showrooms are world leaders in this respect.
Comet executives appeared to have little understanding of integrated multi-channel retailing, operating instead from disconnected silos – marketing in one, customer services in another, supply chain and logistics in yet another and operations and technology out on its own.
A sad ending for an organisation that once set the standards for electrical retailing.
Rapid Growth Impacts Negatively on Compaq
Founded in 1982, Compaq became the world’s largest supplier of PCs during the 1990s.
The company focused on differentiating its offering from other PC manufacturers by producing a system with better graphics and improved performance and reliability, all at a competitive price.
Employing highly experienced engineers and very astute marketers (in addition to partnering with Intel) gave Compaq enormous credibility and a technological lead unmatched by its competitors. During its second year of operation, the company became the first start-up ever to hit the $100m mark so quickly. In 1986, with record sales of $329m, Compaq became the youngest-ever firm to make the Fortune 500.
Twenty years after its founding, it all came to an end. In 2002, with almost $2bn in short-term debt and stock trading at around $12 per share (down from a high of $51 and a market value in excess of $18bn), Compaq was acquired in an all-share offering by Hewlett-Packard. The Compaq brand name was discontinued in the US 11 years later.
While the dotcom boom-and-bust of the late 1990s heavily impacted on technology stocks, the cause of Compaq’s demise lay beyond market forces. Essentially, the company suffered from the same issues that affect many companies, particularly start-ups.
Research by Boston Consulting Group has revealed a striking relationship between revenue growth and mortality: accelerated growth correlates with shorter life spans; whereas companies with more moderate growth face the lowest risk.
You could argue that Compaq’s rapid growth merely reflected the industry it was operating in and the global market’s desire for improved technology. Yet IBM, Dell, Microsoft and others didn’t suffer a similar fate, so other factors had to come into play.
By buying Tandem Computers in 1997 and the Digital Equipment Company (DEC) in 1998, it may bethat Compaq added a great deal of complexity to what had been a simpler, fast-growing personal computer company.
There was strategic logic to the acquisitions: traditional hardware business was becoming increasingly difficult, so to avoid the trap of becoming a commodity products company, Compaq tried to differentiate itself, moving into services and software.
Compaq wanted to dominate nearly every aspect of the computer industry, but its M&A activity seemed to distract company executives from the very successful business of selling PCs to corporations. Excess inventory and unexpected price competition in PCs saw Compaq’s profits wiped away.
If, as suggested, more than 50% of companies won’t survive beyond 16 years, leadership teams must more effectively align their strategies with their shifting environments. Simply focusing on rapid change in a volatile marketplace can result in missing slowly unfolding signs that could indicate vulnerability in the longer term. Executives need to keep doing what the organisation does best while maintaining a better balance between retuning the business without losing focus on the all-important day-to-day activities.
It’s one thing to grow rapidly; it’s quite another to grow rapidly, but under controlled conditions.
Hindsight is a wonderful thing, and judging corporate behaviour can be far clearer with the benefit of time.
There are also times when glaring strategic errors only seem noticeable to those on the outside.
So it was with Borders, the global book retailer established in 1971 by two young University of Michigan graduates, brothers Louis and Tom Borders. They founded the firm after having failed to interest existing booksellers in their system for tracking sales and inventory that could predict demand in specific communities. In effect, they started a revolution in book retailing.
Borders wasn’t just another retailer occupying a very large area of retail square footage. It was a place where employees were devoted to their jobs, where they prided themselves on their knowledge of their assigned sections – and everybody else's. For customers, the stores became a library, a refuge, a place they could come to and simply get “lost”. Borders had soul, something that, even today, is almost unique to bookstores.
After 20 highly successful years with stores across the US, Borders was acquired by discount department store chain Kmart in 1992. Kmart already owned the mall-based book chain Waldenbrooks but had struggled with the book division. The two businesses were merged in the hope that Borders’ management would successfully resurrect the ailing Waldenbrooks.
It was not to be. Many of the Borders senior management team left the company. Borders people were book people, not peddlers of discounted clothes, jewellery and toys.
Three years after buying the company, Kmart spun off the Borders division (which included Waldenbrooks) via an IPO. Borders, however, seemed more adept at making mistakes than selling books.
Even though the large store format had worked well in the past, vigorous expansion of its retail footprint right into the internet boom, including the opening of a substantial chain in the UK and stores in other international markets, saddled the company with long-term leases that would later play a pivotal role in its bankruptcy.
The executives also appeared to have slept through the onset of the digital era. Amazon was launched in 1995, and rival Barnes & Noble responded with its own website two years later. It wasn’t until 1998 that Borders finally woke up and launched its own online presence. However, the venture quickly lost tens of millions of dollars.
The response? In 2001, Borders made a deal with Amazon to run all of its online business. In retrospect, this was tragically shortsighted and a crippling strategic error. Amazingly, Borders wouldn’t end the Amazon deal until 2008 when the company relaunched its own website!
Further strategic errors followed. Borders moved into CDs and DVDs just as consumers were moving into digital delivery systems; it was late into developing an e-reader, which wasn’t then sufficiently supported; a stock buyback programme consumed $600m of invaluable cash.
Book retailing is characterised by some unique idiosyncrasies. Companies need to be run by people who have a deep understanding of these idiosyncrasies; book people who know intimately how the industry works, what the customer expects and how to reach out to them. They don’t need executives with a supermarket or department-store mentality, as appears to have been the case with Borders after its IPO. Once it was sold to Kmart, Borders quickly lost the founders’ DNA that had made the company so successful.
VC Killed the IT Star
ArsDigita was a US web development company founded in 1993 by Philip Greenspun. The company wasn’t just another IT startup with a few geeks who excelled at programing. It was a group of talented people who had identified an opportunity in the marketplace long before the major players such as IBM, Microsoft and Oracle did.
ArsDigita produced an Open Source toolkit (the ArsDigita Community System – ACS) for building database-backed community websites. Such was the power of ACS that within a relatively short space of time, the company’s client list included Hewlett Packard, AOL, Levi-Strauss, Oracle and Siemens.
By March 2000, ArsDigita had grown to 80 people and an annual recurring revenue of $20m. It had a useful software product and its customers were happy and loyal.
Although ArsDigita was growing carefully, Greenspun openly admitted that for every task in the company, he could not say exactly who was supposed to do what and by when. Not only did the company require experienced management executives, it also needed additional capital to grow its customer base.
Then came the dotcom crash. Although solvent, ArsDigita needed working capital and opted for VC funding. General Atlantic and Greylock invested around $35m in the company (30% of the issued shares) and held two of the seven board seats.
Within a year, and even with a new CEO, things began to come unstuck. The board (inexplicably) had yet to appoint two non-executive directors to make up the seven. This, in effect, gave the VCs (backed by the CEO) full control of the company.
With interest rates low and fuelled by the belief that the internet was about revolutionise people’s lives, VCs were suddenly awash with funds from investors looking for rapid and substantial gain. However, investing in a company such as ArsDigita required considerable knowledge of software development, as well as the ability to manage the often disparate personalities of those involved.
The new CEO, recommended by the VCs, came from a background in IT services consulting but had no experience in software product development. The VCs also appeared to have difficulty understanding the challenging personalities, not only of the founders but also key software engineering staff.
For all intents and purposes, ArsDigita was a start-up and needed to be handled as such by the VCs. Sure, they needed to see a return on their investment, but the VCs would have reaped much greater dividends had they not killed the goose that laid the golden egg. Allowing the hostility between the founders and the VC-appointed board members to escalate was reprehensible. ArsDigita had established a strong thought leadership position in its industry and any VCs worth their salt would have done everything they could to maintain that. In the end, both market and thought leadership were lost.
Many of those who worked for ArsDigita, as well as product users, have expressed their opinions on the company’s demise. In the end, a promising young organisation with ample VC capital to develop was left in tatters. There were no winners and plenty of losers, but perhaps a little bit of knowledge was gained about the positive role that VCs should play in their investments.
A few conclusions: Companies that fail to embrace change and reorganise themselves accordingly will, regardless of any prior success, be swept away. Learning only from success creates a deeper problem: drawing conclusions only from available or convenient data will systematically prejudice results and long-term thinkUltimately, it pays to study failure and learn from it. Only by doing so, can we prevent similar failures in our own organisations.
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