Attributes of Unsuccessful Companies

from Mike Cohen

(whether they have gone out of business or have underperformed)

1) Goals (most importantly financial) have not been clearly identified or calibrated, with a number of damaging consequences:

  • It is not clear whether strategies being pursued will lead to the company achieving desired results
  • Companies may not be able to quantify and qualify the potential impact of the risks they are taking relative to the goals they are trying to accomplish (Many firms!)
  • The goals may not be realistic, and the company could be stretching beyond its capabilities and risk tolerance to attempt to achieve those goals (possibly becoming desperate)

2) Company does not have the necessary expertise or reputation to operate successfully in its chosen lines, for various reasons:

  • Leading competitors have set standards that are not attainable by the company (Many firms, for example those pursuing the ‘Financial services supermarket’ model)
  • Smaller companies seeking to compete ‘toe-to-toe’ with larger companies as opposed to executing niche strategies in segments the larger firms are not interested in
  • Core competencies aren’t sufficiently robust (Many firms!)
  • Competitive advantages are overstated (Many firms!)

3) Not accurately understanding the customer (product pushers are particularly susceptible)

  • Being out of touch with current trends, needs, wants, attitudes, demographics
  • Customers may not know what they want, exacerbating the problem (Steve Jobs’ theory, executed extremely successfully at Apple!). Following on this thought, can focus groups provide accurate, actionable input? The quip about ‘quality’ also comes to mind: “I can’t define quality, but I’ll know it when I see it”

4) Product performance is materially poorer than projected

  • Pricing assumptions are missed, leading to lower margins or necessitating reserve strengthening
  • Product features cause benefits to be paid that are much greater than anticipated (Variable annuities)
  • Product guarantees are not effectively hedged (Again, variable annuities)

5) Risk management practices do not adequately address the company’s most important potential exposures, leading to:

  • Taking risks that do not have commensurate returns
  • Pursuing strategies or entering into transactions that have not been exhaustively vetted
  • Inaccurately calibrating the potential adverse impact of risks taken (General American – Funding Agreements, AIG – Credit Default Swaps)
  • Overestimating the company’s tolerance for risk, and underestimating stakeholders’ reactions to outsized risk exposures
  • Weakened capital
  • Suppressed earnings
  • Asset-related issues: Erosion of principal, poor returns, constrained liquidity

6) Decision making culture and processes producing poor choices

  • Inwardly focused decision making, placing greater value on what has been created internally than on what others (externally) have done, either individually or collectively, potentially missing out on higher-order thinking generated by groups and on critical perspectives of others
  • Not recognizing dislocations, changed paradigms and fundamentals; slow and cautious reactions to new information
  • Getting bad advice (including faulty research) or no advice (not realizing when they are at an information disadvantage), and not differentiating between helpful and harmful experts ahead of time
  • Defensive attitude: Arrogance, cowardice, lack of openness to other ideas
  • Ineffective problem solving
  • Working only on problems that seemingly can be solved and avoiding those that appear difficult to solve
  • Not admitting mistakes or misassumptions, tending to blame others for poor results as opposed to studying the causes for their own mistakes and fixing them.
  • Not making corrections decisively, or overreacting
  • Penalizing (punishing) associates for raising troublesome issues (Many companies!)
  • Following the herd

Conclusion

  • There probably isn’t a single attribute leading to company underperformance that couldn’t be successfully addressed if the company was so inclined.
  • It is instructive to note that the causes leading to underperformance are not the ‘opposites’ of the attributes of successful companies. Every company strives to be successful, but unfortunately many haven’t realized their aspirations.

Michael A. Cohen, Principal of Cohen Strategic Consulting

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