Why Do Corporations Die?

Which is the best international company in quality of Management? McDonald’s! The traditional winners, Procter & Gamble and General Electric, have been toppled in the latest Fortune ratings.

Bear Stearns, reveredÿas the “Most Admired” securities firm in Fortune’s List in 2005-2007, with 13,500 employees, is dissolving into thin air.ÿFortune’sÿsurvey is a covetedÿranking of talent, quality of management and innovation. In 3-years,ÿBear Stearns achieved the distinction twice.ÿ But,ÿby mid-March2008, Bear Stearn’s share price collapsed toÿa ten-year low (droppingÿ80% of its stock value), due to faulty judgements onÿsubprime mortgages.

Studies reveal significant mortalities amongst corporations in existence and admirability in the last decade. Companies, which are market leaders, on a sales, profit, admiration hype, suddenly evaporate. Darlings of the stock-exchanges, disappear without a trace. A decade ago, it was unthinkable that monolithic corporations, employing thousands, could just evaporate or loose leadership.

The reasons for corporate mortality are simple. Corporations atrophy, due to lack of a vision, loss of contact with the market/consumers, absence of strategies to negotiate change, obsession with the short-term, sheer laziness and lackluster leadership.

Corporations fade because they are unable to work a vision for themselves. “What is our business? What is our future role? How do we re-define our objectives in view of changing markets, customers and technologies?” These are questions that the CEO and the Board must answer relentlessly. When corporations, merely make products i.e. shoes or soups, but have no societal purpose, they shrivel.

Corporations also dissipate, when they loose contact with customers – their moods, fancies, etc. It is not enough to study mountains of research data. It is necessary to talk to customers. Sam Walton, the man who built the most formidable retail business in the world, spent a lot of his time talking to customers on the floors of his stores. IBM, on the other hand, did not recognise changing trends in the computer markets. For years, they shed sales, profits and employees. Businesses with mingy contacts with consumers will also be characterized by inadequate investment in research and technology.

Absence of strategies to deal with changes in the operating environment, i.e. political, economic, consumer and above all, technology, can also decimate a company. In the West, power has shifted from manufacturers to retailers, ince the latter were faster to hook onto information technology, logistics, supply-chain management, and micro management of customer-requirements. Manufacturers had bloated, obsessed with internal bickering. They lost control over the shoppers’ basket.

Financial engineering to buoy profits, rather than real volume growth, is also a nail in the coffin of a corporation. A business is hard work. Money, is not made at a picnic. It requires labor, long hours, hard thought. Businesses, which get fat, and begin to enjoy the boons, of the efforts of yesteryears, without investing in the future, are doomed to disaster. The elementary formula, of spending less than you earn, which a housewife applies in her home, applies to a corporation too. When corporate executives start giving more importance to the cars they travel in, than volume growth, the corporation is headed for disaster. Saving for a rainy day, is vital for a company.

As corporations get bigger, and frequently bureaucratized, they sometimes become an end, in themselves. The basic rationale for their formation and existence- to meet societal goals, consumer needs and thereby earn a profit, is bypassed. They get obsessed with form than content i.e. meeting-schedules than meeting customers, meeting short-term quarterly objectives, at the cost of a vision. Short sighted pursuits become paramount, to sub serve personal bonuses and career goals.

Finally, corporations die, because some leaders are weak, lazy, or, just incompetent. Unfit CEOs are the biggest cancer that any corporation can have. They rise to the top, for reasons other than performance or merit. They corrode systems and morale, like a locust they destroy the foundations, built over decades, through labor and sacrifice. Such businesses are characterized by demotivated staff, and inhuman/arbitrary management.

The fact is that corporations which do not measure up to stringent performance standards, neglect research and do not invest in technology will have severely curtailed futures. A Company, however large or admired, is only as good as its order book. The measure of any company, in the ultimate analysis are customers buying its products. Too many corporations have started existing for stakeholders and shareholders, than customers. Chairmen and board members are obsessed with market capitalization, and will desperately dress up financial results to look presentable to stock markets. Or, they launch a short-term public relations campaign to refurbish the image of the company. They neglect customer and markets. They are under the desperately erroneous impression that the stock market is their evaluator, not their customers. If a company can keep its customer happy and with them, it does not have to worry inordinately about its bottom line and shareholders return. They will be delivered. But, if customers are not buying a company’s products, it is doomed.

There are chairmen and directors who rarely visit the market to talk to customers, shopkeepers, managers of supermarkets or hypermarkets. They are busy having lunches with bankers! If you own shares in a company characterized by such maladies, get rid of the shares, fast. There is no substitute, for close relationship with the customers, making products that meet consumer needs, producing a healthy top and bottom line year-after-year, humane management and employee welfare, investments in technology.

Corporations that are beset by these fatal afflictions will die. And, they deserve to. Ultimately, corporations must serve the societal goals of providing quality goods, generating surpluses for investment, creating employment, contributing to the environment and development. If they do not, then, they are better dead, than to survive as financial and societal parasites. They will be replaced by more robust corporations.

(The author worked with Unilever in India, Latin America Brazil and Africa for over 28 years, and was Managing Director of a Unilever company in Africa. He also worked in Colombia, Venezuela, Ecuador, Peru etc. Since then he was the CEO of a large Retail Group in the Middle East, managingÿover 70 retail outlets in fashion, electronics and cosmetics. Heÿis now the CEO of a manufacturing/retailing Foods business in the Middle East. He was a Sir Dorab Tata Special Scholar throughout his education, and a Government of India Merit scholar. He has authored a book, “Agenda For a New India.”)

October 6, 2008
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