The mighty can (and do) fall

Undisciplined growth, poor people focus, low financial performance, and a weak capital structure can sink a firm – even big ones with brand names.

I’ve been working with several colleagues for the past four years on a study of the performance of companies in our industry using the ENR Top 500 as a primary data set. We sought to explore why some sustain success over many decades while far too many struggle and even become extinct, as exemplified through the sale of long-standing, high-reputation companies.

During this four-year period, we analyzed about a half million data points looking for numerical trend information, and interviewed some 100-plus C-level executives. We discovered a handful of key success factors for long-term company sustainability and more than a dozen success drivers. Whether a firm succeeds or fails, our study found that everything revolves around strategy, a focus on people, and healthy internal fundamentals.

My last column, “Better is Better,” was an overview of the success factors and drivers we found in our research. This current article, however, presents those critical factors that seem to have caused companies to struggle, decline, and, in some cases, go extinct. The key fundamentals that cause decline include:

1. Muddled strategy. Companies get enamored and then strung-out on the “heroin” of growth for growth’s sake. They move away from their strategic roadmap and fall prey to the temptation to chase shiny objects – opportunities that are hot but arrive too late in a firm’s maturity cycle. They place more emphasis on growth instead of a balanced strategy that includes internal opportunities to create a new standard of performance, one that strengthens the company from where it is today. The leaders of these companies want to grow so badly they make big bets that place asymmetrical risks on the company and accelerate their path to decline.
2. The loss of purpose and a focus on people. Everyone says, “People are our most important asset,” but in many firms we found that these words weren’t put into action. Leaders forget that an engaged staff makes a difference, an essential ingredient to provide the company with a competitive edge over the long haul, not factory workers on an assembly line. And they take an economic-driven approach where short-term results drive the decision process rather than a long-term approach. Thus, investments in people are the first to get cut.
3. Falling prey to complexity. Many that struggle lose sight that it’s crucial to keep the company client-centered while empowering your people to deliver what you do best. Rather, these companies encumber or bog down their people with needless control and complexity that frustrates both them and your clients. As they grow, leaders believe the solution to create consistency, improve quality, and improve communication, is to add layers of supervision, initiate policies and processes, and hold countless meetings which instead reduce productivity.
4. Financial strength is paramount. Meeting goals all along the way and timely decision-making focused on financial success in all categories is essential for sustainability of companies. Yet we find that many accept upper single-digit to below median double-digit profits in good economic times, and low single-digit to even losses in bad years. And their cash and balance sheet management is less than prudent, taking on undue risk by assuming too much debt and weakening their capital structure in their quest to grow the company. The leaders seem comfortable pushing the envelope with leverage and get lured into a sense that a bigger organization can endure rough times better.
5. Not investing in the future. Because the profit levels are lower, companies in decline focus on short-term results for survivability and can’t readily invest in new markets, equipment, tools, and in their people – key elements for future success. In particular, companies that are employee-owned place less emphasis on their long-term ownership model to ensure it is well-funded, sustainable, relevant, and doesn’t need modification to turn over ownership for generations to come. Essentially, the leaders are less vigilant in retaining some of that precious profit to build a strong capital structure that strengthens the company today while investing in their future.

It is difficult to excel in every single aspect of this business at every point in time. But the companies that “win” over the long-term endeavor to excel in everything they do. We find that undisciplined growth, a lack of focus on people, low financial performance, and a weak capital structure combined with a “triggering” event is a common thread in the demise of nearly all the great “brand name” companies. Those triggering events come in all shapes and include, but are not limited to, economic downturns, very large claims, and acquisitions gone bad. Employee-owned companies are particularly vulnerable with this triggering event as the poor financial performance obviously results in a dip in shareholder value which in turn causes a “run on the bank” with more departing shareholders than buyers – a situation that cannot be weathered given the financial performance and weak capital structure.

The lesson in all this is that bigger is not necessarily better. Better is better. And if you focus on better you will get bigger. Executives and board members have the primary responsibility to all stakeholders in a company to ensure long-term sustainability by making decisions that don’t put the company in jeopardy at any given time. After all, the mighty can fall. Don’t let this be your company.

Gerry Salontai is the founder of Salontai Consulting Group, LLC. Contact him at gerry@salontai.com.