The four steps to corporate extinction

Organisations can suddenly find themselves facing oblivion. Usually, though, the road to perdition is a long one. Persistent inaction or a smug unheeding of the signs is what takes them to the precipice. Then an unexpected event tips them over. Richard Reeves steers you away from this dismal fate

by Richard Reeves
Last Updated: 31 Aug 2010

0ne of Fleet Street's stock-in-trade words is 'collapse'. When talks or negotiations on the EU constitution, Northern Ireland peace process or world trade fail to reach an agreement, they cannot be said merely to have ended: only 'Talks Collapse' will do. Share prices are at risk from the same verb, as in 'shares in Minorplanet collapsed yesterday after the vehicle telematics group...'

Support for political leaders can collapse, as can high street sales, consumer confidence and, of course, elderly aunts after a couple too many sherries. Collapses on a dramatic scale - the Enrons, Andersens, WorldComs (and perhaps to be joined shortly by Parmalat) in recent business times - are most likely to catch the eye. But the history of institutional life shows that a large number of organisations have suffered at some point from a precipitous loss of control, balance and confidence: Leyland in the 1970s, the Labour party in the early 1980s, the Bank of England in the early 1990s and the Royal Mail, Marks & Spencer and the Conservative Party in the late 1990s.

Running an organisation is like driving a car on an icy road. There is always a risk of losing control and once the vehicle starts sliding away, it takes great skill to bring it back on track. (For linguistic historians, the roots of the word collapse, are col, 'together', and labi, 'to slip'.) Just as even supposedly civilised societies can erupt into unrest, so institutions can suddenly break out of the bounds of management control and become effectively ungovernable: the business equivalent of a State of Emergency.

Hitting the icy patch on the bend of the road tests the reaction times and driving skills of business leaders. But the skid rarely comes out of the blue and can often be prevented if the vital signs are monitored.

Four steps lead to corporate anarchy: myopia, playing away from home, denial and, finally, a 'tipping point'.

Myopic businesses are the ones that have become expert in the contours of their own navels. Often they are firms with long stretches of easy success behind them, encouraging a dangerous complacency in the face of market changes. Like the husband who stops bothering with all the romantic stuff, myopic firms are lulled into a state of blind faith in the loyalty of their customers.

Marks & Spencer provides a shining example of a firm that suffered a severe bout of myopia. The 1990s were a decade in which the once-solid icon of the British high street lost market share to chains such as Next, lost its automatic access to the wallets of parents as children turned away, and lost swathes of the crucial 30-something shoppers. By the end of the decade, the brand was fusty. A joke at the time described a new rap artist, with records aimed at the elderly market, named 'Emanes'.

Political parties are not immune. The belief that socialism was historically inevitable condemned the Labour party to a decade of ignoring the voters it was supposed to attract: similarly, the post-Thatcher implosion of the Conservative party stemmed from a refusal to re-examine the free-market nostrums that had served it so well in the past. Indeed, successful organisations are especially at risk from myopic behaviour, believing that what worked is what works - a trend economists call the 'leaders lose syndrome'.

So just as M&S held on to to its patterned polyester sweaters, so Iain Duncan Smith clung to Euroscepticism and deregulation. Faced with the tensions between what the world wanted and their own product lines, the organisations began to collapse under the weight of these contradictions.

Richard Jolly, a teaching fellow in the department of organisational development at the London Business School, says: 'Organisations can learn from the science of systems, which shows that "closed systems", which do not engage with the external environment, suffer from entropy; "open systems", the ones that are constantly interacting with the world around them, are the ones that thrive.'

M&S made it into the second warning zone, too: playing away from home.

Organisations that have become blind to the world in which their core businesses must survive often make daring expeditions to other territories.

So M&S decided to go for continental Europe, and also for financial services; knickers and sandwiches just weren't exciting enough any more. You will remember BT had an even more Napoleonic vision of world domination.

The third step towards chaos is denial. Just as couples in trouble are capable of pretending that they are just going through a short 'bad patch', so company leaders are able to keep issuing upbeat reports to the market and to employees. This means that when the implosion comes, the shock waves are all the greater: Enron is perhaps the outstanding example.

One of the key skills of business leaders is to be able to recognise that their organisation is going through a painful time - and, critically, to be able to distinguish between the unnecessary pain caused by poor management or strategy, and the necessary pain that occurs as organisations adapt and grow. 'It is rather like a snake shedding a skin in order to grow further,' says Jolly. 'The fact that things are difficult can be for very different reasons. The skill is in seeing the source of the pain and helping the organisation to adapt.'

An influential model developed by US management expert Larry Greiner shows that as organisations necessarily pass through different stages, periods of evolution and relative stability are punctuated by periods of revolutionary change. But the leadership attributes required at different stages vary significantly: this is where non-executives can play a key role. And this is a lesson that M&S seems to have learned: Luc Vandevelde stepped out of the chief executive's chair once 'Mr Turnaround' had done the bit he was good at.

The final slippery step to collapse occurs when organisations reach a point at which the confidence of staff, investors and customers suddenly evaporates. This can happen almost overnight if the cause is principally external. The struggle of Firestone in the wake of tyre failures on Ford Explorers is a case in point. But, equally, there can simply be a point at which a collective sense that the game is up spreads like wildfire.

In his book Tipping Point, Malcolm Gladwell describes how small changes in environment can bring about huge changes in outcome. A few fashionistas in New York created a tipping point for Hush Puppies, sending sales up from 30,000 in 1994 to 430,000 in 1995. But negative tipping points - for example, for suicide and smoking - exist too. And for organisations, loss of confidence feeds on itself: it becomes harder to attract, retain and motivate quality staff, which pushes performance down and weakens market valuation, in turn denting brand image - until a point is reached when the game is suddenly up.

The challenge for leaders is to ensure order without necessarily wielding control. While direct control is necessary at certain points in development, it is a strictly time-limited approach. So Labour MPs were subjected to pager-slavery for the later years of opposition and early days of Government in order to rebuild external trust in the organisation's capacity to be an effective instrument.

But in the second term this tactic has failed, as the recent battle over university top-up fees demonstrates. Large, complex organisations are difficult to control directly. And the changing nature of markets and the need for innovation mean that mature companies are unable to exert direct control over events, or at least not for very long.

Mature, successful organisations have to be ever-alert to external changes and attendant to their core business, but they are also required to be highly collaborative and flexible. Leaders can provide cohesion only by telling a consistent story about the direction of the firm, and by being open about the risks and difficulties. How to hold large enterprises together without totalitarian tendencies is the central dilemma for our large-company bosses. And given that there are few easy answers makes it doubly difficult.

Burt Mannis writes in The Leader's Edge that 'in this day and age, if you're not confused, you're not thinking clearly'.

Perhaps the greatest capacity required of leaders in organisations is a high degree of emotional resilience. On the one hand, loss is always painful; on the other, the risks associated with bad decision-making are higher than ever. This adds up to a cocktail designed to provoke anxiety, warns Jolly. And the trick for leaders is to strike the right balance between pretending that all is well - when everyone can see the organisation is going to pot - and revealing too much of their own fear.

'The key skill at these difficult points is containment,' he says. 'Leaders have to be disciplined about keeping their own anxiety within tight boundaries, while also being honest with the organisation about the real challenges it faces. This is difficult - but it is when leaders have to earn their money.' Perhaps they are not so overpaid, after all.

AVOID CORPORATE MELTDOWN

NEVER do things because that's how you do things.

INVITE honest criticism from customers and staff.

BEWARE of success: it makes you lazy.

FEAR every new entrant to your market.

EMBRACE pain when it signals necessary change.

TAKE TIME to heal before another upheaval.

DESCRIBE the destination repeatedly.

BE AFRAID (but don't show it).

FACE the truth - and share it.

IF TIMES CHANGE, change leaders.

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