According to Greg Hackett, formerly a benchmarking guru and now a Professor at Kent State University , Ohio , there is a certain inevitability about corporate failures. Travelling through London to address an audience of finance professionals, the professor unveiled his latest research of more than 1000 listed companies in the United States gathered over four decades. The results made uncomfortable reading, especially for those companies that fail to adjust to market turmoil. Gary Simon , FSN's managing editor reports.
It is a sobering experience to look back over the last thirty years at famous companies and brand names and see how many have been swallowed up by acquisition or simply failed outright. But if Greg Hackett, is right, around eighty percent of companies are either stagnating or declining. Worst still, the rate of decline is accelerating with younger companies failing three time faster than they were more than 30 years ago.
Hackett, who was presenting his research to a mainly finance audience gathered at a symposium sponsored by Kalido (a data warehouse vendor), in London, bases his finding on an investigation of more than 1000 US listed companies from 1960 through to 2004. Taking into account the comings and goings in the top 1000 over this period the actual number of companies surveyed amounted to 3,225.
Despite the advantages of steadily reducing cost of goods sold over four decades average profitability has declined forty percent over the same period. Alarmingly, average profitability (after taxes and all costs) is only 4.3 percent and only 20 percent of companies are actually profitable. To put the problem into context, half of the companies surveyed currently make less than 9 days' profit – hardly an adequate buffer against unexpected events. In fact companies are 3.5 times more unprofitable than they were in 1960. Furthermore, few industries escape the bad news with more than 75 percent in decline and a mere 16 trending upwards.
So why is that more than 65 percent of companies end up in serious financial difficulties and is there anything that can be done to stave off the decline which sees companies acquired on average 23 years after they become listed entities?
There is no doubt that the trading conditions have changed markedly over the four decades of Hackett's survey. Markets are more fiercely competitive, products life cycles are shorter, and the business climate is more volatile than ever before, exacerbated by global capital markets, regulation and new sales channels such as the internet.
What is very clear is that many companies are inflexible, too slow to take decisions and unable to defend themselves from seismic changes in their market places. Take for example, the impact of internet publishing on traditional print publishers, the effect of digital cameras on photographic film or the iPod on the music industry – to name but a few seismic changes. Hackett maintains that it isn't that the traditional industries did not see these things coming - it was more a failure to act.
Sometimes these events, which Hackett calls “capsizing events” are well signalled but very often the changes are more subtle and perhaps involve a range of simultaneous impacts that are difficult to assess. It is the inability to detect and monitor these early warning signs that causes companies fatally to miss external changes.
The inability to act is as much to do with (probably more to do with) organisation structure and culture as it has to do with technology. Successful organisations become bloated and complacent – locked into a mindset that says “this is how our market place works.” Attitudes such as these are not helped by traditional management behaviours that encourage decision making for the short term, fail to confront dying businesses and resist change.
If companies are to prosper in the face of constant volatility then they are going to have to change to more nimble organisational structures and a culture that rewards innovation and risk. Hackett complains that traditional planning and budgeting processes act as a brake on innovation. The familiar budget cycle is simply too detailed, slow and inwardly focussed to provide any enduring value. Effectively, most budgets are out of date the moment that they are completed and their tight links with remuneration and bonus systems simply serve to constrain innovation and risk taking.
Nevertheless, technology and supporting processes have a significant role to play but will have to adapt in sympathy with wider organisational and cultural changes. It's a view supported by a recent Deloitte Touche Tohmatsu survey, “In the Dark II: What many boards and executives still don't know about the health of their businesses,” developed in conjunction with the Economist Intelligence Unit, which revealed a critical disconnect between rhetoric and reality in the boardrooms and management circles of some of the world's leading companies. It seems that too many companies are still wedded to traditional ‘lagging' financial indicators rather than more forward looking non-financial measures of performance. It these ‘leading' indicators which act as an early warning system that can help companies detect and react to initially subtle changes in market behaviour before they become a problem.
Hackett adds his voice to the steadily growing chorus seeking change in the way that companies plan their businesses. Rather than an obsession with traditional planning, Hackett urges companies to model not only their businesses but also their competitors and the market in which they all trade.
Even if the messages from industry watchers are relatively new, the supporting technologies are not. In recent years the market for performance management systems has grown substantially in sophistication and capability and there are many vendors that can support the kind of modelling and measurement systems envisaged by Hackett and others concerned about the lack of preparedness of many business in the face of increasing volatility.
Hackett urges companies to “abandon the assumpti
