The 11 types of business failure – and how you can learn from the mistakes of others
To err is human, but the lessons are priceless! This book shares a comprehensive framework for how to classify and cope with different categories of failure.
Founders and business professionals can learn a lot about the failure landscape from Robin Banerjee’s new book, Who Blunders and How: The Dumb Side of the Corporate World. The eleven chapters are written in a conversational style and span 265 pages, full of examples, analysis and tips.
Humans and organisations are not immune to blunders. From startups to established brands, many companies have made serious mistakes, and decayed or disappeared. There are examples abound from India and around the world: Kodak, Ambassador cars, BlackBerry, Lehman Brothers Kingfisher Airlines, and many more.
Robin Banerjee, MD of Caprihans India, has 35 years of experience in MNCs in India and overseas. He was at Hindustan Unilever, Arcelor-Mittal, Thomas Cook, Essar Steel, and Suzlon India. He is also the author of Who Cheats and How: Scams, Frauds and the Dark Side of the Corporate World.
Here are my key takeaways from the eleven chapters of the book. See also my reviews of the related books The Other ‘F’ Word, Adapt, The Up Side of Down, The Wisdom of Failure, Fail Better, Fail Fast, and Failing to Succeed.
While much can be learned from business success stories, there is a lot to learn from mistakes, failures, blunders, errors, lapses, traps, snags, bad judgment, mistiming, malpractice, deceit, fraud, and foibles as well, Robin begins. Forewarned is forearmed, and the lessons of hindsight and research can help avoid failures on your part as well, and prevent the destruction or erosion of value.
News of mistakes rarely makes it to the press, but fortunately, there are conferences like FailCon that help entrepreneurs analyse failure. See also my articles on Eight lessons in failure from Amani Institute’s Fail Faire and Exit Plan B: Where is your parachute? 15 tips for winding down your startup.
“Mistakes are inevitable but learning lessons is optional,” Robin cautions. “To err is human. The lessons are priceless,” he emphasises.
Missing the innovation bus
Innovation is a continuous journey, but many successful companies have failed to adapt to changing times or come up with flops. “Innovation is the calling card to the future,” Robin explains. Companies need incremental as well as breakthrough innovations.
Diversification of offerings does not always succeed, as seen in the case of Harley-Davidson perfumes and Colgate’s frozen dinners. Invention without business development is not effective, as seen in Xerox.
The inability to assess the strength of new entrants led to the decline of the Blackberry. And not all companies are willing to cannibalise old offerings in the face of their own new inventions, as shown in the demise of Kodak.
Some products were launched too late, such as EMI’s CAT scanner. Without sustained enhancements, innovations cannot compete effectively, as seen in the case of GoPro. Quality and performance are not the sole guarantors of success; German luxury car giants will need to take on the shift to electric cars, self-driving, and shared mobility.
Mismatched positioning and pricing can bring down well-intentioned products, such as the Tata Nano. Financial constraints posed challenges to some companies, like Bombardier and Hawker Beechcraft.
“Innovation is about anticipating the future, responding to changing customer needs, or creating a new need for customers to consume. Organisations need to rekindle the innovation magic of entrepreneurship,” Robin emphasises.
This calls for taking failure in stride and being open to learning from failures. “Failures are harbingers of success,” he explains. If you do not fail, you are not trying enough,” Robin cautions. Companies must find out how to “flourish from fiascos”.
He advises companies to be flexible, inspire creativity, encourage employees to experiment, cultivate talent diversity, and design a career path for innovators. Successes in this regard include Google, 3M and Microsoft Xbox.
Incorrect business models
Changes in technology and customer preferences call for frequent changes to the business model. At a global level, there are both cyclical as well as structural changes, Robin observes, pointing to China’s economic power as an example. Tech disruptions to watch are Internet of Things (IoT), drones, automation, and 3D printing, along with new business models like the sharing economy.
Digital models like ecommerce have challenged the likes of HMV, Borders, Toys ‘R’ Us, Nordstrom, and the Future Group. Health consciousness is putting pressure on tobacco and sweet soda manufacturers.
One challenge that companies face is knowing when to stick to established formulas and when to switch to new ones. This has been seen in Coca-Cola’s experiment with New Coke, and JC Penney trying to drop the discount model.
Useful business tools in this regard are BCG’s growth-share matrix. It divides business segments into cash cows, stars, dogs, and question marks. The 80-20 principle is also applicable to market analysis.
Robin documents a number of failure reasons for startups. They include demand-supply mismatch, inadequate capital or cash burn, poor marketing, co-founder conflict, lack of professionalism, competition, operational challenges at scale, and being ahead of the time.
He advocates a mindset of change and agility, ability to re-engineer, and capability to bounce back from setbacks. Examples include Netflix switching from DVD rentals to streaming. Stora, founded as long back as 1288 in Finland, has evolved a range of offerings from copper to bio-materials.
Founder and CEO blunders
“Bossy bloopers” abound, Robin observes, pointing to Bill Gates underestimating the search engine market, Steve Ballmer launching Zune too late, and Fitbit CEO James Park ignoring Apple Watch’s entry. Other examples include Ronald Johnson’s errors in layoffs at JC Penney, Tony Hayward’s unrepentance about BP’s oil spill disaster, the loose remarks of Ryanair CEO Michael O’Leary, and Vijay Mallya’s multi-million dollar parties when Kingfisher Airlines had unpaid debts.
A number of bosses have been too autocratic for their company’s good, such as German automaker Carl Borgward, Fred Goodwin of RBS, and Jean-Marie Messier of Vivendi. Charges of unethical conduct have been detrimental to Phaneesh Murthy of iGate and Brendan Eich of Mozilla Firefox.
Charismatic leaders have fared much better in this regard, Robin explains. Leaders should be open to hearing diverse opinions and even bad news. They should guard against slips of the tongue and antagonising remarks.
Disputes between founders and CEOs are not uncommon either, particularly with regard to strategy, company control, decision-making, professionalisation, and succession planning. Examples from Infosys and Tata Group have been well documented.
There are also successful founder-CEOs, of course, such as Jeff Bezos, Kiran Mazumdar-Shaw, and Bhavish Aggarwal. Other founders have handed over the reins of their companies to other CEOs, such as James Dyson and Bill Gates.
Unfortunately, research has shown that many founders have had to be sacked due to alignment, mismanagement, or capacity problems. Examples include Dov Charney (American Apparels) and Housing.com (Rahul Yadav).
As solutions to such issues, Robin recommends that CEOs and boards focus on teambuilding, develop new competence in a changing world, keep a keen eye on governance, stay focussed on the customer, and build solid governance processes. Capability, credibility, and compassion are key success factors in this regard.
Skimping on quality
In the mad quest for business speed or cost-cutting, many companies have deliberately and inadvertently cut back on quality and training. Incompetence, callousness, and disregard for warning signs are to be blamed in many of these cases. This has led to a product recall, regulatory fines, brand damage, business losses, the firing of managers – and even bankruptcy in some cases.
Examples include Toyota’s faulty brake incident in 2009-2010, GM’s safety lapses with ignition switches, Takata’s exploding airbags, Ranbaxy’s manipulated and falsified data, Samsung’s exploding Galaxy Note 7, and contamination of cereals (Kellogg’s), baby milk (Lactalis), peanut butter (ConAgra Foods), and tablets (Tylenol).
Growth ambitions should never overtake quality consciousness, Robin warns. The perception of quality is decided not just by the manufacturer but the customer as well. “Quality concern erodes the edifice of trust,” he adds.
The quality message needs to be imbibed and practised by the leader and employee alike. “Quality is a culture, a philosophy, a faith that needs to be practised over and over again,” Robin emphasises. Acknowledgement of errors in quality should not be denied, delayed or deflected.
TechSparks 2019: Innovation happens when you fail, fail, fail, and then succeed, says Naveen Tewari, Founder and CEO of InMobi
Family businesses: infighting and succession
A notable proportion of small and large companies in the world are family businesses. Some are known for their focus on long-term value and not just short-term gains. Unfortunately, many of them don’t last beyond three generations, and there have been high-profile incidents of family in-fighting and lack of succession planning.
Success stories of “lucky sperms clubs” (in the words of Warren Buffet) include Ford, Dior, BMW, Suzuki, Swarovski, Samsung, Wallenbergs (ABB, Electrolux, AstraZeneca), Ayala, Mahindra, and Bajaj.
But Italian fashion gurus Giorgio Armani and Roberto Cavalli have yet to anoint successors in a professional manner, Robin observes. Family infighting has plagued the Koch, Mondavi, and Ambani groups.
Other family companies that have gone awry or faced serious issues include Warner-Lambert (pharma), Pritzker (Hyatt, Royal Caribbean Cruise Line), Karmann (coaches), Kasturbhai Lalbhai (Arvind textiles), and Khataus (sarees).
To become more professional, Robin advises family-run businesses to stay away from arbitrary management styles, nepotism, and sticking to the laurels of past glory or to outmoded practices. He recommends more foresight, clarity on business values, and willingness to negotiate over disputes.
Management control and ownership need to be planned for the future in a systematic manner. “Squabbles over succession kill generational entrepreneurship,” he cautions. “Many business leaders think that they are either indispensable, or can role from their grave,” he laments.
Disputes over IP, contracts, business partnerships, and employee relationships can cause serious damage to a company. Examples include patent and design disputes (between Microsoft and Samsung; Kellogg’s and Nabisco; Britannia and ITC), labour unrest (Maruti Suzuki India), acquisition-exit terms (NTT DoCoMo and Tata Teleservices), and business partners (Jamie Dimon and Sandy Weill of Travelers and Citigroup).
Some rivalries between business groups have led to allegations of unethical advertising practices (Tesco, Heinz India) and even corporate espionage (P&G on Unilever). Robin advises dispute resolution (through mediation or arbitration), written documentation, ethical communication, and adherence to contracts as appropriate practices in this regard.
Mergers and Acquisitions
In theory, mergers and acquisitions can yield benefits like faster and better growth, cost savings, synergy, resource sharing, more talent and IP, and market share. But culture clash, incompetence, lack of due diligence, bad timing, and regulatory missteps can unravel an M&A, Robin cautions.
Examples of botched or troubled deals include DaimlerChrysler, VW-Suzuki, AOL-Time Warner; Microsoft and Nokia phones; HP and Autonomy; Intel and McAfee; Daiichi Sankyo and Ranbaxy; Publicis and Omnicom; Suntory and Beam; eBay and Skype; Kmart and Sears; and Yahoo’s acquisition of 53 companies from 2012 to 2016.
For successful M&A, Robin recommends a ‘give and take’ approach, assessment of fit, and combination of complementary offerings. Each company should be open and willing to learn from the other. Respect, trust, and willingness to negotiate are key success factors.
As examples of successful M&A, Robin cites Walt Disney and Pixar (creativity with financial muscle), Tata Global Beverages and Mount Everest Mineral Water (quality and distribution network), Microsoft and Forethought (PowerPoint in the Office suite), Thomas Cook and LKP Forex (less duplication, more cost savings), Apple and PA Semi (specialised chips for iOS), Facebook and Oculus (VR and gaming), Tata Tea and Tetley.
Public relations fiascos
When blunders occur, many companies err even more through further falsehoods, deceit, denial, wrongful allegations, hiding of data, obfuscation, gimmickry, and even belligerence. Robin urges companies to follow the basic principles of PR in such situations: humility, transparency, and regret.
Examples of PR debacles have been documented during Volkswagen’s deceit in under-reporting emissions from 2006 to 2015, Bridgestone’s denial of Firestone tyre problems, BP’s oil spill in the Gulf of Mexico, News International’s phone hacking, FIFA’s repudiation of corruption claims, United Airlines’ “re-accommodation” of a passenger, and Uber’s handling of accusations about its toxic culture.
Robin advises companies to have a crisis management strategy in place. Ownership of the mistake, repentance, empathy, prompt and unified responses, access to leaders, compensation, and recalls of faulty products are necessary. “Goodwill is any organisation’s greatest asset,” Robin emphasises.
Corporate governance ills
Corruption, fraud, espionage, and lack of long-term thinking has brought down many a company, Robin observes. Examples include the Sahara Group. Governance disputes and strategy shortcomings have also plagued companies like Sony.
Many Indian banks and corporates have been caught in fraudulent loan scandals; bribery of government officials has been documented as well. Some companies have over-promised and failed to meet commitments, such as SunEdison and Valiant Pharmaceuticals. Theranos made lofty promises on tests that were later shown to be inaccurate.
Even ratings agencies have been accused of fraud and misleading the public, as shown during the 2008 economic crisis when Moody’s and S&P were penalised. Indian rating agencies failed to identify financial troubles at IL&FS.
Micro- and macro-level issues (at employee and leader levels) need to be fixed. Robin recommends internal controls, independent directors, splitting of the CEO and chairperson roles, third party audits, and enforcement of legal and ethical guidelines.
The debt trap
“Debt is a double-edged sword – it helps to do business; it can also ruin one,” Robin cautions. Startups and corporates need to master the differing contributions of equity and debt in this regard. Government regulations are being upgraded to meet such challenges as well.
Over-reliance on borrowing leads to less room for manoeuvre. Failure to meet payment obligations can lead to penalties, lower credit ratings, reduction in market valuation, and negative employee morale, Robin warns.
A notable example of the debt trap is the subprime mortgage crisis in the US that led to the 2018 downturn. Sears has been on the deathbed for years, and Indian companies in limbo due to insolvency issues include Bhushan Power and Steel and ABG Shipyard.
Another Indian company that fell from grace is Videocon (Allwyn, Kelvinator). Over-ambitious acquisitions can also lead to debt, as seen in Suzlon Energy’s purchase of German firm REpower.
Robin also documents “mortal mistakes” such as unbalanced short-term thinking, herd mentality, mistaken judgments, missed opportunities, lack of skills, inability to delegate, and over-optimism. This leads to the proliferation of “me too” undifferentiated products, lack of product-market fit, and dysfunctional micro-managed organisation.
For example, Decca Records missed out on the Beatles, and 15 publishers rejected JK Rowlings’ work. Many Indian companies prefer hiring “friends of politicians at their request.”
Robin advises professionals to have a sound management system, an attitude of realism, relevant data and dashboards, requisite talent in the firm, and a focus on cashflow. Plans should be action-oriented, and assessed regularly.
The book wraps up with more tips on how to interpret and bounce back from mistakes. “Inexperience provides us with experience,” Robin explains. Learning from mistakes is enlightening.
Instead of sticking to flawed positions, it is better to rework the assumptions and conclusions, and cut losses. After all, humans are fallible and at times irrational. From managers to employees, Robin recommends that companies cultivate a culture of open dialogue, admitting wrongdoing, seeking feedback, devising corrective steps, and re-energising for the future.
In sum, this is a must-read book for all startups and corporates, and offers a wealth of insights and tips into the world of business blunders. The author ends with the adage –
“Tough times don't last; tough people do.”
(Edited by Saheli Sen Gupta)