“A good plan today is better than a perfect plan tomorrow.”— George Patton
“The moment we believe that success is determined by an ingrained level of ability as opposed to resilience and hard work, we will be brittle in the face of adversity.”— Joshua Waitzkin, American chess player
“When we are no longer able to change a situation, we are challenged to change ourselves.”— Vicktor Frankl, Austrian psychiatrist
“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”— Bill Gates
“I think we build resilience to prepare for whatever adversity we’ll face. And we all face some adversity – we’re all living some form of Option B.”— Sheryl Sandberg, Facebook executive
“Persistence and resilience only come from having been given the chance to work through difficult problems.”— Gever Tulley, Brightworks founder
Many businesses fail (see Related Reading below) but few businesses learn from failure. Even fewer businesses learn prior to failure and so avoid it.
Failure is often learning the hard way. Resilience in this case is simply getting up and trying again. This also is likely to be the hard way. A better way is to build resilience – systematically, in a special way – that avoids failure entirely.
Business resilience is usually addressed in terms of surviving a serious adverse impact and ultimately recovering more or less fully. But there is a different kind of resilience that is even more important: the resilience that helps you avoid business failure in the first place. No impact involved. Just potentially fatal problems lurking beneath the surface that need detection and addressing.
Business failures: some bad news and some good news
The Small Business Administration (SBA) defines a “small business” as one with 500 employees or less. In 2019, the ultimate failure rate of “startups” (i.e., new businesses and those remaining “small” by SBA definition) was around 90% overall, with about 22% (cumulative) failing in their first year, 30% in the second year, 50% in the fifth year, 70% in their tenth year, and ultimately reaching 90% in later years.
So much for the bad news. In my experience at least, the majority of early-stage businesses that failed had entrepreneurs who got right back in the game. Probably most succeeded in their second or third tries. Businesses failed but entrepreneurs mostly did not.
One very techie study showed that business failures from internal causes alone not surprisingly were highest among smaller, new businesses but dropped off sharply in subsequent years and as businesses grew. Must have been something to do with learning, yes? Anyhow, as businesses grew and aged somewhat, internal failure causes decreased and external factors became an important failure cause. For the largest and older businesses, external failure causes dominated.
This might actually be quite good news in that it reinforces the idea that new, small businesses fail mostly from internal, self-inflicted wounds, while failures among larger and older businesses are driven mostly by external factors.
But I don’t believe it.
Defining business “failure” in practice
While bankruptcy is a pretty standard definition of business failure, many businesses manage to survive but only just barely, limping along for years or even decades after the major downturn occurred. A walking-dead kind of existence. To me, this is failure every bit as bad as bankruptcy. Maybe even worse.
“Success”, normally thought of as the opposite of “failure”, describes a situation of steady growth in sales and profitability at best, and no significant or lasting downturns at worst. This is a continuum definition of “success”. There must then be an equivalent continuum definition of “failure” – from a lengthy process of steady decline and decay at best, to a sudden business end in bankruptcy (ignoring Chapter 11 reorganizations here).
“Failure” then becomes a kind of “not success” existence.
I don’t know about you, but I would not like to run or be part of a business that was okay with this kind of “not success” existence. Terminal failure seems preferable.
Non-impact, not-success failure avoidance
Huge external events and situations such as earthquakes, floods, fires, wars, and the like are generally regarded as external-source “impacts”. They are often of the black swan persuasion – unforeseeable in nature, timing, and magnitude. These are almost always survival-challenging that only the strongest, most resilient, and often most fortunate, are able to survive.
The majority of business failures (defined here as not-success) are not the result of external-source impacts but are due largely or entirely to some combination of internal causes. Self-inflicted wounds in a sense. Worse yet, so many appear unexpectedly – becoming apparent only in the late stages when successful recovery becomes difficult or even impossible.
You can plan for impact events but just how do you plan for self-inflicted wounds?
One of the articles referenced below in Related Reading considers the role of implicit, major assumptions in damaging, weakening, or fatally-wounding a business. Implicit in the sense of being unrecognized until too late. These critical assumptions about markets, competitors, technology, and the like have killed many initially-successful businesses, regardless of size.
Such assumptions are of course only part of what can destroy a once-strong business: Financial weaknesses. Economic changes. Management errors. Product or service quality problems. Technology changes. Fraud. This is a big list.
These underlying problems can be largely invisible for years before growing or combining into something major and visible. Often too late then to do much about the source problems.
Is there any way to monitor such potential problems while they are still small and mostly invisible in day-to-day activities? Early enough to take effective remedial actions?
This is a different form of business resilience – non-impact
Business failures (defined as “not-success”) creep up on a business. They are not visible or are regarded as transient problems – until they are not. They are effectively hidden. Being hidden, ignored, or not recognized (including the all-too-common denial process) means that they can’t be dealt with early enough to develop an appropriate resilience.
Resilience here means that the business is continually adapting to areas of detected weakness so that such weaknesses rarely lead to serious problems and not-success. The resilience comes from the detection and adaptation or correction process, not from strengthening-post-impact kinds of responses.
Keywords here are “detecting” and “adapting”. You need a way to identify underlying problems and situations routinely. Then, you need a process for developing and implementing mostly incremental changes that address each detected problem area.
Detecting potential problem areas requires a process
Annual strengths, weaknesses, opportunities, and threats (SWOT) exercises and events are typically focused on strengths and opportunities. You know, thinking positively kind of stuff. They get attention mostly during the event or exercise itself. And then they are backgrounded or largely forgotten until next year’s exercise.
Also, what may appear as “strengths” may actually be sources of weakness. Apple’s early strengths in personal computers nearly led to its demise. Fortunately, Steve Jobs reinvented Apple as a fundamentally new, design-focused business – but only after getting forced out in 1985 by John Sculley, who turned out to be an even worse disaster.
Could the early decline of Apple been detected somehow? Tough to do in the shadow of a visionary dynamo like Jobs but probably still possible.
NASA astronauts undergo routine health and physical conditioning monitoring. One device is a “Bio-Monitor” that tracks pulse and electrical activity of the heart, blood pressure, breathing rate and volume, skin temperature, blood oxygen saturation, and physical activity levels. Fitbit, an American consumer electronics and fitness company, produces wireless-enabled wearable technology, physical fitness monitors and activity trackers such as smartwatches, pedometers and monitors for heart rate, quality of sleep and stairs climbed as well as related software. A consumer bio-monitor.
Could the same monitoring and analysis process be implemented for a business unit as well? Today, certainly.
The business health monitoring industry
You will definitely not be at all surprised to hear that there are many products and services out there today that claim to be able to monitor business health in almost-real-time mode. Google helpfully lists just 5.43 billion results under “Business health monitoring”. In case you don’t have time to check these out, here are a couple of randomly-selected examples:
- The Collective has an “Advisory Collective for better business health” service. Their pitch:
“Discover your blind spots, inefficiencies and limitations with our Business Health Check. If you’re not getting enough sleep, you’re stressed or working through some personal problems, you’re simply not functioning as well as you could be.”
“And your business is the same. Your strategy may be perfect, but if the execution is letting you down you need to know about it, so you can address the situation and improve the health of your business. Our Business Health Check process has been developed to do just that.”
“1. Online Assessment. Ranging across the Six Pillars of business health, we’ll ask you a series of questions. The process should take around 60-75 minutes, but don’t rush. Some questions will challenge your thinking, and may require calculations based on financial data.”
- Evolution Strategy Advisors, a consulting firm no less, has another pitch in its “Business Health Monitoring and Improvement” services:
“We have pioneered the technique of monitoring business health and suggest improvements in any consumer business through analytics and business health modules developed by in association with our global partners. This has given our clients immediate improvement in financial results from the next quarter itself.”
“This is a new approach to strategy, marketing and sales consulting for B2C companies which enables an organization to scale up. We have pioneered this technique of monitoring business health and improvements through analytics and business health modules developed by us in association with our global partners. Different stake holders have different roles and thus their perceptions are different about business which alters their assumptions and insights. A CEO would be more strategic while a salesman will be operational. Being too close to a business creates biases which may result in strategies failing to deliver results.”
“Our approach to consulting is to understand from a business health perspective as to what are the challenges an organization faces. We deep dive into the causes or insights which are limiting an organization from growing or have enabled it to reach where it has. This could be through meetings, structured questions or online tools. What’s unique about our approach We have designed a proprietary method of conducting a business health study with various stake holders in the organization who know how to get business results. These could be the sales team, distributors/ dealers, influencers and/or the customers. This gives us a detailed understanding of the reasons for successes, impending challenges and probable solutions which arise from these stake holders.”
Resilience process is different
Business health monitoring is an established consulting business development approach. Offer to look for things to fix and then offer to help the client fix them. Mostly big stuff for big bucks. It works, for the consultants at least.
What I see as a resilience process detection (or monitoring, if you prefer) approach is quite different. This process would look primarily at negative changes in key aspects of the business. Some examples might help here:
1. Key employee turnover. High or growing turnover among key employees is nearly always a bad sign. The cause may be a bad manager or two but a more general turnover trend is likely due to something deeper being amiss. The detection part is simply tracking, probably on a monthly basis, turnover among those identified as “key employees”. Good chore for an HR person. It is the change or trend that is important, not the baseline. Second part is figuring out possible causes. These can be checked out subsequently to assess validity. Final part is figuring out what to do about the turnover and taking appropriate corrective actions. This would remain an ongoing resilience process focus until the turnover trend stabilizes or turns positive.
2. Major customer losses or declines. This is a pretty standard tracking target but it may be buried in other marketing or management activities. Key customers are usually well-known but sales trends, or significant changes in purchase mix, are often not examined systematically in terms of causes. In my experience, at least. Causes may be changes in the customer’s business, or in the product mix involved. Lots of potential causes. What you want to look for as a resilience detector is something inside your business that may be causing downtrend losses or declines in more than one key customer. Not seasonal or transient changes. Identify potential causes, such as a major product weakness or a competitive incursion starting, and begin any corrective actions that may be helpful.
3. Cash flow decreases. I am a big believer in the information carried in cash flow data. Cash flow reflects so many aspects of a business. Virtually every business tracks cash flow but not many track it by major customer or major product groups. You will be looking for persistent downward movements in a key group or across groups. Here too, it is the trend across groups that may indicate something wrong internally – product capabilities vs. competition, for example – or heavy discounting by salespeople. In one project I worked on, we found that certain salespeople were discounting delivery charges (furniture retailer) to the tune of millions of dollars a year. This led to a new tracking metric – actual delivery charges vs. standard charges – and that led in turn to a quite extensive effort to figure out why. As I recall, it was due mostly to weaker store managers and salespeople who were ignoring formal discounting procedures. This alone was not a business-killing situation in any respect but simply one of quite a number of cash flow damaging practices that we detected in the process.
Every business probably has dozens of similar situations that are not tracked and addressed routinely (monthly) as a resilience-building practice. Most are relatively minor in their individual impacts but together they can grow or combine into a serious problem if left unaddressed.
Every business is different
As these examples illustrate, the particular places where small but potentially serious situations exist will be different for almost every business. These situations may combine over time into a not-success business situation if left unidentified or unaddressed.
This means that one-size-fits-all solutions, such as those provided by software, may not do what is really needed. Where to look will probably flow from your management teams or financial analysts who know your business in great detail.
A resilience-building process targeting non-impact situations can be started simply and quickly using whatever data is currently available. In my experience, you can hit real paydirt in a surprisingly short time. The trick here is in looking at trends in key business aspects differently – as indicators of something going on that is much deeper than each indicator itself.
The internal vs. external causal distinction in failures is misleading
Situations that may result in a not-success type of business failure are likely to have a range of causes that include both internal and external ones. Impacts that are the focus of much “resilience” planning today have clear causes and are major in most cases. Non-impact causes are typically much more subtle and harder to detect. They may be individually small and largely unnoticed until they grow or combine so as to seriously weaken an otherwise good (successful) business.
Businesses fail for many different reasons, and often for some combination of these. True causes are seen most clearly post-failure, from the smoking rubble. But these causes are rarely not detectable long before the final crash and burn. Signs of trouble are always there someplace, but few businesses have any systematic way to spot them. That’s what a resilience process can do. Small problems can build into major problems if not detected and addressed as a routine management practice.
- Dr. Pero Micic addressed reasons for corporate failure based on implicit assumptions about the future in the Future Management Group blog: “Reasons For Bankruptcy: This Is Why Most Companies Fail”:
“Reasons for bankruptcy: Changes as drivers. Nokia had the future assumption that customers want many different cell phone models and always with a keyboard. VW, Mercedes, BMW, General Motors and virtually all other traditional car manufacturers had the future assumption that electric powertrains would not be marketable for decades, if ever. An assumption that today even threatens their very existence. How can something like this happen even to the world market leaders?”
“But also restaurant owners, retailers and gym operators had the future assumption that of course guests and customers could come to them at any time. A pandemic, as a surprise disruption of their future assumptions, was not on their radar.”
“In the next few years, there will be so many changes in the markets that it is highly dangerous to have your assumptions about the future only in your gut. All your strategic decisions are based on future assumptions. Future assumptions need to be treated critically, logically and rationally. Instead, wishful thinking and emotional denial prevail.”
- Research, data mining, and analysis firm CBInsights in 2019 had an interesting overview of some major corporate stumbles and recoveries: “18 Companies That Battled Bankruptcy, Scandal, And More”:
“Apple. Today it’s almost impossible to imagine a world without Apple, but Steve Jobs’ computing giant was on life support when he returned to the company in June 1997 after 12 years away. In the fiscal year that ended three months later, Apple had lost over $1B on an expansive line of products that included flops like the Newton MessagePad, a handheld device similar to a Palm Pilot. Even worse, the company was 90 days from being insolvent, according to Walter Isaacson’s biography of Jobs.”
“Apple’s recovery began with a $150M investment from Microsoft, which came as part of a broad peace pact that helped Microsoft defend itself from antitrust allegations by keeping its biggest rival afloat. Next, Jobs went to work trimming Apple’s product offering so that it could focus on selling a small number of transformative devices. He laid off 3,000 employees and discontinued about 70% of Apple’s products, including the Newton MessagePad. As Jobs told Isaacson, ‘Deciding what not to do is as important as deciding what to do.’”
“Jobs also pushed the company to be more innovative in its design. In one famous 1997 moment, he called a meeting with Apple’s top executives and proceeded to shout that, ‘The products suck! There’s no sex in them anymore!’”
“Best Buy. At a time when online sales are surging and brick-and-mortar retailers are going bankrupt, it would seem that a physical electronics store like Best Buy would be doomed to go the way of Circuit City or RadioShack. But a well-executed investment in the in-store experience has helped the company post at least 3% sales growth every quarter for nearly two years.”
“In March 2012, Best Buy reported that it had lost $1.7B in the preceding quarter. The loss was attributed to the rise of e-commerce and Amazon’s Price Check app, which allows shoppers to compare in-store prices to those offered by the web giant. Like many retailers, Best Buy saw customers visit its stores to browse, only to make their purchases online later.”
“To combat this trend, former CEO Hubert Joly instituted a price-matching guarantee, which cost the company margins but kept customers in stores. As Joly told The New York Times, ‘Until I match Amazon’s prices, the customers are ours to lose.’ Best Buy made up for these reduced prices by hiring former Target executive Rob Bass to make its supply chain more efficient. Under Bass’s direction, Best Buy teamed up with logistics system integrator Bastian Solutions and startup AutoStore to overhaul some of its distribution centers and speed up the repacking process with robots.”
“Nokia. Nokia lost 96% of its market share between 2007 and 2012, a testament to the rise and domination of Apple and Android devices. But thanks to a successful pivot, Nokia exists today as a $28B company and the world’s third-largest seller of mobile network equipment. After losing $3B in 2012, Nokia was forced to make a change. The company sold its tanking smartphone business to Microsoft, which made the operating system for its phones, for $7.6B. The company then turned its attention to its network infrastructure business.”
“In June 2013, the company paid $2.2B to take full control of its telecommunications equipment joint venture with Siemens. Nokia doubled down on this bet in 2015 with a $16.6B purchase of Alcatel-Lucent, increasing its addressable market by 50%.”
“In just three years, the company had shifted core competencies and honed in on what it did best. Later in 2015, it sold its mapping division to Daimler for $3B, intensifying its focus on the successful network equipment business. Former Chairman Risto Siilasmaa told BCG in 2016, ‘it has been a complete removal of the engines, the cabin, and the wings in midflight of an airplane and reassembling the airplane to look very different while in midflight.’ Nokia ultimately returned to smartphones in a roundabout way. In 2016, tired of losing money on the failing smartphone business, Microsoft sold the Nokia handset brand to a new company called HMD, and sold the former phone manufacturing, sales, and distribution assets to Foxconn. The phones are sold by HMD today, through a licensing agreement with Nokia.”
- Trading Economics tracks U.S. corporate bankruptcies (Chapters 7 and 11) and appears to show that COVID was quite effective in reducing bankruptcies from around 23,000 in 1Q 2020 to just 16,000 in 4Q 2021. That’s a bit inconvenient for standard wisdom, yes?
- For reference purposes, the population of U.S. companies as compiled by NAICS (North American Industry Classification System) is shown below: