Why Companies Fail

1
Why Companies Fail

• By Ram Charan and Jerry Useem
• FORTUNE, May 27, 2002

Presented for Business 12, November 20,
2002 By Nora, LeeJoan, Jerose, Cecilia and Ailya
2
Why Companies Fail

• A bad economy
• Hundred year flood
• Market
• September 11th
• MANAGERIAL ERROR

Ex Enron, NASA
3
Guilty of Being Innocent

• Polaroid, Xerox and Intel
• Nifty Fifty were the 50 large stocks most favored
  by institutional holders.
• Bad Business Model
• Explain away or Confront

4
Dysfunctional Board

• Conflict of interest
• Who reports to whom?

Revisionist Model
Traditional Model
Top Managers
Stockholders
Board of Directors
Board of Directors
Stockholders
Top Managers

• No bad news / The Godfather

5
Death Spiral

• The first domino falls Why?
• Customers delay new orders
• Rating agencies lower the companys debt rating
• Employees head for the exits
• More customers defect
• ENRON A firm is inherently fragile if its value
  added emanates more from conceptual as distinct
  from physical assets Trust and reputation can
  vanish overnight. A factory cannot.

6
Fearing the Boss more than the competition
7
Slave to Wall Street

• Listen to Wall Street more than to employee
• Lucent CEO Rich McGinn ignored two groups

• Lucents Scientists
• Lucents Salespeople

8
Dangerous Culture

• Arthur Anderson/Enron vs.
• Salomon Brothers

Rotten cultures produce rotten deeds
9
Softened by Success

• Optimal decisions?
• Crisis or success
• Mental models
• CISCO
• Key assumption - growth

10
Acquisition Lust

• WorldCom CEO Bernard Ebbers said
• Our Goal is not to capture market share or to be
  global, but our goal is to be the No. stock on
  Wall Street.
• Their stock has lost 98 of its value
• CEOs succumb to an undisciplined lust for
  growth, accumulating assets for the sake of
  accumulating assets.
• CEO Their eyes are bigger than their stomachs.

11
Overdosing on Risk
12
Strategy du Jour

• Short Term strategy
• Doom loop
• Ex Kmart
• Long term strategy

13
Three Quick Fixes

• Reengineer the Board
• Turn employees into corporate governors
• Banish EBITDA
• Earnings
• Before
• Interest
• Taxes
• Debt
• Amortization

14
Conclusion

• 10 common mistakes that companies make
• Guilty of being Innocent Dysfunctional Board
• Death Spiral Fearing the Boss
• Slave to Wall Street Dangerous Culture
• Softened by Success Acquisition Lust
• Overdosing on Risk Strategy du Jour
• 3 ways to avoid them
• CEOs offer every excuse why their company has
  failed but the right one their own errors.