MLab

Should We Save Dying Companies?

Posted by Gary Hamel on June 24, 2009

In two recent blogs I outlined four reasons why flourishing companies often falter: change happens, gravity wins, strategies die and success corrupts. To these let me add a fifth failure factor: catastrophes strike. Occasionally it really isn’t management’s fault—poop happens. For example, it would be unfair to blame Toyota’s management team for the entirety of the firm’s recent $21.8 billion reversal in earnings (from FY08 to FY09). Likewise, executives at Southwest Airlines deserve at least a tear of sympathy for the brass-knuckled battering their company has received in the recent recession.

By itself, an externally-generated calamity is seldom enough to kill off a successful business; though a bout of seriously bad luck can deliver the coup de grâce to a company that was already on its knees.

But should we care when a company struggles or dies? Isn’t birth, growth and death the natural order of things—to be expected in organizational life just as it is in human life? Isn’t the cycle of beginnings and endings a good thing? Even a recession has it uses. Like a forest fire in an over-protected wilderness, it clears out sickly trees and gives new saplings room to grow. So while organizational failure is inconvenient for those involved (after the forest fire, campers will have to roast their marshmallows somewhere else), is it, well, a catastrophe?

Maybe we should cheer when a poorly managed company with poorly led employees, poorly served customers and poorly rewarded shareholders, finally shuffles off the stage—and releases its resources for more productive uses. My first thought when United Airlines went into bankruptcy a few years back: this couldn’t happen to a more deserving bunch of people. It’s not that I was unsympathetic to the employees who were facing the axe (even years of bad-tempered service isn’t enough to make me vengeful), it’s just that I was hoping the company’s travails would clear out some gates for a bright and snappy newcomer.

When it comes to life and death struggles of the corporate kind, my venture capitalist friends in Silicon Valley are mostly a pitiless lot. Since they’re in the business of creating new companies, they don’t care much about the old ones (unless of course the stalwarts are looking to buy). For the most part, VC’s are happy when the incumbents stumble and delighted when the insurgents surge.

Business school professors, on the other hand, usually have a keen interest in prolonging corporate life. For every book that promises to untangle the secrets of growth, there’s another that offers lessons in how to forestall death—or at least helps managers identify the warning signs of impending doom. (A few representative titles: “Permanently Failing Organizations,” “The Icarus Paradox,” “The Innovator’s Dilemma,” and my favorite, “Why Good Companies Go Bad.”) In my own book, “The Future of Management,” I offered a lot of advice on how companies can become more adaptable—and thus withstand the gale force winds of creative destruction.

Unlike those heartless VCs, my academic peers and I ooze sympathy—though our tender concerns may not be entirely selfless. A few years back, I was giving a talk at an academic conference on the problem of reinventing strategy in large organizations. Halfway through my disposition, Professor Henry Mintzberg, ever the contrarian, raised his hand. “Why,” he asked, “do you care about extending the life of big companies? Is it because they’re the only ones that can afford your fees?” Haha. Very funny, Henry. I fumbled my way through an answer, but the distinguished professor had a point: Whose interests are really served when one works to extend the life of a big company—and whose interests are, perhaps, trampled upon?

Given the recent spate of multi-billion dollar bailouts for serially incompetent companies, Henry’s question is more timely now than ever. General Motors, Chrysler and Citi are just a few of the laggards and miscreants who’ve been provided taxpayer-funded ventilators and respiratory therapists. In a recent article the Financial Times reports that nearly $60 billion of government loans and subsidies have been handed out to U.S. car-makers and suppliers over the last nine months. But is this a good use of the public purse? Did these companies get rescued because society has a long-term stake in their continued existence, or because they had political muscle? One hint: GM agreed to postpone the closure of a parts distribution facility in Massachusetts after a meeting between Fritz Henderson, GM’s CEO, and the chairman of the House Financial Services Committee, Barney Frank, this according to the Hill’s Blog Briefing Room. Once again, politics trumps business logic.

A hypothetical question: Would humanity have been well served if a herd of tender-hearted beasts, back there in the Mesozoic Era, had somehow figured out a way to keep T Rex and his mates alive? I can see the win from the dinosaurs’ point of view, but I’m not sure it would have been a net plus for you and me. And that, in a sense, was Henry’s point: Why would we want to do anything that might reduce the cold efficiency of Darwinian competition in improving the breed? Wouldn’t it be better to simply admit that destruction, whether caused by ineptitude or catastrophe is, as Schumpeter claimed, creation’s unavoidable counterpart?

So, dear blogee, what do you think? Should we give a toot when a company gets into trouble? In a dynamic economy, is there any reason to care whether a company lives or dies? Or put another way, does organizational longevity have any intrinsic value—for shareholders, employees, customers or society at large? Please share your views, and next week I’ll come back with some more of my own.

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