Situations of Rapid Change

All good things come to an end – lack of strategy is the major cause of death in the corporate world

Following the right strategy is the key to long term going concern of a firm. As markets keep ever-changing, for mature companies, it’s vital to review the implemented strategies and also foster adaptability to new market conditions; whereas Start-Ups are observed to launch with mistaken market assessments and competitive strategies into the rough waters of competition. Both observations are supported by recent research data.

Corporates die like rabbits.

For 96% of corporates, the 10-year mark, marks the end of corporate life, matching the 10 years lifespan of rabbits. The methuselahs of the corporate world, the remaining 4%, excel in cash management as well as protecting their independence.

Reasons to go out of business are acquisitions, mergers, bankruptcy, etc. According to research, based on Standard and Poor’s Compustat, the “mortality rate” is irrespective of the past performance or the actual field of operations. In other words: It does not matter if you sell banana or airplanes. You are dead anyway.

The decline is often triggered by situations of rapid change, where the dynamics of an (involuntary) transformation process keep accelerating and eventually exceed the management’s capabilities to control and adapt.

As a matter of fact, the lifespan in the S&P 500, is heavily decreasing. Whereas in 1955, a firm was good to expect 61 years in the S&P 500, by 2015 this has decreased to 17 years, only. The fight for survival has become more brutal also among the titans of the economy.

Profit is a theory. Cash is a fact.

The abstract of all analyses on bankruptcy is: “the firm couldn’t pay its bills anymore”. This is a simple, yet, terminal statement, subject to a number of known root courses.

Peter Drucker says the reason for businesses to fail is, that management didn’t ask “What is our business?” in a “clear and sharp form”.

Eric Wagner, a seasoned serial entrepreneur claims, entrepreneurs fail, because they “retreat to a cave”, when developing new products, instead of thoroughly understanding their customers’ needs.

On a systematic level, the disconnect between company evaluation and taxation, based on EBITDA, on the one, and the brutal truth of cash flows on the other side, is adding complexity to a situation, which is, for companies in a critical stage, highly fragile and sensitive to any turbulence.

Hence, the real issue is not cash, but the idea, how to obtain (and keep) it. In general, this is called “strategy”.

The relevance of strategy for going concern is outlined by a research from the Turnaround Management Society, which identified main drivers for corporate failure:

  • 54.6% continuing with a strategy, which is not working for the company any longer.
  • 51,6% losing touch with markets and reluctance to adapt to changing customer needs.
  • 39.4% concluding incorrect strategic decisions.

Most common internal causes for corporate crisis

One important learning here is also: Over the past 38 years, the lack of financial control has become less relevant as a crisis factor. Whereas in 1984, inadequate financial control contributed to 75% of corporate distress situations, in 2014, this has been identified as root cause only in 36% of all cases.

Now, about giants and dwarfs

Whereas the strategy is the identification and deployment of (the right) ideas over time, this is reflecting a severe difference between mature organisations and Start Up firms.

A mature organisation has sufficient time at its hand, to adjust opinions, operations and market offerings to balance for changing markets and demands.

Start Ups, in hindsight, are dealing with time constraints, resulting from scarce resources, causing lacks to deploy products and services, quickly, address markets etc..

Short runways again, are leaving insufficient time frames for new strategies, to proof effectiveness.

As a footnote: Whereas successful Start-Ups master to manage cash constraints by excelling on agility and create momentum ahead of competition, time is diminishing quickly. If major organisations fall over the cliff and find themselves in turnaround and distress situations. The inability, to adjust culture, thinking and operations, and master agility, is one of the major challenges, turnaround professionals are facing, when on-boarded (which happens normally too late).

Going through the various “Why your start up will fail” Blog-posts, available from numerous self-proclaimed experts, a number of myths are in the room, regarding the reasons for default of Start Up firms. Some arbitrary chosen examples of such advice include:

  • Don’t let your desire to grow your business distract you from the core purpose.
  • Be willing to make changes to your vision, based on needs of clients and markets.
  • Welcome innovation, don’t be afraid to stand out.
  • Take a break sometimes.
  • Don’t overexert your company.
Though this is more in the tone of a DO-It-Yourself column, the advice holds some truth. The major point is, the general myth of Start Up life&let die – constraint cash supply, is not highlighted here.

Advice is cheap, evidence matters.

Whereas many of the published advice, appear to be either more from common sense or considerations around stereotype Start Up personalities, statistic analysis provides some valid insights. FRACTL concluded a postmortem analysis over 200 Start-Ups that failed. Also, CB Insights researched the reasons for default in 2014.

Reasons for default in 2014

Though the researches have a similar set of questions, the two results are not congruent.

Top scoring elements (both values at least 10% of answers or higher) on both sides are:

  • Business model not viable.
  • Ran out of cash.
  • Got outcompeted.
  • No market need.

Whereas “ran out of cash” might be anything from poor cash flow management, incapability to raise funds, even for the best business model, or simply bad luck on timing, it is moreover a proxy for other root causes.

The other three elements are a sign of poor strategy. This is underlined by the systematic character of those root causes – non of them can be cured with simply more cash.

Whereas, for example, “legal challenges” as reason for going out of business, can be normally cured through sufficient cash reserves, neither market need nor weaknesses in the competitive proposition and surely not the general business model can be subsidised by any chosen budget.

With regard to these researches, mature firms, fall into distress situations, due to their inability to adjust their strategies fast enough to ever-changing market conditions, whereas Start Ups fail, because their inability to launch a business with a right-on-spot strategy.

Truly, strategy is more an art than a science. Yet, there are numerous tools and technics, to develop, analyse and test strategic assumptions and also correct the course on the way, to begin a strategic process with. Investing some time in thorough analysis and concluding (and reviewing over the course of time) sound strategy is vital for the survival of a firm.

corporate die like rabbits

Take away:

96% of corporations do not survive longer than 10 years. As outlined by research, the major reason, to go out of business is the lack of agility to adapt to new market conditions. Inadequate financial control is decreasing as a root cause for distress situations. Also, for Start-Ups lack of strategy is the fatal trap, whereas running out of cash is the aggregate for lack of strategy.

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