Why good businesses fail.

The Success TrapBusinesses become big by doing some things better than anyone else. As they grow, they invest in those things so they can do them even better. But whilst they become more effective and efficient, they also become set in their ways, and find it increasingly hard to change.

Great businesses fail for one of two reasons: they stop doing what made them great, or the world stops wanting what they do.

A key reason Comet failed was that they were stuck with a huge store portfolio in a world where customers were increasingly going online. Ten years ago, Kodak stuck with film while the world moved to digital. A decade before that, IBM stuck with big mainframe systems while the world moved to small, cheap PC networks.

When the world changed, the things that made each of them great became their undoing. It’s not that they didn’t see the changes coming: Kodak famously pioneered digital photography, and then dropped the idea. It’s because, in each case, they were heavily invested financially, emotionally and culturally, in one particular way of doing business.

Fear stopped them leaping into the new reality. Fear that these radical changes could kill their core business. To change that core business was just too expensive, too risky, too darned hard. So they focused on justifying their approach: “big, integrated systems work better”; “digital photo quality will never match film”; “people will never spend big money buying TVs on the internet”. They became quite convinced.

The success trap is as much psychological as it is financial. It’s why all radical innovations come from small businesses, and it’s why all large businesses (yes, even Apple) eventually plateau and decline, as younger guns, with far less to lose, take risks and disrupt established markets. So how can you be successful but avoid the trap?

Three ways to escape the success trap:

  1. Start up a Start-up: When Tesco wanted to create radical innovations, like Clubcard and Tesco Bank, they knew they couldn’t do it from within the business. They set up new, standalone businesses, partnering with external organisations to bring in new perspectives and expertise. Clubcard led the market, changed the game and changed the Tesco business.
  2. Think like a Virgin: Branson is a serial disruptor of markets with businesses ranging from music to money, from health to holidays, all supported by Virgin Management Limited, but all autonomous, independent and entrepreneurial. The group goes from strength to strength, but no individual business ever gets so big that it fears to shake-up the market.
  3. Act like an Icon: Put yourself in the mind of a very different business, maybe Apple, Tesco or Sky. If they decided to enter your market and turn it on its head, what might they do? If it’s what customers would want but it looks bad for your business, you need to change your business and fast. If you can see ways to disrupt your market, it won’t be long before someone else can too. Move first and you’ll benefit from the change, hang back and you’ll suffer for it.

Bottom line:

Any business that’s been around for a while will struggle to adapt when circumstances change. However, the world is changing. And that pace of change is increasing. In more and more markets, adaptability is becoming more important than efficiency. How are you adapting to the brave new world?

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