Our research looks at the data that others have ignored. Most business research studies successful companies and tries to generalize from their traits, tactics or strategies. But a serious question always lingers: What about companies that tried to do the same thing as the winners and failed? And, if they failed dramatically, they might not have survived long enough to even make it into the sample set of many success-oriented research efforts.
To glean the lessons from those that have failed, we examined a broad cross section of the most significant business failures between 1981 and 2006. We defined failure as writing off significant investments, shuttering unprofitable lines of business, or filing for bankruptcy.
Working with leading information vendors, including Reuters, Thomson Financial, and bankruptcy.com, we built a comprehensive database of more than 2,500 such failures suffered by publicly traded companies in the U.S. We picked U.S. public companies because reporting requirements ensured uniformity and access to data while, at the same time, yielding a large enough universe from which to generalize the results. We picked the 25-year period because it was long enough to span multiple economic cycles but recent enough to be relevant to today’s business environment and management practices.
We also did a literature search to look for failures that didn’t show up in the vendors’ databases—for instance, companies that sold themselves before having to account for a major problem.
Then, aided by a team of researchers from Diamond Management & Technology Consultants, we spent more than a year poring over the data. We first applied several financial filters that narrowed the list to the 750 most meaningful. We narrowed bankruptcies to companies with $500 million or more in assets in the last quarter prior to bankruptcy. We narrowed write-offs and discontinued operations to those greater than $100 million, not including write offs for in process research and development. (Accounting rules during the years covered by our data required the immediate expensing of all recognized in-process research and development assets following a business combination. These write-offs were a mixed bag; the charges sometimes represented dead-end projects while at other times they were one-time charges against otherwise worthy, continuing projects. Given that it was difficult to distinguish between the two, we chose to ignore the category of write-offs. )
We then did a root-cause analysis, reviewing financial filings, business and popular press reports, and assessments from industry analysts to understand these failures. Using this analysis, we identified repeating patterns, where failures across multiple industries were variations on a theme. We homed in on failures that seemed to be because of strategic failures, rather than environmental factors beyond management control or mishandled implementation. Out of the 750 cases, we found 355 where strategies led directly to major failures. These cases are shown in tables at the end of this section, organized by failure type.
Next, we drilled further into 80 of these strategic failures, selected to give a representative sample across a broad set of industries and failure patterns. In this further analysis, we turned to a wider set of references including personal interviews, court documents, local newspaper coverage, and business-school cases. The personal interviews included principals involved in the failure, journalists and analysts who covered the events at the time. We also talked with many of those who were responsible for cleaning up the mess and who, for the sake of posterity, were willing to guide us through what happened, in excruciating detail.
From this analysis we drew the lessons about the common problems, the red flags that might alert management to impending failures, and the tough questions that might avert those failures.
