Why good companies go bad

Share buyback announcements tend to excite investors as the buyback price is usually at a premium compared with the prevailing market price at that point. But is it really exciting news? That depends from company to company and under what circumstances a particular company has announced share buyback.

Why good companies go bad

Is it that companies just stand by idly, taking no actions to keep their businesses alive? Donald Sull does not believe that is the case at all, in fact, he believes quite the opposite.

Why good companies go bad

Sull believes that many companies fail to adapt to changing business environments because of active inertia. What does he mean by this? Active inertia is when a company uses the same patterns and ideals that have motivated actions in the past in an attempt to adapt to the changing environment.

The company is taking actions to try and evolve with the business world, but does so in a way that is actually more detrimental than helpful because the company strategy has not materially changed.

For years Firestone was the leading tire manufacturer in the United States. Firestone built strong relationships with the Detroit Big Three automakers and grew steadily for years.

In fact, Firestone grew so steadily that they saw their only challenge as keeping up with the growing demand for their product. In the early s, the French tire company Michelin entered the U.

Firestone had known about Michelin and the advantage they had in the tire market for years because of the great success Michelin had in Europe.

Firestone had even taken steps to develop its own radial tire to compete with Michelin.

See a Problem?

Unfortunately for Firestone, the steps taken were not enough. The investment of manufacturing the new tire design was a good one, but the new design needed a new production method and Firestone did not change its production processes. The new tire design required a higher quality than that of the older design and with out a new process this quality would not be achieved.

Also, Firestone took too long in closing plants creating the older and almost obsolete tire design, thereby creating more costs and fewer revenues. By the end of the decade, Firestone was forced to let the foreign company Bridgestone take control.

Firestone exhibited each of the four hallmarks of active inertia. Strategic Frames become Blinders. Strategic frames are the sets of assumptions manages make about the business world; they help managers answer complex strategic problems by giving them a framework to begin with.

Strategic frames can be very beneficial in allowing managers to find solutions to difficult tasks, but they can also hinder. When managers find the same frames working over and over they begin to believe that those frames are the solutions, the only things that matter.

However, when an environment changes, the strategic frames need to change also. Many mangers have problems identifying this because they have used the same ones successfully for so long.

Take Firestone as an example. The managers at Firestone had always considered its main competitors to be domestic companies like Akron.

When Michelin entered the U. The managers had their minds set that the only competitors that could really be a threat were domestic. They were using outdated frameworks about competitors causing the company to be blinded instead of enlightened to the competitive measures that needed to be taken.

Processes Harden into Routines.In “Why Bad Things Happen To Good Companies,” the authors explain why companies that at one time were very successful go into decline. In . Why Good Companies Go Bad by Donald N. Sull Reprint THINKING ABOUT W h y Good C o m pa n i e s Go Bad by Donald N.

Sull When business conditions change, the most successful companies are often the slowest to adapt. May 28,  · Companies make bad acquisitions, and sloppy diversification moves in what Collins calls the second stage of trouble: "the undisciplined pursuit of more." They stop getting the right people in key.

When business conditions change, the most successful companies are often the slowest to adapt. To avoid being left behind, executives must understand the true sources of corporate inertia.

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