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Major corporate failures have more in common than you’d think, and can be avoided

Enron: Once powerful, now gone. Hanneorla/Flickr

Well-known firms such as AIG, American Airlines, Arthur Andersen, Blockbuster, Chrysler, Citigroup, Delta Airlines, Dunlop, Enron, General Motors, Kodak, Marks & Spencer, Nokia, Parmalat, Polaroid and Woolworth have one thing in common: They’re cases of major corporate failures. Any resemblance seems to stop there, as they worked in widely different industries and the reasons behind their declines and collapses seem quite different.

However, in April 2018 research published in the Journal of Management Studies, my colleagues and I asked whether there are any recurring patterns explaining how and why large corporations fail, a fundamental question that has puzzled organisations and management scholars. This article was co-written by Stefanie Habersang (Leuphana University of Lüneburg, Germany), Jill Küberling-Jost (Technical University of Hamburg, Germany), and Markus Reihlen (Leuphana University of Lüneburg, Germany).

To explore such patterns, we used a qualitative meta-analysis research design. This allowed us to synthesize the wealth of previously published single-case studies on corporate failures.

Four common processes leading to corporate failure

A first salient finding of our analysis was that all the failure cases seemed to converge around four distinct process archetypes. We named these processes imperialist, laggard, villain and politicized.

  • Imperialist: This process archetype describes the failure of a firm due to overexpansion. For example in the cases of Parmalat, WorldCom, and News of the World, a dominant firm leader (often either autocratic or charismatic) fostered an aggressive expansion strategy. These firms failed due to an unfocused overexpansion of the firm which gave rise to conflicts with internal and external stakeholders.

  • Laggard: In the cases of Kodak, Nokia and Polaroid, once industry leaders, they failed because they did not adapt to changing market environments. These firms were stuck in their identity of being leaders, even as their dominance slipped away. While the management of these firms saw the need for change, they were not able to change a previously well-established business model that had made them so successful before – a similar process is described by Joshua Gans in discussing how the iPhone disrupted the mobile-phone industry.

  • Villain: Here the case involves the process of a previously good corporate citizen into a villain. In the cases of AIG, Enron and Fannie Mae, previously well-regarded firms with ambitious goals increasingly engaged in questionable business practices (see also Kennedy and Anderson discussing how unethical practices can become routine). After repeated discovery of such questionable business practices, these firms failed because they lost the trust of their customers and more generally their legitimacy in society. They lose their social “license to operate.”

  • Politicized: This model describes how firms fail due to increasingly severe conflicts with internal and external stakeholders. In cases such as Arcandor, Chrysler and Delta Airlines, the firms failed because they engaged in “trench warfare,” which strained resources and did not allow them to adapt to changing customer demands.

Two underlying mechanisms explaining the four processes

When examining the four typical process types in more detail, we were intrigued that each one could be explained by two underlying and self-reinforcing mechanisms: rigidity and conflict.

  • “Rigidity mechanisms” are processes of converging interactions. In the case of Marks & Spencer, top managers overestimated the firm’s stature, which lead to middle managers developing an illusion of invulnerability, which was fed back to top management. The process took hold and led to the company becoming locked in to an erroneous self-perception.

  • In contrast, “conflict mechanisms” are contradicting interactions and are also self-reinforcing. In the case of Nokia, changing consumer preferences for mobile innovations collided with the organisation’s strategy to diversify into businesses unrelated to mobile phones and caused it to lose sight of its core business.

In total, we identified five types of rigidity mechanisms (e.g., identity rigidity, obedience rigidity, etc.), as well as five types of conflict mechanisms (e.g., identity conflict, authority conflict, etc.)

While the rigidity and conflict mechanisms are fundamentally different – one is based on convergence, the other on divergence – both are capable of bringing about or preventing firm-level change contributing to the failure. Furthermore, we find that it is the distinctive pattern of rigidity and conflict mechanisms over time that gives each process archetype its pronounced characteristics and explains why firms fail.

Helping executives avoid corporate failure

No manager wants to experience or be the cause of a corporate failure. But at the same time, it is notoriously difficult to detect early on the subtle signals of factors that could lead to a downward spiral. In this regard, the outlined process archetypes hold two important implications.

First, we provide evidence-based conceptual frameworks that can help managers recognise patterns that may threaten the survival of their firm. For example, the “laggard” archetype draws the attention to the role of organisational identity in corporate failure. When firms must engage in a radical technological shift – for example, the automotive industry needing to shift from thermal to electric motors (as explained by Stefan Tongur and Mats Engwall), converging on a new identity becomes a crucial task in the turnaround process.

Second, the good news is that we find that each of the outlined processes can be overcome. While it is important to note that some rigidity and conflict is actually desirable within organisations because the former increases efficiency and the latter has creative potential, it is the extreme forms of these two mechanisms that contribute to organisational failure. The practical implication is that effective leaders will have to strike the right balance between rigidity and conflict within their organisations…

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