Home  •   Subscribe  •   Voting Poll  •   Archives  •   Advertise on Marketviews
9 Ways to Ruin a Successful Company (Part 1 of 3)
Nicholas van der Meer
4 May 2011

There is a proverb that says, “Wise men learn more from fools than fools learn from wise men”. The majority of our learning in business and investing is based on what we should do, yet we can learn as much from what we should not do. Throughout history, business leaders have made costly mistakes and we would be wise to learn from them.

In this three-part series, I will share with you nine guaranteed ways to ruin a successful company, because the successful investor should be as vigilant about identifying and avoiding bad companies as he is about investing in good ones. Ultimately it is the inclusion of bad companies that ruins an investment portfolio. 

All material for this series is adapted from Donald R. Keough’s book, ‘The Ten Commandments for Business Failure’. Take some time to evaluate the companies in which you’ve invested against these points and be prepared to make some tough calls if needed.

Finally, remember that if the company is not making any of these mistakes, it is no guarantee of success, but if they are making these mistakes then you can be assured of some level of failure.

1.    Quit taking risks

All businesses must start by taking risks. Someone must come up with an idea and take the risk of growing that idea into a viable business. He must, amongst other things, acquire capital, hire staff and invest time and resources in an uncertain venture for which there are no guarantees. If anything, the odds are stacked heavily against him (considering the high percentage of new businesses that fail). If that business manages to become successful, the risk does not stop there. The attitude of risk-taking must continue, otherwise the entire basis upon which that business was founded, is lost. At every fork in the road, the frontier path must be chosen.

The more there is to lose, the more difficult it becomes to take a risk. It is natural human behaviour to stop taking risks as soon as we’ve acquired something of value; and the temptation is to reallocate efforts to building walls to protect what we’ve acquired. Instead of playing to win, one is now playing so as not to lose.

Investors should look carefully at the signals being sent by management to determine their mindset. Pay particular close attention to companies that have performed well in the past, because past success does not guarantee future success. If management continues to try new things, innovate and seek out new opportunities then one can be more at ease that they are at least adhering to one of the core principles of business: an appetite for risk.

If, however, you see that management is taking decisions to build a protective wall around its past achievements and is adopting a ‘laager’ mentality then you should beware. There will always be competitors who are taking risks and if your business is not doing the same then the chances of it being the relative winner are slim.

A caveat to taking risks: There is a distinct difference between taking risks and being risky. A company that invests in an offshore venture without doing the proper research is being risky; a company that undertakes the same venture but does thorough research is taking a risk. A good measuring stick is to ask if the company is able to quantify its ventures. Risky companies will often talk about ‘blue sky’ investments or pin their hopes on a single deal or resource. In contrast, a company that takes risks is one that can accurately quantify the expected investment, returns, major risks and probabilities of each scenario. Be sure to distinguish between the two.

2.    Be inflexible

Charles Darwin said, “It is not the fittest of the species that survives, nor the strongest, but rather the one most responsive to change”. This could not be truer in business – especially in today’s fast-changing landscape.
A company may have achieved success thanks to a certain formula – a concoction of ingredients that worked together at one time to generate profits. The worst thing management can do is believe that their formula for success is everlasting and that they will never need to change or adapt it.

A great example of inflexibility can be seen in the US in 1939, where Pepsi, Coca-Cola’s major competitor, started selling its product in larger bottles because, with the advent of refrigeration, more people were able to serve soft drinks at home and so they preferred larger bottles. Until then all soft drinks were sold in 6-ounce (175ml) bottles. Pepsi sales soared while Coca-Cola’s idled along. But still Coca-Cola’s management would not budge because they ascribed their past success to their magic formula, of which they believed the 6-ounce bottle was a key ingredient. It took them sixteen years to eventually start selling Coke in larger bottles. Thankfully for them their sales numbers recovered, but not before they had allowed Pepsi significant inroads into the soft drink market.

In contrast, a great example of a company that is flexible is Apple Inc. Each year Apple makes significant developments to existing products like the IPhone and Mac Computers, as well as bringing on new products like the IPad. Once Apple had developed a superior personal computer, they could have become inflexible by simply looking to that one product to make their business success. But instead they have continuously adapted to the changing technological environment with their exciting new products and developments.

3.    Assume infallibility

Each of the following companies shares two common characteristics: AIG, General Motors, Bear Stearns, Chrysler, Fannie Mae, Freddie Mac, HBOS, Northern Rock, Lehman Brothers, Merrill Lynch, Wachovia, Saab and Circuit City.
They were all deemed ‘too big to fail’. And they all failed.

The worst mentality that any company’s management could adopt is, “We are so great/so good/so far ahead of the competition that no one will ever be able to dethrone us”. As soon as company management shows signs of arrogance and an assumption of infallibility, then trouble is on the way. Because of their arrogance they don’t pay the commensurate attention to detail, their work becomes sloppy and worst of all they inevitably underestimate their opponents. From the world of sport we have seen that as soon as you underestimate your opponent, you are bound for failure.

The most contemporary example of this is the ascendency of Korean carmaker Hyundai. At the turn of the millennium Japanese and German car manufacturers scoffed at the Koreans and said they could never build a car superior to theirs. At the time, Hyundai’s products were well behind the competition based on all measures. Today, ten years later, Toyota says it fears Hyundai more than any other competitor. Hyundai has taken the market by storm, producing better-looking, better-performing, better-value cars each year. In the comparative period companies like Toyota have made virtually no advances and in many respects have gone backwards. And now these companies like Toyota have to scramble and fight for their previously-secure market share because, in assuming infallibility, they underestimated their opponent and practically handed them the ascendency.

Be particularly wary of management teams that exude even the slightest bit of arrogance – it is a sure recipe for disaster


Trade and invest like a professional - you can with Sharenet. Book a seat now at our 2nd Quarter presentations across the country and change the way you invest forever. Click here to book a seat now


Market Statistics are calculated by Sharenet and are therefore not the official JSE Market Statistics. The calculation/derivation may include underlying JSE data.
© 2018 SHARENET (PTY) Ltd, Cape Town, South Africa