Understanding Organizational Failure

When do organizations fail?  It is typically when their financials go south.  Their deficits are unsustainable.  Cash is draining from the enterprise.  Their strategies for stemming the tide are too little, too late.  Why do organizations fail?  What causes these financial outcomes?

The story that led to these consequences almost always started playing out much earlier. Leaders either ignored or did not understand this story. Or, they thought they were in a different story, where they were becoming prime time players in their targeted market.  They needed to believe in this future.

But, they ignored the signals from the big time players that the game was changing. Instead, they invested scarce resources in becoming good at the old game. When it finally hits them that the game was changing, resources were scarce and/or committed to the old game. They felt that they have to stay the course.

Companies such as Kodak, Polaroid, Xerox, Motorola, and Nokia experienced such unraveling.  However, companies are not the only victims.  Inside Higher Ed reported that since 2015 more than 10 non-profit universities have closed per year.  Moody’s projects this number to grow to 15 per year in the near future.  Particularly at risk are private institutions with annual revenues less that $100 million, and public institutions with annual revenues less that $200 million.

What is driving these closures? First, obviously, revenues have not kept pace with costs.  Second, enrollments of foreign students, who pay full tuition, in US institutions is dropping due to increasing parity of foreign institutions and immigration worries.  Third, high quality, technology based online programs are attracting corporate students with tuitions far lower than traditional programs.  Thus, two cash cows for many institutions are steadily withering.

What should corporate or academic leaders do?  Mike Pennock and I formulated a multi-level strategy for addressing such situations.  One should optimize when objectives, dynamics, and constraints are measurable and tractable.  Unfortunately, organizations often delude themselves with regard to these requirements, assuming the game has not changed, often because of the immense social risk of admitting it.  See my book Don’t Jump to Solutions.

If optimization is not warranted, organizations can adapt if the enterprise response time is less than external response time.  Thus, an organization could transform to address change as it is happening.  This typically requires highly flexible processes for delivering value, e.g., when the Great Recession hit, Honda immediately switched production from Accords to Civics on the same production line.

If optimization and adaptation are not warranted, organizations can hedge the future if multiple, viable alternative futures are describable.  Modest investments in multiple possible futures can yield options, one or more of which can be later exercised once market desires and uncertainties are better understood.  For example, the University of Illinois recently bought insurance to hedge against the possibility of Chinese graduate students disappearing.

When none of the above is feasible, organizations likely have to accept the situation.  In this case, it would be prudent to preserve resources to deal with whatever happens.  The worst strategy would be to heavily invest in optimization when this is completely unwarranted, e.g., investing in capacities for a demonstrably fading value proposition.  This is a dominant precursor to organizational failure – a good way to stage a disappearance.

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