Failure Is A Commodity, Success Is A Brand
Compare the first Fortune 500 companies list of 1955 with the Fortune 500 list 2019. There are only 52 companies that appear in both the lists and have remained since inception. That’s a remarkable attrition rate. Only 10.4 percent of the Fortune 500 companies in 1955 have remained on the list. The rest have degraded, gone bankrupt, merged with or acquired by others.
‘In Search of Excellence’ – by Tom Peters and Bob Waterman was published in 1982. It listed 75 corporations as exemplars. Just 2 years later in 1985, Business Week ran a cover story titled ‘Oops!’ that recounted the fall from stardom of many of these 75 companies.
Through the years, the troubles at revered companies such as IBM, Polaroid, Motorola, Maytag, HP,Delta Airlines, Kodak,Raychem, Amdahl, Kmart, DEC and others have been the stuff of case studies on topics ranging from strategic mastery to scandal.
The modern Corporation is an institution which is most exposed to failure.
According to a famous study by Arie de Greus, the then planning director at Shell, the average life expectancy of a multinational company is around 40 years. This research was conducted in the late 1990s but the first 20 years of the 21st century have only proven that the mortality of corporations is an even bigger reality now than ever before.
My entire career has been working with global brands and companies. I have worked in great multinationals such as Unilever, Visa and Diageo. I have had the privilege of managing global brands in highly competitive categories. I sincerely believe that corporations should be exposed to natural competition and the risk of failure. Otherwise they will not be efficient and the fruits of their sustained success will not accrue to society at large. Capital is the accumulated saving of society. It must fetch return.
As a brand builder, I see brands potentially outliving parent corporations. To me, the important question is what makes ‘successful longevity’ possible? I search for the answer with a brand based view of the business reality. Companies can live, die, mutate, merge but brands can remain forever. Poor Corporations may kill great brands. Great Brands can never kill good corporations.
When markets are very profitable, new entrants are attracted. From having too few firms in the market before long there will be too many. Profits tend to zero. This is theoretical, classical economics and does not correspond to reality. Brands ensure different trajectories for businesses. Financial adventurism, short-term profit mindedness and management myopia can tank companies with great brands. As a general rule, brands help amplify the benefit of the virtuous cycle and mitigate the damage of the vicious cycle in the market.
Commodity pricing is a case of a non-branded reality. Margins suffer when there are few barriers to entry and exit. Differentiation is at the core of brand building. This is as much true for cheap motels, unskilled labour, poor farmers selling horticultural produce by the roadside as it is for very rich corporations selling packaged goods, boxed hardware or financial packages. If you don’t have the edge, you are losing control.
A virtuous cycle happens when a brand differentiates its product and service so that it can enjoy higher margin than competitors and gain a large market share. The brand with the higher margin can make further investments in scale, technology, innovation to consolidate and increase its lead. It can pay more to get better talent and build more productive systems and alliances. It can afford to advertise and provide better value.
This is the secret for successful, profitable companies. This is the reality of increasing returns. The brands which build such virtuous cycles account for the majority of profits in a developed economy.
On the other hand, the neglect of the brand leads to a negative or a vicious spiral. Those who are behind fall further behind. Returns get diminished. The squeeze leads to a declining pace of innovation and this in turn erodes differentiation even further.
Successful companies and brands can fail because they are unable to retain the edge on learning, adaptation and innovation/renovation. Therefore, the moment the cycle turns to the declining side they are unable to change.
Success makes brand management arrogant, complacent or plainly greedy. They ignore new technologies, customer service and innovation. They stop listening to customers and lose empathy. They stop hiring new talent or rewarding productive talent. Basically, they don’t want change.
“Nothing fails like success” wrote Richard Pascale in his wonderful book ‘Managing on the edge’ published in 1990. If you have laurels, try not to rest on them. Remember your greatest strengths are also weaknesses. Don’t be so enamoured with what you do best, that you fail to realise that the world around you is changing.
