Why Companies Fail1 - WHY COMPANIES FAIL Introduction CEOs...

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WHY COMPANIES FAIL Introduction CEOs offer every excuse but the right one: their own errors. Here are ten mistakes to avoid. FORTUNE Monday, May 27, 2002 By Ram Charan and Jerry Useem How many more must fall? Each month seems to bring the sound of another giant crashing to earth. Enron. WorldCom. Global Crossing. Kmart. Polaroid. Arthur Andersen. Xerox. Qwest. They fall singly. They fall in groups. They fall with the heavy thud of employees laid off, families hurt, shareholders furious. How many? Too many; 257 public companies with $258 billion in assets declared bankruptcy last year, shattering the previous year's record of 176 companies and $95 billion. This year is on pace, with 67 companies going bust during the first quarter. And not just any companies. Big, important, FORTUNE 500 companies that aren't supposed to collapse. If things keep going like this, we may have trouble filling next year's list. Why do companies fail? Their CEOs offer every excuse in the book: a bad economy, market turbulence, a weak yen, hundred-year floods, perfect storms, competitive subterfuge--forces, that is, very much outside their control. In a few cases, such as the airlines' post-Sept. 11 problems, the excuses even ring true. But a close study of corporate failure suggests that, acts of God aside, most companies founder for one simple reason: managerial error. We'll get to the errors in a moment. But first let's acknowledge that, yes, failures usually involve factors unique to a company's own industry or culture. As Tolstoy said of families, all happy companies are alike; every unhappy company is unhappy in its own way. Companies even collapse in their own way. Some go out in blinding supernovas (Enron). Others linger like white dwarfs (AT&T). Still others fizzle out over decades (Polaroid). Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward. Creative destruction, they call it. It was roughly this sentiment that Treasury Secretary Paul O'Neill was trying to convey when he said that Enron's failure was "part of the genius of capitalism." But aside from sounding insensitive, O'Neill got one thing wrong. Capitalism's true genius is to weed out companies that no longer serve a useful purpose. The dot-coms, for instance, were experiments in whether certain businesses were even viable. We found out: They weren't. Yet many recent debacles were of companies that could have lived long, productive lives with more enlightened management--in other words, good companies struck down for bad reasons. By these lights, Arthur Andersen's fall is no more part of the "genius of capitalism" than the terrorism on Sept. 11 was part of the "genius of evolution." By "failure," we don't necessarily mean bankruptcy. A dramatic fall from grace qualifies too. In the most recent bear market, for instance, 26 of America's 100
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largest companies lost at least two-thirds of their market value, including such blue chips as Hewlett-Packard, Charles Schwab, Cisco, AT&T, AOL Time Warner, and
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This note was uploaded on 07/03/2010 for the course FINANCE dc taught by Professor Jdcvs during the Spring '10 term at Indian Institute Of Management, Indore.

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Why Companies Fail1 - WHY COMPANIES FAIL Introduction CEOs...

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