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The business landscape has changed drastically over the last 3 decades. With the digital boom, we witnessed the steady metamorphosis of small technology disruptors into today’s mighty tech giants. Concurrently we also witnessed the gradual doom of several global businesses that were once household names in their respective industries.
When giants fall….
Since 2000, over 52% of the companies in the Fortune 500 list have either gone bankrupt, ceased to exist, were acquired, or dropped out of the list. The failure of big successful businesses to successfully respond to big changes in their environment is one of the most perplexing puzzles in the business world. Faced with business disruption, caused by nimble competitors offering innovative solutions, these giants are often caught up as the proverbial dear in the headlight.
Unable to defend themselves against their nimble competitors, they watch helplessly as their sales, profit, and cash reserves erode. Employees and customers start deserting them for greener pastures and they are left to die. Although some finally manage to turn around after several rounds of painful downsizing most don’t. But the question is why don’t these companies innovate in time and save their once trawling businesses? The simplest answer seems to be policy paralysis. But is it?
Policy paralysis or Active inertia?
However, analysis of the failure of big companies reveals quite the opposite. Instead of suffering policy paralysis, the managers of those companies often recognized the threat early and unleashed a flurry of initiatives. However, despite their best efforts, the companies failed. Therefore, the problem it seems is not the failure to take action, but an inability to judge the right course of action.
There can be various causes to this inability, but most often it arises from active inertia. Active inertia can be defined as an organization’s tendency to follow the established behavioral patterns even when faced with dramatic environmental shifts. They seem to be stuck in the modes of thinking that brought them success in the past, even while the environment around them has undergone a paradigm shift. To understand it better let’s consider the example of Nokia.
The failures…
Historically, Nokia has been a very adaptive company- moving in and out of several business sectors based on changing business dynamics. Recently, the company had reinvented itself to transition into a telecom business from being a conglomerate focusing on several verticals earlier. Nokia was never a technology laggard and invested a sizeable amount into research and development over the years. The company brought a prototype of an internet-enabled, touch phone at the end of the nineties. To its credit, the company was also adept in marketing and knew how to turn mobile phones into fashion accessories.
However, Nokia failed in the following years by focusing all its attention on hardware. Nokia was so enthralled by its past success that it underestimated the importance of software and the transition to smartphones. It also overestimated the strength of its brand and believed that it could win the smartphone game even after late entry. But the reality, as we all know was far from that and we all witnessed the gradual fall of a giant into oblivion.
Although starling, Nokia is however not the lone example of a giant gradually falling into oblivion. Kodak, one of the leading players in the photography industry hastened its downfall by continuing to bet on film sales even as the world was transitioning to digital. Similarly, Blockbuster continued investing in its chain of video rental stores, even while the world was transitioning into streaming video services- and ultimately went into administration in 2013.
Renewal: the solution
Although company names are different, all these business failures are connected by the common thread of active inertia. So, success leads to active inertia and active inertia leads to failure. So, is failure the inevitable endpoint of all success stories?
Not necessarily so. As companies like Goodyear, IBM, GUCCI, and Samsung show, not all success stories lead to failure. Instead, by timely renewing their business processes, these companies were able to revive their businesses and emerge stronger out of disruption.
Active inertia exists due to a strong pull of the past. By trying to break that pull-through revolution, companies can leave their employees disoriented. Thus, instead of revolution, what is required is renewal. Companies should build on their past foundation as they recast their processes, values, strategic frames, and relationships to meet the new challenges of their changing environment.
