The Truth About Why Companies Rise and Fall
Have you ever looked at the stock market and wondered why companies rise and fall? This article delves into the complex factors behind the growth and decline of companies, analysing market dynamics, management decisions, and external influences that shape their trajectories. The rise and fall of companies is not determined by a single factor but rather a complex interplay of internal and external factors, including management, market dynamics and a company's ability to innovate. While a strong product or service can launch a business, its long-term success is usually determined by its ability to adapt to challenges, changes to business processes, changes to market conditions and how effectively the company executes its business strategy
Factors causing companies to rise
1. Strong leadership and clear vision: Clear direction, effective leaders set a compelling mission and vision that provides direction and motivates employees to achieve shared goals. Strong leadership is the ability to inspire others to achieve a common goal. A clear vision is a compelling picture of a desired future that drives strategic direction and decision-making. Smart leadership is not about charisma, titles or being the smartest person in the room. It is about consistent behaviours, ethical choices and the ability to empower others.
The enduring truths about strong leadership
According to Kouzes and Posner's The Truth About Leadership, there are 10 timeless principles. This article names a few 1. Leadership starts with believing your actions matter. This is important because it is the fundamental driver of motivation, resilience and growth. This belief, often referred to as self-efficacy, shapes your perception of reality and empowers you to pursue goals and overcome challenges. 2. Leader must know and live their values as they drive commitment by providing a sense of purpose and meaning, fostering a connection between personal and organisational goals and leading to increased trust and engagement. When employees feel their personal values are aligned with the company's, they become more motivated, loyal, and invested in the organisation's success. Values act as a foundation, giving a company clear purpose beyond just profit. This purpose motivates employees by providing a why behind their work which increases their committment to achieving organisational goals. 3. Trust rules: Without trust, leadership fails. This can happen when employees lose confidence, are demotivated, and lack commitment, leading to poor performance, high turnover and a toxic environment. For example, poor communication can be attributed to a leader who doesn't listen to their team and fails to communicate a clear vision or holds back important information, causing misalignment and disengagement. Tim Cook of Apple is an example of a strong company leader for his focus on employee development and operational efficiency. Cook emphasises employee development and streamlined processes to maintain high product standards and operational efficiency.
As the leader who successfully followed the iconic Steve Jobs, Tim Cook has proven to be a strong company leader by achieving unprecedented financial growth, cultivating an ethical and transparent corporate culture and maintaining product innovation through a collaborative leadership style. Cook's evolved leadership style, in contrast to Steve Jobs' autocratic and micromanaging style, is characterised by his democratic and collaborative approach, which empowers his team.
Adaptability and Innovation
Adaptability is the ability to adjust to new conditions. It is defined as the capacity to adjust to different situations and circumstances by changing strategies, operations or business models in response to market conditions. Innovation is the process of creating and implementing new ideas, products, services and solutions that create value. Innovation is about renewing or altering existing things to make them better or creating something entirely new. Amazon's constant use of innovation turned it from an online bookstore into a global e-commerce and cloud computing company.
Adaptability and innovation are crucial for business success because adaptability enables organisations to respond to change, and this flexibility creates an environment where new ideas and innovations can be developed and implemented. For example, Netflix is an American media company founded in 1997 that has a global presence with over 300 million paid subscribers. Netflix offers a diverse range of streaming entertainment, including original and licensed TV shows, movies, and documentaries. Netflix shifted from DVD to streaming.
Companies that continuously innovate respond well to changes in market dynamics. By consistently making incremental improvements to products, services and processes, companies to embrace continuous innovation can stay aligned with evolving customer expectations. One advantage of continuous innovation is that it can mitigate risk. Unlike high-stakes disruptive innovation, continuous innovation involves smaller, less risky adjustments over time. Companies rise because they keep pace with technology, and they embrace new technologies to streamline operations and gain a competitive advantage. Risers have a strong brand and deploy effective marketing campaigns; they know how to communicate their unique value proposition to their target audience.
Talent development
Successful leaders prioritise recruiting and developing talent, institutionalising their skills and empowering them to build the company. Developing talent is crucial for a company's success because it builds a skilled, adaptable workforce that drives innovation, productivity and long-term growth. Talent is arguably the fundamental reason why companies succeed and are successful. Employees are more likely to stay with companies that invest in their growth, which reduces recruitment costs and preserves institutional knowledge.
Tech companies such as Microsoft and Google, which officially became known as Alphabet on 2. October 2015 are recognised for acquiring and developing talent. Google's G2G (Googler - Googler) learning program, for instance, where employees teach one another, fosters a continuous learning environment. Talent isn't the only factor contributing to Google's success. The company's success can also be attributed to a combination of relentless innovation, a user-centric philosophy and a highly lucrative business model built on advertising. Google's stock price has risen significantly over recent years due to several factors which reinforce its market dominance. The market has rewarded Alphabet for successfully transitioning from being perceived as an AI loser to an AI winner.
Factors causing companies to fall
So far, this article has discussed factors that contribute to a company's rise in its market and to its overall success. Now let's discuss some of the internal and external factors which can contribute to a company's downfall.
1. Hubris and ignorance:
An internal factor is both distinct concepts that actively interact with each other, particularly in the context of decision-making, psychology, and moral philosophy, often leading to poor outcomes. Hubris is defined as excessive pride, self-confidence or arrogance that leads a person to believe they are beyond the constraints of human limits or moral law. Hubris contributes to my way is the right way factor, which can effectively lead to mismanagement, and ineffective decision-making may cause other issues to take effect, such as locus of control. Locus of control is the state of a company becoming too focused on internal politics, bureaucracy ego-driven decision-making, which means it can lead to losing sight of their customers and market needs.
BP is a British multinational oil and gas company founded in 1909. Its core business is oil and gas, but it is transitioning to become a more integrated energy-efficient company. The company has a large retail network, including gas stations and convenience stores, with over 1,150 retail sites in the UK alone. BP is an example of a well known that has struggled at some point in time with poor leadership. The Deepwater Horizon Oil Spill was exacerbated by poor leadership decisions and a lack of safety protocols, leading to devastating environmental damage and financial losses.
2. Internal decay
Internal decay is an internal factor that can happen at any stage of a business's lifecycle, but is more common during rapid periods of growth. Fast growth can lead to chaos, and companies may struggle to maintain their culture and processes. Internal decay is the gradual decline or deterioration of an internal structure or processes, often leading to decreased performance, efficiency or overall success. These factors can manifest in various ways, such as bureaucracy and red tape, such as excessive rules, regulations, and procedures that hinder innovation and progress. Politics and silos are contributing factors of internal decay, causing internal power struggles, departmental silos, and a lack of collaboration can lead to inefficiencies and decreased productivity. Internal decay can be insidious, often going unnoticed until it's too late.
3. Financial mismanagement
Financial mismanagement is a significant factor in a company's downfall because it can lead to a cascade of problems that are difficult to recover from. Financial mismanagement refers to the inefficient or irresponsible handling of a company's financial resources, leading to financial instability, losses or even bankruptcy. Financial mismanagement can include overspending; excessive spending on non-essential items such as lavish offices or unnecessary equipment. Financial mismanagement can also include poor budgeting, consisting of inaccurate financial broadcasting, inadequate budgeting or failure to plan for expenses. Misinvoicing, inadequate or fraudulent financial reporting, leading to incorrect financial decisions.
When a company mismanages its finances, it can lose credibility where investors, customers and suppliers lose trust in the business's ability to manage its finances, making it harder to secure funding, negotiate deals, or maintain relationships. Businesses can run out of cash; poor cash flow management can lead to bankruptcy even if the company is profitable on paper.
4. External pressures
Many factors can indeed contribute to a company's downfall. A research study conducted by McKinsey suggests that external factors, such as industry trends, account for up to 50% of a company's performance. Bain & Company's research on corporate longevity found that companies that adapt to external changes, such as shifts in customer needs and technological advancements, are more likely to survive and thrive.