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Wednesday, February 09, 2005

Jagdish Sheth On Why Good Companies Fail

Jagdish Sheth, the Charles H. Kellstadt professor of marketing at the Emory University’s Goizueta Business School, says that the life expectancy of American companies is declining, and that even some of America’s most respected firms are susceptible to failure. Sheth discussed why success too often breeds failure. His most recent book— The Rule of Three: Surviving and Thriving in Competitive Markets, co-authored by Rajendra Sisodia, altered the current notions on competition in business. In an interview with Knowledge@emory, Jagdish Sheth elaborates on this theme Excerpts with edits and comments added:

- The life expectancy of companies was declining. That was very surprising. Institutions were supposed to be immortal and humans were mortal. Today, we are living longer and the company’s life expectancy is dropping. For example, a corporation’s life expectancy is only about 14 ½ yrs and declining, because of mergers and acquisitions or Chapter 11 protection.

- The six externalities that bring about a change. They are regulation, capital markets, competition, technology, globalization and customers. When any of these external contexts changes radically and the company is either unable or unwilling to change, it often results in failure. The fastest moving externalities are regulation, competition, and capital markets, while the slowest moving ones are technology, customers, and, globalization. Regulation, in particular, is the most influential. With the stroke of a pen, you can change a whole industry’s nature.

- Most companies come into existence by being opportunistic—call it entrepreneurial opportunity. They take all the credit, but it’s partly the environment and partly the individual. Company success is very much like human behavior—a result of nature and nurture. They succeed as long as the environment doesn’t change. The underlying theory is that many people in business succeed by accident and not by plan.

- When you succeed by accident, you often latch on to your belief system much more than before. You become superstitious in a way. Next to baseball players, the most superstitious people in the world are entrepreneurs. They get locked into one paradigm or one way of life, like Digital, for example. The founder destroyed the company himself since he was bent on his belief in the continued success of the mini computer. He held on to that belief even when the personal computer became the standard, and he destroyed the company in the process. Similarly, many airlines failed after rapid deregulation in the late seventies because they could not change fast enough to meet or resist competition. Examples include Pan Am, TWA and Eastern Airlines.
- Change management is most effective when the company is in crisis. it is, just like in our daily life. The best wake up call is often after a mild heart attack or discovery of a chronic disease, such as diabetes.
- There are three dimensions to change management.
-The first is mindset change. This is usually accomplished by leadership programs, such as the famous "workout" program at General Electric.
-The second is some form of reorganization. This includes eliminating or restructuring leadership’s responsibilities and restructuring the organization. HP went from a country-by-country profit & loss organization to, for example, global product management reorganization.
- Finally, the most critical change is the reward system. I am on the compensation committees of several public company boards, and I am amazed at how much the CEO and his direct reports are obsessed with compensation issues: we all are! For successful change management, it is important that these three dimensions of change are coordinated and executed in parallel.

My Take: Ever since I read his book,based on recommendation by colleague Mohan Srinivasan,I had been a fan of Jagdish Sheth - while his findings are backed up by impressive analysis and backed by facts - these seem applicable to all industry - except IT professional services industry - As we noted in this posting the marketshare of IBM in IT consulting hovers around 8% and there are several players and this is not a new industry either - the industry has been affected by all the factors that Dr.Sheth lists down -from regulation to technology -but fragmentation does not change - may be it is because of very high growth the industry is undergoing - more of this later. But otherwise Dr.Sheth is always a pleasure to read - excellent assessments backed by very incisive inferences.

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