The Writing on the Wall: Reading the Signs of Business Success and Failure

By Terence Sheppard

Thousands of businesses, large and small, fail every year. According to The Writing on the Wall most instances of business failure begin with early warning signs of trouble, which are clearly discernible, provided we know where to look and what to look for. Targeted at managers and business owners who want to avoid the mistakes made by many businesses, this book highlights the common pitfalls that lead to business failure, and aims to assist readers to identify where their business may be off track and provide advice on what they can do about it before it\'s too late. Author Dr Terence Sheppard is a management consultant with over 25 years experience in lecturing, consulting and business management.

• Language: English
• Publisher: Wiley
• Release date: Jan 30, 2012
• ISBN: 9781118319697

Book preview

Introduction

Why do some businesses succeed while others fail? In particular, why are some businesses wildly successful while others, which offer essentially the same products and services to a similar group of customers, struggle to survive? This is one of the enduring mysteries of commercial life — and one that this book aims to understand.

If ten new businesses with the same resources start out in the same market and offer similar products and services, it would be reasonable to expect that over time they would each achieve similar levels of success. Yet, as we are well aware, this is never the case. Despite the fact that they would all have started from roughly the same position, slowly but surely a favoured few will draw away from the rest and ultimately dominate their markets. Within a few short years, most of the businesses will have disappeared, while the remainder will struggle along, enjoying modest success at best. As Al Ries and Jack Trout point out, sooner or later every market evolves into a two-horse race; for example, Coke and Pepsi lead in soft drinks, and Hertz and Avis compete in the rental-car industry.¹

Business decline and failure is also a reality for large established firms. Large companies may appear impressive from the outside, but only a minority last very long; for example, of the one hundred–largest US businesses in 1974, only half were still around in 2000.²

Only a tiny minority of businesses — new or old — ever achieve their true potential. Of course some new businesses are earmarked for failure from the beginning, usually because they are either chronically under-funded or lack even the most basic technical and management competencies required for success. In addition, some businesses — such as HIH Insurance, WorldCom and Enron — can be destroyed by corrupt managers, but these are a minority.

Why do so many businesses that, on paper, have the necessary management and technical capacity to succeed, fail to do so? An even more intriguing question is why do the successful ones thrive? As you shall see, the answers to these questions do not lie in the markets that these organisations compete in — because some businesses flourish even in extremely competitive markets. Nor can the quandary be explained by looking at the economic conditions prevailing at the time — because companies succeed and fail in boom times just as they do in recessions. As an Economist article on the 2001 recession points out, every recession has ‘winners as well as losers’³.

The case study below contrasts the collapse of Ansett airlines and the concurrent success of Virgin Blue airlines to show how similar businesses can fare differently under the same market conditions.

Case study

Ansett crashes while Virgin Blue soars — part 1

When Ansett airlines collapsed in September 2001 after sixty-six years in business, it was the end of an era in Australian aviation. It was also extremely traumatic for the more than 15 000 employees who lost their jobs, forty of whom subsequently committed suicide.⁴ Several attempts to resurrect the business eventually failed because the Australian government refused to underwrite a new airline with taxpayer money.

The most serious rescue attempt, mounted by businessmen Solomon Lew and Lindsay Fox, collapsed when the government of the day declined to subsidise them to the tune of $1 billion per year. Obviously these experienced business operators believed that a new domestic airline in Australia could not succeed at that time without massive government support. It’s easy to understand why considering that the airline industry was struggling with the effects of a global recession that had been exacerbated by the 9/11 terrorist attacks of 2001.

However, somebody forgot to tell Sir Richard Branson that business was tough when he founded his Australian domestic airline, Virgin Blue, in 2000. Starting from scratch, and using a no-frills operating model, Virgin Blue immediately began to take business away from both Qantas and Ansett, the two established Australian domestic airlines. It achieved this without any government funding, and despite heavy discounting from both incumbents.

By 2002 Virgin Blue had nearly 10 per cent of the market and was beginning to eat the big boys’ lunch. Ansett’s collapse catapulted Virgin Blue into the number two spot, with 30 per cent of the market.

On the surface at least, many outstanding businesses appear to be like their less successful competitors. They may have similar resources, employ the same type of people, use identical technologies and be confronted with similar market opportunities and challenges, so why do some make it and some don’t?

The answer to this question will not be found either in the competition these businesses face or the broader economic conditions within which they operate. The real answer lies closer to home — within the businesses themselves, and in particular, how they are managed.

The early indicators of future success and failure — the writing on the wall — are there for all to see

For every business, the early indicators of future success and failure — the writing on the wall — are there for all to see, well before the organisation emerges as either a market leader or a market loser.

Learning to read these signs can make all the difference to your business as well as to your future as a manager or an entrepreneur — but you have to know where to look!

How to read this book

The Writing on the Wall: Reading the Signs of Business Success and Failure is not a management textbook. It is a practical handbook for working managers that is designed to help you improve your professional performance and increase your business success at the same time. It is not based on the latest management fads or theories, but the thousands of discussions I’ve had with managers all over the world who are faced with the daily challenges of running their organisations. Like any handbook, this book will be most useful if you refer to it regularly, rather than reading it once and then putting it back on the bookshelf.

The title of this book — The Writing on the Wall — refers to the collective behaviour of managers, which ultimately determines corporate performance. Carefully observing the behaviour of any management team will reveal the writing on the wall — the early signs of future business success or failure.

Part I describes some notable business successes and failures. It should be read in its entirety as it sets the scene for the remainder of the book. It contains several case studies that demonstrate that the real causes of business success and failure lie inside an organisation — not in the external environment that it operates in.

Part II identifies the major reasons some businesses flourish while others, with the same opportunities and advantages, falter and lose their way. It is the cumulative impact of management behaviour, comprising the collective habits of managers, that ultimately determines the future of a business. Some management habits sustain and nourish organisational growth, while others have the opposite effect. In part II I identify the five primary ‘success habits’ (see the appendix for a quick guide to these) displayed by all best-practice organisations, as well as those habits that promote failure. Unfortunately, because many habits are unconscious it is quite possible for an organisation to act against its own best interests, sometimes for long enough to guarantee its own demise.

Because many habits are unconscious, it is quite possible for an organisation to act against its own best interests

Part II also identifies particular aspects of organisational behaviour and discusses their relevance to achieving business success. Each section includes a checklist of questions that you can use as tools to critically analyse the performance of your organisation and, in particular, the performance of your management team. If management behaviour ultimately determines corporate success or failure, an honest appraisal of your management team will provide a clear indication of what the future holds for your business and where the business may need to change before it’s too late. The questions raise important issues that may take some time to resolve. You will probably find it easier to work on one checklist at a time — starting with the one that is most relevant to you.

Part III addresses the question, what is a manager’s role? It explores how effective managers work with staff to create a successful business, and focus their limited time and effort on the critical activities that make a genuine difference to corporate performance.

Part III also examines particular aspects of management behaviour and includes checklists of questions to encourage self-analysis. Just as part II can be used as a manual to troubleshoot and finetune aspects of your business, so too does part III enable you to assess your performance as a professional manager.

Part IV uses the definition of management in part III to explore the four ways effective managers create superior value for their business.

Once you have finished reading this book, you will be aware that the causes of corporate success and failure are invariably located inside an organisation — specifically, in the way managers habitually behave. You will also understand why businesses that start out with similar opportunities and resources often end up in quite different places. You will know why companies with significant advantages over their smaller rivals can stumble and fall if their management teams have not developed the daily habits that drive corporate success. More importantly, you will be able to analyse your organisation — and your competitors — to identify the management practices that threaten the future of your business and those that create lasting value.

Finally, you will understand the role of effective managers in modern organisations — how they apply their skills to build a business that succeeds today as well as tomorrow. In short, you will have learned how to read the writing on the wall!

It is the cumulative impact of management behaviour — what managers do and don’t do on a daily basis — that ultimately determines whether their business succeeds or not. How managers plan and implement strategy, interact with customers, and manage themselves and their staff provides them with an infallible guide to where their business is headed. How managers behave dictates how staff members behave, and how both behave determines the future of their organisation.

By closely observing the behaviour of a management team, you can predict whether its company is heading for the winner’s circle or the knacker’s yard. This is good news because it means your future success as a manager is in your hands — and not at the mercy of the market or the economy. In other words, market and broader economic conditions provide businesses with a playing field, but they do not determine their fate. The causes of success and failure lie inside an organisation — not outside it — and, more specifically, inside its managers.

Notes

1 Al Ries and Jack Trout, The 22 immutable laws of marketing, New York, HarperCollins, 1994, p. 47.

2 ‘Masters of the universe’, The Economist, 5 October 2006, viewed 20 April 2007, www.economist.com.

3 ‘How was it for you?’, The Economist, 7 March 2002, viewed 20 April 2007, www.economist.com.

4 William Birnbauer, ‘Hidden toll of Ansett’s collapse’, The Age, 14 November 2004, viewed 20 April 2007, www.theage.com.au.

Part I

A tale of four companies

Chapter 1

Winners and losers

An important theme of The Writing on the Wall is that it is how an organisation is run by its management team that determines its fate, rather than the events in its external environment. Chapter 1 of this book illustrates this by analysing a number of notable corporate successes and failures from the past twenty years. In particular, it contrasts the success and failure of Toyota and General Motors (GM), in the global automotive industry, and Woolworths and Coles, two major Australian retailers.

Each pair of companies has competed in the same market and has had to manage the same changing economic conditions. Yet Toyota and Woolworths have both achieved outstanding success in their particular industries while their major rivals — GM and Coles respectively — have experienced more than two decades of failure.

Understanding the recent history of each of these companies provides us with important insights into the generic causes of corporate success and failure. In particular, this analysis identifies the critical management behaviours that ultimately determine the differences between winning and losing organisations of all kinds.

GM and Toyota

For much of the twentieth century, GM was the largest corporation in the world and indisputably the world’s leading carmaker. In 1980 its global share and US domestic market share were 21 per cent and 46 per cent respectively, demonstrating the stranglehold it had on the car industry, both at home and abroad. At the same time, Toyota, GM’s Japanese rival, barely had a foothold in the US domestic market. With annual sales of a few hundred thousand vehicles in the US, Toyota was hardly on the radar.⁵

Twenty-five years later, the situation had been reversed. Toyota had become a global powerhouse about to overtake GM as the world’s largest carmaker; GM, on the other hand, had declined so badly that in 2005 its bonds were rated as junk, and some analysts were predicting possible bankruptcy for this once mighty corporation.⁶

In 2004 Toyota overtook Ford to become the world’s second-largest carmaker. At the beginning of 2005, it was already the world’s most profitable car manufacturer and — with 15 per cent of the global market — was poised to become the biggest as well. In 2007 it was expected to assume GM’s spot as number–one carmaker in the world.⁷ Indeed, in the first quarter of 2007, Toyota did in fact sell more vehicles worldwide than GM — 2.35 million vehicles to GM’s 2.26 million. GM finally relinquished its mantel as the world’s largest car manufacturer for the first time since it passed Ford in 1931.⁸

GM lost US$10.6 billion in 2005, and by the end of that year had posted five consecutive quarters of losses, as its margins and markets continued to be squeezed, particularly by Japanese competitors. By 2007 its share of the US domestic market had fallen to just over 25 per cent, despite heavy discounting.⁹

The problems caused by GM’s loss of market share were compounded by declining profitability. In the 1960s GM earned an average margin of 17 per cent on sales of cars and trucks, but by the 1970s the figure had slipped to just over 11 per cent. In the early 1980s — when Toyota, Nissan and Honda were making their first major assaults on the American market — GM’s average margin per vehicle had fallen further, to just over 7 per cent. And by 2002 — when GM could only manage a 1.5 per cent margin per vehicle — Toyota, Honda and Nissan all achieved figures in excess of 10 per cent.¹⁰ Even in 1995 — the year Toyota went public on its ambition to be number one — GM was still the major player in the global automotive industry, yet slowly but surely it lost its grip.

How much just to take it?

Not surprisingly, GM’s problems in the 1980s and 1990s were reflected in the performance of its share price. Throughout the 1990s it underperformed the Dow Jones Industrial Average by approximately 70 per cent. Amazingly, at the end of 1998, all its sharemarket value was accounted for by its non-carmaking activities — GM’s finance and spare-parts divisions, and its stake in Hughes Electronics. In an article on the state of GM at the time, The Economist makes the following comments:

Other car firms also make money on financing and parts, but rarely do investors implicitly value the vehicle-making side as worthless, or even a liability. What GM’s shareholders are saying, in effect, is that they would pay you to take the world’s biggest industrial operation off their hands.¹¹

Coles and Woolworths

Coles and Woolworths have deep roots in Australian retailing. Coles’ origins date back to 1900, and the first Woolworths store was opened in 1924. Coles commenced the 1980s as easily the dominant Australian retailer, yet by 2001 had relinquished its leadership to Woolworths. In 1983 Coles’ market capitalisation was 2.7 times greater than Woolworths; however, by 2002, with a market value 30 per cent greater than that of its rival, Woolworths had replaced Coles as the major Australian retailer.¹² By 2007 its value was more than 75 per cent greater than Coles’; despite the two companies having similar turnovers, Woolworths’ market capitalisation was a staggering A$32 billion, while Coles languished at A$18 billion.

In the mid 1980s Woolworths was struggling and needed a major management overhaul. At the same time, Coles merged with the Myer department-store chain to form a retailing giant nearly three times bigger than its closest rival; Coles’ future seemed assured.

Since then, however, Woolworths has not merely overtaken Coles but left it trailing in its dust. Under the leadership of Paul Simons — and later Roger Corbett — Woolworths invested heavily in revamping its stores and developed a new ‘fresh food’ image in 1987 that proved very successful with consumers.

Coles, on the other hand, badly implemented its merger with Myer. The merger was ‘ill-conceived [and] after years of mismanagement and board infighting [it] hadn’t met expectations’¹³.

Fish rot from the head first

I’m sure you’ve heard the expression ‘Fish rot from the head first’ before. It’s a reminder that an organisation lacking strong, focused leadership will eventually struggle, because problems at the top are reflected in poor performance lower down. Unfortunately this phrase could serve as an epitaph for Coles under its current management.

For the past fifteen years the company has had a history of warfare between its board members. In 1995, following a bitter struggle with his fellow directors, Solomon Lew was forced to relinquish his position as chair of the board, and in 2002 he was ousted from the Coles board altogether. In addition, there has been constant turmoil at the top as senior managers have come and gone, as well as a strong smell of corruption. For example, Brian Quinn, a former Coles chair, was jailed in 1997 for spending $4.5 million of shareholder funds on renovating his home.

More recently, in 2006 a senior supermarket executive was sacked for making secret deals with a meat supplier. Two other executives involved left soon afterwards.¹⁴ In response to these events, Coles issued a statement saying that its investigation ‘highlighted the need for improvement in process, governance, culture and leadership within [their] meat merchandise team’¹⁵.

We could say the same thing about the entire company. In 2002 The Bulletin concluded that ‘arguably, much of Woolworths $10.4 billion rise in value over the past nine years has been thanks to internal upheaval and the management talent vacuum at Coles Myer’¹⁶.

An Australian corporate pantomime

John Fletcher was appointed CEO of Coles in 2001, when the company was still clinging to its lead as Australia’s premier reailer. His appointment was heralded as an opportunity to revive the struggling company’s fortunes. At his first press conference, however, he stunned the market by announcing that he had not stepped inside a supermarket for twenty-five years!¹⁷

Without first-hand knowledge of his new industry, it was imperative for Fletcher to surround himself with a strong team of experienced retailers who could drive the changes required. But constant turnover of senior management meant he