Why companies really fail and how to turn them around, Part I

Many problems, and solutions, point back to management

THE FABRICATOR® JUNE 2004

June 1, 2004

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Why do some companies fail or continuously underperform? It's a complex question with as many "answers" as there are heads of industries and university scholars.

In actuality, the most common reason for business failure is poor cash flow. Most organizations experience severe cash flow problems at some point. But some companies seem to go from one cash flow crisis to another until they sell out, merge, or end up in bankruptcy. Many blame the economy, the unions, or unexpected changes in technology. Typically, though, the real problem is poor management practices and attitudes.

How Management Brings About Failure

Inept management and poor work attitude, coupled with a lack of consistency, are the most to blame in all ineffectively run organizations. Following are some common management-related causes of failure:

  • CEOs often discourage any negative information from reaching them, so they are given only the good news and thus are misinformed about the true state of their companies.
  • Innovation and cost-cutting projects are lacking.
  • Some managers have a propensity to spend countless hours in meetings that do not always address the root causes for the decline of their cash flow, market share, or company stock value. They don't realize that their company capital assets and capacities may be much greater than necessary.
  • Corporations often unload their unprofitable operations, especially when their stock value keeps dropping, rather than addressing the real issues causing their problems. This is a quick way out of a grave problem, but with dire long-term consequences that will reduce the company's total size, earnings, and clout in the marketplace. The real problems go unaddressed and therefore will resurface in the remaining company operations.
  • If the company doesn't sell its underperforming units, it frequently starts looking for a new, low-cost supply chain, usually located offshore. One U.S. community after another suffers economically when domestic operations are closed to move overseas. The resulting reduction in the industrial tax base is one reason that property tax collections keep increasing, as federal and state governments switch this burden to homeowners. In the long term of 15 to 25 years, this presents a very grave dilemma for our form of democracy, our ability to compete in foreign markets, and our standard of living—all because quick short-term profits are permitted to take precedence over the long-term national interests.

Turning a Company Around

When a company bleeds red ink daily and is on its last leg, nothing but a fanatical resolve to save it will do. To turn around a distressed operation, finance, manufacturing operations, purchasing, sales and marketing, and engineering all must coordinate their efforts under the guidance of an experienced leader.

Finding the right person to lead the cost-savings project is the crucial priority in turning a company around. In this selection, "hands on" is far more important than "big name."

When Carlos Ghosn, an employee of the French carmaker Renault, was selected to salvage the giant but nearly bankrupt Nissan Corp., few had ever heard of him. He was a relatively unknown but hard-nosed and brilliant accountant with diversified industry experience. He was not exactly known for being a team player and could be considered a job-hopper. (Many inventive, talented people leave their jobs in frustration rather than going along with a structured, political, or ineffective company system.) Today Ghosn is well-known for his quick and supremely successful turnaround of Nissan operating costs.

It is unfortunate but true that most big-name, senior-level executives brought in by the executive boards of underperforming companies usually end up bankrupting the firms. Operating on perceived "star" power, they lack the hands-on skills of knowing the details of how a company works from down in the trenches all the way to the boardroom.

Career-oriented executives tend to want to satisfy their bosses first, as they know that this will eventually lead them to their next career goal. The well-being and future of the company over the long run usually are secondary.

For truly positive results, companies need to skip the big names and look for hard-nosed, no-nonsense but fair-play types who are not concerned with their careers, and then give them the authority and respect to finish the job they were hired to do.

Competent managers realize that cost and waste reductions and increased productivity are key to their firm's future. Consultants heavy on book knowledge or providing a few quick seminars on lean manufacturing won't do the trick. Most so-called experts do not have the deep expertise in all business facets to pull it off.

The right candidate to lead the cost-savings project should have the following attributes:

  • A great reputation for innovation and cost savings
  • A nonpolitical attitude, coupled with commitment and hard work
  • Extensive, hands-on experience in a variety of business functions
  • Diversified business industry experience
  • Interest in results, not career advancement
  • A focus on getting into the trenches, not creating impressive-looking reports
  • Imagination, energy, and courage

To improve any underperforming or a bankrupt enterprise significantly, the most logical choice is a highly experienced operations manager with a combination of hands-on experience in manufacturing, profit and loss, engineering, sales, and accounting, and a short-sleeves attitude. This individual should have at least 20 years of rounded experience, be able to communicate easily with employees from the shop floor to the boardroom, and be able to identify the company's problems quickly.

He or she shouldn't be concerned with popularity; only with fixing what previous managers have destroyed. This person should be given full authority and responsibility for his or her actions. Any second-guessing by other executives who may not share the same philosophy or sense of urgency will undermine the candidate's work and eventually will be detrimental to the company. The candidate must be given the respect and clout he or she needs to manifest positive change.

The necessary changes involve not only the actual manufacturing operations (to be discussed in Part II), but also the company's operating environment. Three of the most important aspects of improving the company culture are related to innovation, teamwork, and morale.

Innovate or Die?

Thirty years ago U.S. companies had mature, proficient engineers with an insight for inventing. Today it's rare to see engineers older than 50 still being employed in an engineering capacity. In a shortsighted approach to saving money, inexperienced, young engineers, perhaps strong on computer skills and book knowledge but short on time-worn wisdom and foresight, regularly are brought in to replace seasoned, experienced engineers.

Today's manufacturing industry employs only between 13 and 15 percent of the U.S. population, meaning that fewer engineers than ever are innovating in research, development, and manufacturing. Allowing this sad process to continue will have an increasingly negative impact on the U.S.'s overall technological leadership position, standard of living, military self-reliance, and international respect.

Go Team

The highly publicized, promoted, and misconstrued concept of teamwork bears some blame for lackluster performance in many U.S. industries. While employee teamwork has received an incredible amount of attention from the media, higher education, and management, productivity gains still remain low, often resulting in layoffs to make it appear that productivity has gone up. If teamwork truly existed, there would be no need for layoffs to keep productivity high.

Many incompetent team members, some of whom may be in charge, hide behind a few genuine contributors who truly help make things happen. It is a well-worn statistic that 20 percent of the people do 80 percent of the work, but the teamwork environment has a tendency to spread the glory as well as the blame; no individual ever gets singled out for praise or reprimand.

Teamwork works only when everyone on the team is a real contributor. There must be consequences for those who do not pull their own weight, and rewards for those who make the extra effort. When productive individuals in a team of slackers contribute to the success of an enterprise, they must be acknowledged. Otherwise, the producers actually are penalized.

Accountability often is lacking when "the team" works on a project jointly. Multimillion-dollar investment blunders resulting from team decisions are not rare; they happen daily in most corporations around the world. Subsequently, individual efforts to reveal and correct collective errors are met with resistance. Ultimately, those striving to effect positive change become fed up with the "don't-rock-the-boat" atmosphere and leave the company, while the less productive and unmotivated employees stay behind and continue to do as little as possible.

Management is crucial to the success of teamwork. The boss must be willing to keep an open office door and truly respect, listen to, and consider the employees' concerns.

Morale Booster

Management can help maintain high employee morale by treating everyone, regardless of his or her social stratum or job title, with the same level of respect. That respect includes rewarding them for positive contributions; not punishing them for speaking out as long as their comments are constructive; and providing them with a clean, safe work environment in which they can take pride.



Robert Vackar

Contributing Author

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