By Blake DuBose and Mike DuBose

Business failure! These are two words that most business leaders would rather not even think about. Most focus all of their energy on succeeding and being profitable instead of simultaneously predicting and preventing business failure. Few realize that success and failure are interwoven.

Since establishing the goal of building a great family of companies in 2006, we spend about 10% of our time thinking about that horrible path that many companies end up taking. “Failure” and “Mistake” are our two greatest (and most painful) teachers.

For six years, we drove by a prosperous boat retail business. Suddenly, there was bankruptcy sign posted on their front door. The media reported the once successful business owed $20 million more than they had assets. A liquidation sale occurred and now everything is gone! But why? Did the owners fail to see this event coming?

Which businesses do you think about when business failure is mentioned? My first thought is Circuit City, once identified as a great company by Jim Collins in Good to Great—only to have its assets sold off. Every company has its unique threats that can cause problems. Some businesses experience failure in small increments (Zenith took three decades to fail), while others, such as Circuit City, take the fast road to despair. Many people sum up Circuit City’s demise with two words: BEST BUY! But if you study Circuit City’s fall in greater depth, you learn that the company ventured into areas that did not fit with its Hedgehog Principle (what a business does best, is most profitable at doing, and is passionate about).

Jim Collins recently published How the Mighty Fall. Collins discovered that companies go through five stages on the way to failure. He concluded that “there are more ways to fall than to become great.” In the past, some of our companies have travelled through all five phases.

STAGE 1: Success – Surprised? We have witnessed many successful companies take the dive when they become arrogant and greedy. We experienced this stage with one of our companies when we expanded into a national presence too quickly. Our success rate without warning fell from a twenty-year 90% success rate to an unbelievable 38% in 2006. We were stunned, but arrogantly explained it away as a one-time bump in the road…only to face a 40% dismal rate the following year!

STAGE 2: Undisciplined Pursuit of More – When you try to race to the top with a mission to make money, there is a high chance that the wheels will come off! Collins noted, “They stray from the disciplined creativity that led them to greatness in the first place, making undisciplined leaps into areas where they cannot be great or grow faster than they can achieve with excellence, or both.”

STAGE 3: Denial of Risk – Staff ignores the warning signs that the once-successful business is facing dangers ahead. They rationalize, deny, disguise the signals, and only report the good things leaders want to hear. People simply look the other way, focus on short-term financial objectives, or stick their heads in the sand hoping things will get better, when they know that things are getting worse.

STAGE 4: Gasping for Air – Everyone throughout the organization realizes that they are in serious trouble and panic drives the organization. Instead of focusing on production, fear overtakes the organization, and employees begin to look for employment elsewhere. Efficiency and effectiveness dwindle.  During this stage, desperate people do desperate things!

The staff looks for a savior and often one CEO after another is brought in to quickly fix things, only to leave without success. They launch products that are not yet ready for the market or have a “fire sale” to auction off assets. Some companies like IBM and Ford have been able to make a turn for the better, while the verdict on General Motors is still out. Hopefully, GM will be able to pull itself off of life support—but someone should have rung the warning bell beforehand, since they have been losing money since 2006!

STAGE 5: Death of the Business – Collins noted that the longer a failing company stayed in Stage 4, the more likely they would face their end in Stage 5. In 1983, we painfully took a group of companies to their death. Fortunately, we learned a lot of hard lessons from our fall that turned into gifts from God and showed us what we needed to do differently with the family of successful companies we own now.

How do business owners and leaders prevent the fall that Collins describes? It takes a lot of planning and the “right stuff” to avoid falling off the cliff to failure. We hypothesize that many businesses go through the five stages of failure, but the successful ones see their demise coming and make course corrections early on by:

Planning to Fail Every Day – Don’t fall into that arrogant belief that failure cannot happen to you and your company. It strikes the best of us!

Knowing the Stages of Failure – When you are successful, BE ALERT! Now is the time to take a good dose of humility and a shot of paranoia. Good things are short-lived. Although you want to be a cheerful and positive captain of the ship, expect the unexpected – bad things happen. Focus on your core business that “pays the bills,” but experiment with new products and services about 15% of the time. Don’t be complacent and say, “We have arrived and now we can sit back and enjoy our success!” The bottom line:

1- Get the facts, think, and make calm decisions.
2- Avoid taking actions that could jeopardize your company.
3- Develop clarity about what is your core business and what needs to change.
4- Focus on performance and use facts and results to drive decisions for new directions.
5- Create momentum with good decisions that are well executed that build on one another. 

As my entrepreneurial grandmother ingrained in us: Hope for the best, plan for the worst!

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Blake DuBose is a graduate of the school of business at Newberry College and is president of DuBose Web Group www.duboseweb.com. 

Mike DuBose has been in business since 1981 and is an instructor with the USC graduate school. He is the servant leader and owner of three debt-free corporations, including Columbia Conference Center, Research Associates, and The Evaluation Group. Mike has completed his book The Art of Building a Great Business.

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