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Spot the difference: Why do some companies thrive while others flail?

Updated Friday, 31st July 2009

Dr Brian D Smith looks at why some firms fail and others thrive.

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Every morning, between 6.15 and 6.25 am, I listen to the BBC Today programme’s business slot. In between the froth of share prices and currency rates, there’s usually a story about the real economy and some firm doing well or struggling. I always feel sorry for the interviewer, trying to sum up in a few seconds what is usually a very complex business story. Although I allow myself a “tut” when they over-simplify, it makes me feel lucky really.

As an academic working in the area of strategic management, I get more than 10 minutes each morning to think about why some companies succeed or fail. I get to study hundreds of companies and read lots of other people’s research too. So I ought to have a more rounded explanation of why some companies succeed and others fail. And I do, although I’d struggle to fit it into a sound bite.

I should start by saying that sometimes there’s no rational answer. Pharmaceutical giant Roche is flying at the moment due in part to being in the right place (the anti-viral market) at the right time (a swine flu epidemic). BA is taking a pasting due to a collapse in business travel. Neither can really claim much credit or blame for the market. But the area I’m interested in is when success or failure can’t be put down to luck. Why, for example, are the mighty Microsoft and the once-mighty Yahoo struggling to catch Google, who only a few years ago was a minnow? How come Apple has trounced companies like Sony and Nokia? Why has BSkyB thrived whilst ITV appears to be in terminal decline?

Well, the fundamental answer to the question about success and failure is “it depends”. Every business story can be explained from at least two angles. Ask one academic and they’ll explain it in terms of assets like patents and brand names. Ask another and they’ll tell you it’s to do with the intangible culture of the company. Yet another will explain it in terms of strategy. Truth is, each of the perspectives tells part of the story and none of them tell the whole story.

That said, some academic explanations of corporate success or failure seem to be better than others, in the sense that they are better at explaining what we see happening in the real world. For example, One of these strong explanations is called “dynamic capabilities theory”, which was first proposed by Teece in 1997. He defined dynamic capabilities as “the ability to integrate, build, and reconfigure internal and external competencies to address rapidly-changing environments”. In other words, changing what you’re good at to suit the market. Sounds plausible doesn’t it? But like all good answers it begs another question; in this case, how do some firms come to have such chameleon-like ability?

Recently, Danneels has tried to figure that out. He narrowed it down to five factors:

  • The willingness to cannibalize ideas from other people
  • Allowing constructive conflict within the company
  • Being able to tolerate failure
  • Being good at understanding how the market will change
  • Having a bit spare time to think and experiment

To me, that list makes a lot of sense. Not only can I see how those habits might allow a firm to adapt its capabilities to the market, I can also see how they point to differences between successful and unsuccessful firms. Just try reversing the list for a second:

  • Our business situation is unique and different from other firms
  • We’ve got to get everyone’s buy in and build consensus
  • We must be held accountable for our actions
  • We’ve got to focus on the here and now
  • We’ve got to be lean and mean

I would guess that many people would recognise that second list as describing, at least in part, the thinking in their own firm. Uniqueness, consensus, accountability, focus and efficiency are the buzzwords of many executives. Yet if Danneels and Teece are right, they are a pretty good recipe for failure. Those five words, although they sound good, make firms into endangered species, unable to adapt when things change.

So, if I’m ever invited onto the Today programme and forced to come up with a sound bite about how to be spot the difference between successful firms and failures, I think I’d have the answer: Beware of buzzwords and read the research.

Find out more

"Dynamic capabilities and strategic management" by David J Teece, Gary Pisano, and Amy Shuen
In Strategic Management Journal, volume 18

“Organizational Antecedents of Second Order Competencies” by Edwin Danneels

In Strategic Management Journal, volume 29

 

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