Why do good companies go bad?

Recently, the Charles H Kellstadt professor of marketing at Emory University's Goizueta Business School, Jagdish Sheth has written a book "The Self-Destructive Habits of Good Companies'. He talks about why good companies fail? after having all the good initial momentum. Here is his interview excert from http://www.rediff.com/money/2007/jun/12inter.htm

"I would put arrogance at the top of the list. Success, especially extraordinary or unexpected success, tends to boost the egos of companies, just as it does of individuals. These companies tend to be highly feted and their reputations exaggerated by the media, and that's bad news. There are enough write-ups on the rise of arrogance at Enron and Worldcomm, for instance.

Next would be complacency. When companies owe their success to monopoly situations, they stand in danger of taking their success for granted - like Hindustan Lever [Get Quote], until recently, for instance.

This is also true of monopolies of distribution - as in DeBeers - monopolies of regulation - Bharat Sanchar Nigam Ltd - or when the government owns the business - Air India. When you become complacent, you allow competitors to identify niche areas where they can establish themselves, and from there, take on the whole market. In such cases, your success breeds failure.

The third common bad habit is turf wars. As companies grow bigger, there is an increasing danger of internal battles. Whether it is dissension between divisions, as in General Electric, or family feuds as seen in so many Indian companies, the result must inevitably be suboptimal.

Number four on my list is volume obsession. This is a common problem with successful companies - they compromise on margins for the sake of further growth. Typically, value addition by a company accounts for about 30 per cent of the cost - 10 per cent each as the cost of management, labour and capital. The remaining 70 per cent is procurement costs.

So, when you increase volumes at the cost of your margins, you are actually helping your input providers (your suppliers) grow: they are making money at your expense. For instance, in the PC business, the value addition is only 11 per cent; 89 per cent is all procurement, of which 79 per cent goes to Intel and Microsoft who are making fat profits while the PC assemblers, including IBM, HP and Dell, struggle."

These topics and failures have been analyzed and written manytimes in business literature, but still companies and executives fail to capture the learning! A mystery indeed.