1. Why do companies fail?

“No matter what one does, regardless of failure or success, the experience is a form of
success in itself.” Jack Ma, billionaire founder of Alibaba

One of the most common business phenomena is also one of the most perplexing: when successful
companies face big changes in their environment, they often fail to respond effectively. Unable to
defend themselves against competitors armed with new products, technologies, or strategies, they
watch their sales and profits erode, their best people leave, and their stock valuations tumble. Some
ultimately manage to recover—usually after painful rounds of downsizing and restructuring—but
many don’t.

It’s often assumed that the problem is paralysis. Confronted with a disruption in business
conditions, companies freeze; they’re caught like the proverbial deer in the headlights. But that
explanation doesn’t fit the facts. The managers of besieged companies usually recognize the threat
early, carefully analyze its implications for their business, and unleash a flurry of initiatives in
response. For all the activity, though, the companies still falter.

The problem is not an inability to take action but an inability to take appropriate action. There
can be many reasons for the problem, ranging from managerial stubbornness to sheer
incompetence the following list includes some of the most common reasons:

1. Active inertia. Inertia is usually associated with inaction. Active inertia is an

organization’s tendency to follow established patterns of behavior even in response to
dramatic environmental shifts.

Victims of Active Inertia

To see the destructive potential of active inertia, consider the examples of Firestone Tire &
Rubber. It was a leading player in the industry, and failed to meet the challenge of change, not
because it didn’t act but because it didn’t act appropriately.

The company’s operating and capital allocation processes were designed to exploit the
booming demand for tires by quickly bringing new production capacity on line. The company
had a clear formula for success, which had served it well since the turn of the century.

Then, almost overnight, everything changed. A French company, Michelin, introduced the radial
tire to the U.S. market. Based on a breakthrough in design, radials were safer, longer-lasting,
and more economical than traditional bias tires.

Firestone had developed forecasts that clearly indicated that radials would be rapidly accepted by
U.S. automakers and consumers as well. Firestone saw radials coming, and it swiftly took action: it
invested nearly $400 million more than $1 billion in today’s dollars in radial production,
building a new plant dedicated to radial tires and converting several existing factories.

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Although Firestone’s response was quick, it was far from effective. Even as it invested in the new
product, it clung to its old ways of working. Rather than redesign its production processes, it just
tinkered with them even though the manufacture of radial tires required much higher quality
standards.

By 1979, Firestone was in deep trouble. Its plants were running at an anemic 59% of capacity, it
was renting warehouses to store unsold tires, it was plagued by costly and embarrassing product
recalls, and its domestic tire business had burned more than $200 million in cash.

Although overall U.S. tire sales were plateauing, largely because radials last twice as long as bias
tires, Firestone’s CEO clung to the assumption of ever-growing demand, telling the board
that he saw no need to start closing plants. In the end, all of Firestone’s intense analysis and
action was for naught. The company surrendered much of its share of the U.S. market to foreign
corporations, and it suffered two hostile takeover bids before finally being acquired by
Bridgestone, a Japanese company, in 1988.

The Four Hallmarks of Active Inertia

The fresh thinking that led to a company’s initial success is often replaced by a rigid devotion to
the status quo.

In particular, four things happen:

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  Strategic frames become blinders.

Strategic frames are the mental models—the mind-sets—that shape how managers see the world.
The frames provide the answers to key strategic questions: What business are we in? How do we
create value? Who are our competitors? Which customers are crucial, and which can we safely
ignore? And they concentrate managers’ attention on what is important among the jumble of raw
data that crosses their desks and computer screens every day.

But while frames help managers to see, they can also blind them. By focusing managers’ attention
repeatedly on certain things, frames can seduce them into believing that these are the only things
that matter. In effect, frames can constrict peripheral vision, preventing people from noticing new
options and opportunities.

 Processes harden into routines.

When a company decides to do something new, employees usually try several different ways of
carrying out the activity. But once they have found a way that works particularly well, they have
strong incentives to lock into the chosen process and stop searching for alternatives. Fixing on a
single process frees people’s time and energy for other tasks.

They are simply “the way things are done.” Once a process becomes a routine, it prevents
employees from considering new ways of working. Alternative processes never get considered,
much less tried. Active inertia sets in.

McDonald’s is another example of a company whose routines have dulled its response to shifting
market conditions. For years, the company’s relentless focus on standardized processes, all dictated
by headquarters, had allowed it to rapidly roll out its winning formula in market after market,
ensuring the consistency and efficiency that attracted customers and dismayed rivals.

By the 1990s, however, McDonald’s was in a rut. Consumers were looking for different and
healthier foods, and competitors such as Burger King and Taco Bell were capitalizing on the shift
in taste by launching new menu items. McDonald’s, however, was slow to respond to the changes.

 Relationships become shackles.

In order to succeed, every company must build strong relationships—with employees, customers,
suppliers, lenders, and investors

When conditions shift, however, companies often find that their relationships have turned into
shackles, limiting their flexibility and leading them into active inertia. The need to maintain
existing relationships with customers can hinder companies in developing new products or
focusing on new markets.

 Values harden into dogmas.

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A company’s values are the set of deeply held beliefs that unify and inspire its people. Values
define how employees see both themselves and their employers.

As companies mature, however, their values often harden into rigid rules and regulations that have
legitimacy simply because they’re enshrined in precedent. Like a petrifying tree, the once-living
values are slowly replaced by the cold stone of dogma. As this happens, the values no longer
inspire, and their unifying power degenerates into a reactionary tendency to circle the wagons in
the face of threats. The result, again, is active inertia.

2. An overwhelming strategic plan: Managers don’t know where to begin. The goals and
initiatives generated in the strategic planning process are too numerous because the
leadership team failed to make tough choices to eliminate non-critical actions.
3. Unrealistic goals: While strategic objectives may stretch the organisation, they still must
be realistic. If people feel the goals are unachievable they may not try.
4. Lack of leadership: This issue is at multiple levels. It is not only about ensuring that
each manager at each level is clear about the accountabilities and authorities they have
for strategy implementation, it is about all managers understanding their role as a people
manager.
5. Focus on structural changes: Many organisations overly rely on structural change to
execute strategy. While changing structure has its place, it is only part of the requirement
for successful strategy implementation.
6. Unclear accountability: If people are not clear of their role and their accountabilities for
strategy delivery, or are not held accountable for their work, it’ll be business as usual for
all but a few frustrated individuals. Clear accountability helps drive change.
7. Lack of empowerment: Accountability needs matching authority to deliver outcomes. It
also needs the tools and resources necessary to achieve strategic initiatives.
8. Lack of communication: Communication helps with organisational alignment. If a plan
doesn’t get communicated to employees, they won’t understand their role or how they
contribute to achieving the organisation’s strategy.
9. Getting caught up in the day-to-day: Managers are often consumed by daily
operational problems and lose sight of long-term goals. Unless there is an organisational
focus on strategy implementation, managers will focus on their day-to-day work.
10. Lack of clarity on actions required: The actions required to execute the strategy are not
specified or clearly defined.
11. Inadequate monitoring: Managers are unable to assess if the strategy is being achieved.
Without clear information on how and why performance is falling short, it is virtually
impossible to take appropriate action.
12. No progress reporting: There’s no method to track progress, or the plan only measures
what’s easy, not what’s important, so no one feels any forward momentum.
13. Lack of alignment: The organisation has not been aligned for strategy implementation.
Organisational silos and culture blocks execution and/or organisational processes don’t
support strategic requirements.
14. Lack of planning: Businesses fail because of the lack of short-term and long-term
planning. Your plan should include where your business will be in the next few months to
the next few years. Include measurable goals and results. The right plan will include specific
to-do lists with dates and deadlines. Failure to plan will damage your business.

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15. Leadership failure: Businesses fail because of poor leadership. The leadership must be
able to make the right decisions most of the time. From financial management to
employee management, leadership failures will trickle down to every aspect of your
business. The most successful entrepreneurs learn, study, and reach out to mentors to
improve their leadership skills.

16. No differentiation: It is not enough to have a great product. You also have to develop a
unique value proposition, without you will get lost among the competition. What sets
your business apart from the competition? What makes your business unique? It is
important that you understand what your competitors do better than you. If fail to
differentiate, you will fail to build a brand.

17. Ignoring customer needs: Every business will tell you that the customer is number 1,
but only a small percentage acts that way. Businesses that fail lose touch with their
customers. Keep an eye on the trending values of your customers. Find out if they still
love your products. Do they want new features? What are they saying? Are you listening?
I once talked to the CEO of a training company who told me that they don’t respond to
negative reviews because they are unimportant. What? Are you kidding me?

18. Inability to learn from failure: We all know that failure is usually bad, yet it is rare that
businesses learn from failure. Realistically, businesses that fail, fail for multiple reasons.
Often entrepreneurs are oblivious about their mistakes. Learning from failures is difficult.

19. Lack of capital: It can lead to the inability to attract investors. Lack of capital is an
alarming sign. It shows that a business might not be able to pay its bills, loan, and other
financial commitments. Lack of capital makes it difficult to grow the business and it may
jeopardize day-to-day operations.

20. Premature scaling: Scaling is a good thing if it is done at the right time. To put it
simply, if you scale your business prematurely, you will destroy it. For example, you
could be hiring too many people too quickly, or spend too much on marketing. Don’t
scale your business unless you are ready. Pets.com failed because it tried to grow too fast.
They opened nationwide warehouses too soon, and it broke them. Even the great brand
equity that they have built couldn’t save them. Within a few months, their stock went
from $11 to $0.19.

21. Inadequate inventory management: Too little inventory will hurt your sales. Too much
inventory will hurt your profitability.

22. Poor financial management: Use a professional accounting software like Freshbooks.
Keep records of all financial records and always make decisions based on the information
you get from real data. Know where you stand all the time. If numbers are not your thing,
hire a financial professional to explain and train you to understand, at least the basics.

23. Lack of focus: Without focus, your business will lose it the competitive edge. It is
impossible to have a broad strategy on a startup budget. What makes startups succeed is

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 their ability to quickly pivot, and the lack of focus leads to the inability to make the
necessary adjustments.

24. Personal use of business funds: Your business is not your personal bank account.

25. Overexpansion: It is easy to make the mistake of expanding your business into too many
verticals. Before you enter new markets make sure you maximize your existing market.

26. Macroeconomic factors: Entrepreneurs can’t control macroeconomic factors. Common

macroeconomic factors are business cycles, recessions, wars, natural disasters,
government debt, inflation, and business cycles. Your business can still succeed in bad
times. Hyatt, Burger King, FedEx, Microsoft, CNN, MTV, Trader Joe’s, GE, HP are only
a few examples of wildly successful companies started during a tough economy.

2. The tragic demise of Yahoo, the internet’s first great brand

A. Introduction:

In 2005 Yahoo was one of the main players in the online advertising market.

But because Yahoo undervalued the importance of search, the company decided to focus more
on becoming a media giant.

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The decision to focus more on media meant they neglected consumer trends and a need to
improve the user experience. Yahoo managed to gain a massive number of viewers to view
content but failed to make enough of a profit in order to scale.

Yahoo also missed out on a lot of opportunities that could have saved them.

For example, in 2002 they almost had a deal to buy Google, but the CEO of Yahoo refused to go
through with it. And in 2006 Yahoo had a deal to buy Facebook, but when Yahoo lowered their
offer, Mark Zuckerberg backed out. If the company had taken a few additional risks, maybe we
would all be yahooing right now instead of googling.

Yahoo was the first great internet brand, but numerous missteps over the years have caused its
empire to crumble.

Before there was Google and all its globe-spanning offerings, before social media was so deeply
integrated into our lives, and before there were thousands upon thousands of apps and start-ups
vying for moments of our very limited time, there was Yahoo. Despite its long-anticipated fall
from grace, there was once a time when Yahoo seemed unmatched and unstoppable. “They were
one of the frontrunners and one of the most successful businesses of the first internet
boom”, observed Aija Leiponen, Associate Professor at Cornell University.
Yahoo, the first great internet brand, will always have an indelible place in history. However, in
the years that followed the company’s success, mistake after mistake conspired to cause its
inevitable decline.

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 B. Timeline of Yahoo’s 22-Year History as a Digital Pioneer

C. Origin of Yahoo!

The story of Yahoo begins, as with so many famous tech firms, at an Ivy League university in
the US. It was 1994, and two PhD students at Stanford, Jerry Yang and David Filo, were
working on design automation software. Despite their deeply contrasting personalities, Yang
being sociable and outgoing and Filo being the quiet type, the pair had struck up a close bond
during a teaching stint together in Japan.
They worked side by side in a portable trailer on campus that they had to themselves, thanks to
an absent supervisor on sabbatical. As Yang and Filo were free to do as they pleased, work often
turned into play and their makeshift office took on the appearance of a home. Inevitably, this left

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little time for their dissertations, which only grew worse with their new obsession: the world
wide web, as it was then known.
Filo had discovered Mosaic, the platform credited with being the world’s first web browser and
instigator of the internet’s popularisation. Back then, there were very few websites and, while
new ones appeared every day, it was still possible to visit them all. Instead of spending their days
researching, the two pored over any new sites that had appeared overnight and began a catalogue
of them all, which included ‘hotlists’ of their favourites in competition with one another.
As their computers were linked up to the university’s public internet connection, fellow students
had access to the growing list, which was then called ‘Jerry’s Guide to the World Wide Web’. As
the list’s popularity and size grew, the pair introduced a hierarchical directory and even created
their own software in order to source new websites. Even without an algorithm or automation in
place, expansion was fast because of the countless hours that Yang and Filo spent manually
entering data.
Within a few months, the directory contained around 2,000 entries and Jerry’s Guide was
attracting 50,000 hits a day. It was at this point the two decided a new name was in order; they
agreed upon Yahoo, an acronym for ‘Yet Another Hierarchical Officious Oracle’, with an
added exclamation mark they described as “pure marketing hype”.
“When we started the business, our VCs said we absolutely need to keep the name. It’d be lying
to say we knew what branding meant in 1994. David and I were tech people, but we knew [that]
creating » something that’s easy to remember, that’s easy to use – that’s the key ingredient to a
brand”, Yang said in an interview with ZDTV’s Big Thinkers technology show, according to
Karen Angel’s book Inside Yahoo!: Reinvention and the Road Ahead.

D. Limitless potential

A pivotal moment then came when Netscape, a browser that helped shape the internet in its
early days, made Yahoo its default directory. Those early users who first surfed the web
through Netscape were automatically introduced to Yahoo, causing interest to burgeon. Yahoo
got started early in the first internet wave and gained popularity as a sort of a directory of ‘cool’
websites. It then enjoyed first-mover advantages in becoming well known.
By the end of 1994, Yahoo had achieved one million hits in a single day. Naturally, Stanford’s
servers, which the pair had been fortunate enough to use free of charge, began to struggle under
the mounting pressure, and they were asked to find an alternative.
Although investment firms came calling, no one was quite sure how money could actually be
made from Yahoo. The company wasn’t offering a software package or a tangible product;
essentially, it was just a directory that could be mimicked by anyone, not least the big tech
players of the day. Convincing venture capitalists became an almost impossible task, particularly
as Yang and Filo were adamant the service should remain free – an argument that was not helped
by their lack of business experience.
What did help, however, was making the comparison between Yahoo and TV Guide, once the
most circulated and read magazine in the US. While both radio and television could be tuned into

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for free, listings and directories for them were sought after services that consumers were happy
to pay for. This was the revenue model Yahoo would find success in: advertising to mass
audiences through media platforms. California-based venture capital firm Sequoia Capital
understood this link and took a chance by investing $1m in April 1995 in return for a quarter of
the recently incorporated start-up.

E. What goes up must come down

Sequoia Capital’s gamble quickly paid off; within just four years, the initial investment had
exploded in value and was worth an incredible $8bn. During the dotcom boom of the 1990s,
practically all start-ups were advertising through Yahoo and, by January 2000, its stock
value had increased to an incredible $237.50 per share, while its market cap was $128bn,
according to Bloomberg.
Despite such achievements – the very peak of the company in fact – things then began
unravelling very quickly for the internet giant. The first sign of trouble came when Yang, CEO
Timothy Koogle and President Jeffrey Mallett were faced with the decision of whether to stick
to their existing strategy of providing a platform for the content and media of other outlets,
or acquire a big media company, as AOL had just done with Time Warner. They picked the
former, and the mistake had dire consequences, soon followed by a host of others.
Yahoo’s failure to stay one step ahead of the competition in a rapidly evolving tech world
coincided with the burst of the dotcom bubble. With many key customers declaring bankruptcy,
Yahoo’s advertising revenue fell rapidly. Within just a year, its value had plummeted to $4.7bn.
In that same year, Yahoo began leasing out searches to other companies, one of which was
Google, failing to comprehend the fortune that could be made through search engines. After a
botched attempt to buy its up-and-coming rival for $3bn in 2002, Yahoo attempted to reclaim the
market just two years later via sponsored links on its own search engine – but it was too little too
late.
Google’s rise meant [Yahoo’s] decline. Google had a better search engine, and that invention
was very successful in attracting traffic. Once they had huge traffic, figuring out the advertising
business was relatively easy. Yahoo lost its spot as the essential website to visit for search, so
they began to innovate dozens, even hundreds, of ‘content’ services, from news to finance to
videos and social networks. Many of these were very successful, many more were not.
F. Salvage operations

Terry Semel, former CEO of Warner Bros, had been brought on board in 2001 to rescue the
sinking ship and restructure the company. Using his business nous, he managed to steer two
deals that have enabled Yahoo to survive up to now: the Yahoo Japan venture and the acquisition
of a 40 percent stake in Alibaba in 2005. Although these moves helped the stock price rise to $28
and saw the company’s value increase to $7bn by 2007, Semel’s lack of tech know-how,
together with Yahoo’s growing reputation for failing to complete deals, weighed heavily. He
missed a missed opportunity that could have made Yahoo an entirely different beast to what it is
today (Facebook). Although Semel had agreed to pay $1bn for the social media heavyweight, he

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inexplicably dropped the offer to $850m at the last minute, causing the already dubious Mark
Zuckerberg to walk away for good.
Semel’s time was up in June 2007, leaving a void for co-founder Yang to step into. Yang was a
Silicon Valley legend, but lacked the business prowess needed to make difficult decisions. It was
during these days that Yang declined Microsoft’s takeover offer for $31 per share, yet shortly
after struck a deal to lease Bing from Microsoft to replace Yahoo’s proprietary technology,
giving up the very thing that had made Yahoo in the first place – its search engine.
Another day, another CEO – this time it was the turn of former Autodesk CEO Carol Bartz.
Though Yahoo rose 57 percent on the NASDAQ during her tenure, the revenue earned by the
firm’s core business declined, M&A activity was practically non-existent and the stock price
flatlined. After two years and nine months, Bartz was famously fired over the phone.
By this point, it was no secret the business was suffering; stories of internal friction,
mismanagement and bureaucratic barriers left the company scarred. Bartz’s successor,
Scott Thompson, lasted just 130 days, thanks to the maneuvers of David Loeb of Third Point
Capital, Yahoo’s largest external shareholder.

G. Key Reasons of Failure:

1. Focus: Yahoo never really find their focus as a company. They never had the best search
engine, the best social network, or the best anything. What’s worse, they never seemed to
have a strategic focus around any particular area.
2. You can’t build a company through acquisitions: This has worked for some
companies. Even Google has some successful ones like Youtube. However, in most
cases, companies that do big acquisitions do have a focus and a well-defined strategy.
Example. Facebook acquiring Instragram or Whatsapp, for instance.
3. Innovation is not (only) research: Yahoo has been one of the most prolific labs in terms
of research. A lot of great ideas have been cooked in Yahoo Labs and/or Yahoo!
Research. However, most of those ideas have had zero impact on the business. The
reason is simple (but not easy to fix): the organization was never set up to do quick and
effective technology transfer from the idea to the business.
4. It’s the culture, stupid: At the end of the day, perhaps the most important flaw and
lesson for executives is that Yahoo never managed to build a good company culture.
Yahoo loved its culture. It was many times described as a “big family” where people
were happy, not pressured, and had lots of “freedom” to explore. However, there was no
push in the culture to have real impact, innovate, or move fast. This ultimately ended up
creating all the problems described above.

H. Mistakes Yahoo did

1. Refusing to buy Google for just $1 million: Yahoo failed to gauge its biggest competitors
and turned down the $1 million deal. Yes, Yahoo could have easily turned the tables if it had said
yes to Larry Page and Sergei Brin when the duo approached it, selling Google. Page and Brin
wanted to focus on their studies at Stanford and therefore were looking for a company to sell

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their small startup called PageRank system at a small amount of $1 million. Today Google is the
one of the most valuable companies worth over $500 billion.
2. Failing to buy Facebook: As if saying no to Google was not enough, Yahoo. According to
the book called The Facebook Effect by David Kirkpatrick, Yahoo initially offered $1 billion to
Facebook but later lowered it to $850 million. David writes that Facebook in 10 minutes made its
mind to decline the offer.
3. Hiring wrong CEOs: According to an Inquirer report , Yahoo has repeatedly hired wrong
CEOs. The report states that none of the CEOs at Yahoo including Marissa Mayer had a
"strategic vision" that could match what Eric Schmidt at Google brought.
4. Called itself a media company: Though Yahoo worked as a tech company, it failed to
acknowledge itself one and stubbornly addressed itself as the media company. It got swayed
away by the profit which it earned initially through ads and overlooked the tech involved in it.
5. Declining Microsoft's acquisition: This was the final nail in the coffin. In 2008, Microsoft
had showed its interest to buy Yahoo for $44.6 billion. The company refused. Recently Verizon
bought its core web assets in a deal worth $4.8 billion.
6. Lack of innovation: Yahoo! had access to all the resources across the world. There are other
companies, which just imitated a working business model and succeeded. Social Networking was
not a fresh idea of Facebook. Search Engine was originally a Yahoo’s idea.
7. Access to capital: Despite continued wrong calls, Yahoo was always on the watch list of
investors. Yahoo! has consistently been considered a strong buy, if not for company
fundamentals, but, for the kind of growth phase the industry was sailing through. Yahoo! derived
its goodwill more from the goodwill of the industry, it operated in. And capital was never dearth.
8. Killed by competition: Google, which could be described as one of the major competitor for
Yahoo!’s search engine and mailing services, was not the only one on the pie chart. There was
also Microsoft’s Bing and Hotmail, and other regional players as well. And it would be inanity to
say Yahoo! did not have a competitive strategy in place. Competition was always expected, was
always present and was always going to be present.

I. What could have been done differently?

1. Yahoo finance is a very resourceful platform, however the problem is aesthetics and
accessibly of the information. There is a lot of boom in requirement of financial
information, they can focus on providing an efficient platform for the same.

2. Diversify: The market in which Yahoo operates has leaped ahead but the company is
stuck. Diversification of its product portfolios into newer technology products such as
chat bots, alliances with tech firms like Uber, FinTechs will allow growth of innovation
and of revenue.

3. Yahoo has a strong tech asset base which can be leveraged to be transformed into a
launching board for its new products. But the existing bunch has to be shelved and new
line of thinking has to be brought in.

4. A new business model for revenue generation is also needed. Tapping the emerging
market for payments, internet, driverless cars is the way to go. If not through the main
stream product, definitely through the support channel.

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