We all know we’re going to die. But we don’t usually think about it as we live each day. We pretty much run our lives the same until we are exposed to a new threat, like a particularly dangerous intersection or a tainted food, and then we change our behavior to deal with the threat. We know the average longevity for an American adult is around 75, so we fully expect to live that long and we don’t really think beyond that.
The same is true for most businesses. Yet, for about a decade we’ve known that the odds of a healthy public company surviving a mere decade is, at best 50/50. With such a short expected half-life, it should be surprising that pretty much all businesses do their planning as if they will go on forever. We apply optimism to our businesses the same way we do our lives. No CEO or other top executive will say "I imagine my company is in the half unlikely to make it another decade." Individually this makes sense, but collectively it is a disaster. Business leaders keep being surprised by the fragility of their Success Formulas as their businesses fall into the Whirlpool, wiping out shareholders and bondholders as well employee jobs.
Last week Chicago woke up to the painful, overnight demise of Bennigan’s (read story here). One of the oldest casual dining restaurant chains, Chicago was one of Bennigan’s top markets with 10% of its company stores located here. Also, Bennigan’s largest store was very visibly located on Michigan Avenue in the heart of the city. So Chicagoans were very surprised that at midnight on July 29 the owners called up store managers telling them to shutter the stores – the company is liquidating. Apparently the chain could not compete in a market of recession-softened demand, busted real estate values and higher food prices. So overnight, the business disappeared – leaving franchisees of 140 stores wondering what they heck they’re now supposed to do.
Bennigan’s, owned by Metromedia Restaurant Group, is a startling example of the myth of perpetuity. Despite being one of the very first casual dining concepts, increased competition was not hard to spot. Likewise, the dissolving of real estate values has been happening for months – like a slow pour of honey. And that recessions cause downdrafts in eating out has been known ever since restaurants have existed. And that food costs would increase was being predicted almost 3 years ago as fuel prices went up and showed no sign of a major downward reversal. It takes a lot of fuel to make and transport those quasi-prepared meals to restaurants – as well as a lot of energy to heat and cool the locations to customer expectations. None of these trends were hard to spot. But somehow, Benegan’s management did not plan for them.
As management Locks-in on its Success Formula it becomes blind to changes that could be very threatening – possibly business ending. As problems develop, seen in revenue or profit declines, the tendency is to say "we have to do more of this, do it faster, do it better, do it cheaper." When reality may be there is a need to take much more drastic action. But the desire to Defend & Extend becomes paramount among the optimists, who keep hoping for "things to return to better conditions." When, often, the current situation is more likely "the new reality." Or "the new normal." The past conditions are very unlikely to ever return.
Anyone expecting a return to widely available, extremely low cost credit had better think again about all those banks writing down billions of loans, and the near collapse of the mortgage industry as Freddie Mac and Fannie Mae stand on the brink of failure. And as auto leasing companies shut off all leasing products due to fear of lower residual values. Anyone thinking about a return to rapid U.S. job expansion had better take a look at the videos of hundreds of millions of workers in China, India and South America all desperate for a job at any wage. Anyone expecting lower taxes and a government bail-out had better take a look at the record-breaking deficit built up the last 8 years (when the budget was last balanced) and the expected upcoming costs for war (continued or ending), health care, and the aging/retiring population demand on social security.
What happened in the past was then, all that’s important is planning for the future. Without taking a very sobering look at what might happen, it’s easy to be Pollyanna. And that is how leadership teams fall into the half of businesses that don’t survive. It’s not lack of hard work. It’s an unwillingness to realize things change and we have to prepare for those changes. If we get stuck in D&E management, we keep doing what we always did despite declining returns. And eventually, you just can’t keep going any longer.
Failure rarely is as dramatic as it happened at Bennigan’s. Usually the wind up happens through an acquisition and slower shut down (like JPMorgan is about to complete with Bear Sterns), or through a longer process of management bleeding out the company assets (not unlike SBC’s takeover of AT&T). But the end point for Bear-Sterns and Bennigan’s were the same. They are no more. Any management team unwilling to accept the staggeringly pessimistic statistic that it has a 50% chance of failure in a decade is a likely candidate.
Keep that in mind GM, Ford, United Airlines, Delta and Citibank. We don’t like to think these sorts of iconic companies with long histories and past glory can disappear. Yet, past members of the Dow Jones Industrial Average included Woolworth’s, American Can, Johns-Manville, Esmark, Inco, Internationals Harvester and Nickel, Nash Motors, National Distillers and Swift. None of those DJIA companies thought they would ever leave the DJIA – much less disappear. Yet they did. If we run our business as if it can go on forever by doing more of the same we doom it to demise. Whether it’s fast like Bennigan’s, or more slowly.
