Why Organizations Fail!

I had an epiphany the other day. I was a manager at Boeing for over fourteen years, and I have been studying organizations and leadership since 1988, almost twenty-five years. I have been at this for a while. When I was younger I had a hard time committing to anything, except having fun, and that was usually not the right kind of fun. Therefore, discussing the question of why organizations fail seems, for me, to be quite natural.

To do this I’d like to look at some characteristics of government failure, then demonstrate how it applies to all organizations. Some think that larger government is the solution to all of our social ills, however larger government is often the problem. Over expansion of government that cannot be paid for is a classic lesson in failure, which also applies to business. Companies that expand too quickly may not have the infrastructure or skill to meet the higher demand for product or service. This will lead to a failure of product quality or delivery problems.

Anyone that has read my blog knows that I despise cronyism. As Boskin relates in his article on the anatomy of government failure states, “Programs become entrenched, develop powerful constituencies, and are hard to shrink but easy to expand.” This usually reflects cronyism and pork, which is required for the maintenance of these subsidy programs. The pork programs are often counterproductive, and reflects an escalation of commitment to a bad decision. Bad decisions decimate organizations. Managers are notorious for not listening to those who are more knowledgeable on a subject. There are many examples of companies that have gone out of business due to the inability to listen and an over adherence to the divine right of management.

Boskin gives five tendencies within government that will cause failure. The first is, “wait until forced to act, often too late with great harm.” There is always a certain amount of gap between the market is going where a company positions itself, which means the company needs to be flexible. The shorter the time gap between environmental change and company reaction to the change, research has shown that there is more of a chance of continued company existence. If there is prolonged existence of a discontinuity, then there is more of a chance for company failure.

Two, “Systematically ignore long-run costs to provide short-run benefits.” One of the biggest differences between eastern and western management tendencies is this one element. Western managers focus more on the short-run, while eastern managers focus on the long-run. This is a huge generalization, but one that can lead to company failure if not mitigated.

Three, “ignore economic principles.” Supply and demand are what they are. I think this is self-explanatory. Four, “ignore the laws of arithmetic, selectively counting some effects while excluding others.” I have to tell you creative accounting has been around for a long time, and it usually produces the same result. Has anyone heard of Enron.

Last, Over spending. “Nobel Laureate James Buchanan observed, politicians hide the true cost of spending from citizens by deficit financing. Recently, deficits have run 30-40 cents of every government dollar spent. But interest will have to be paid on this on this debt, sooner or later.” I cannot ignore the problems looming on the horizon associated with the size of debt we have incurred as a nation. However, any organization that does not manage its debt well will fail.

Running an organization takes many types of skill. The modern manager, or politician, needs financial, operational, informational, and human skills to be successful. For the most part our business leaders do a pretty good job of this. But when it fails, it usually has a huge impact.

And that is my thought for the day!


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