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Why Small Businesses and CEOs Fail

April 07, 2015
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I wince a bit every time I go by a new small restaurant that’s displaying an “out of business” sign in the window.  You know someone’s probably invested and lost their savings, if not a 2nd mortgage on their house to fund the “failed” business.  You’re familiar with the statistics on CEO’s of small business success versus failure rate. “About half of all new establishments survive five years or more and about one-third survive 10 years or more.”

Do you know why?  Bet you have a thought on that.  There could be lots of reasons right?  Or maybe not.  Maybe there’s just a couple of reasons that lie at the path of every failure.

Before I go there, think about CEOs of large businesses for a moment.  It turns out the results aren’t appreciably different.  They have roughly the same “you’re out of here” rate.  Within 3-5 years a sizeable number are no longer in the job. 

So what gives?  Why do CEOs of both small and large businesses fail so often?

Perhaps you remember that classic 1999 article in Fortune entitled  Why CEOs Fail.”  The article suggested there was just one thing at led to failure 70% of the time, and that was “bad execution,” not a lack of vision or personal charisma. Fast forward to 2012 and Forbes published an update to the “Why CEOs Fail” article, noting that given the increased level of transparency, abrasive communication practices, especially when it starts causing executives to leave, definitely contributes to the result of poor execution and is a signal the exit door is opening.

I find the emphasis on execution and management style valuable, but because it’s so general and leaves so many questions about what types of execution exactly, to be rather limited in usefulness. 

So I got to thinking about the past 40 years of working with people in large and small businesses and from my limited viewpoint came to the observation that there are two recurring fundamental reason for failure.  Let me summarize and then I’ll explain and see what you think.

CEOs and Business owners fail typically because:

  1. They miss taking care of the 4% critical imperatives in a business (if you’re considering the 80/20 model, where 20% of the possible actions generate 80% of the results, and a specific 4% of the areas of action account for roughly 2/3rds of the final results). Let’s call this executing the right 4%.
  2. They practice low emotional IQ behaviors, including not integrating and failing to adaptively respond to the (under-estimated) amount of change needed to be addressed to achieve their goals, including the differences in others… and it catches up to them. Let’s call this functioning with “square feedback loops”.

 

Executing the “right” 4%

Let’s take the first point about 4% and start with small businesses.  Guess what small businesses tend to focus on?  What’s the 4% that gets their time and attention?  That’s right, it’s their product development and identity description that get over-allocated chunks of time, as contrasted with the 4% that’s critical to their success.  What are the top tier, 4% action items that are critical to success areas?  Well there’s a lot of options, 96% to be exact, to focus on and “miss” the 4% that’s going to drive the business.  Those inward facing things are particularly compelling and often deadly to spend time on, especially when you don’t have incoming customers. 

But it’s the outward facing 4% that’s absolutely critical, but often routinely missed.  For small businesses there are three outward facing 4% drivers that have to executed or solved accurately and competitively:

  1. You have to identify a customer with “felt” needs that are large enough to motivate them to search or respond to your solution, and the resources to pay for it.
  2. You have to be able to get in front of the needy customer at their point of need profitably via your marketing and sales resources.
  3. You have to be able to deliver an attractive, preferably differentiated, solution to their problem, that’s either differentiated by product or location, or price competitive.

Would you want to invest in a small business that had a “great idea” but none of the top 3 issues above nailed down or vetted?  Probably not, but yet many entrepreneurs do exactly that every year… and fail.

Ok, so what’s in the 4% regularly, in fact inescapably, for CEOs of large businesses?  Ok, you’re thinking and I’m waiting.  And what comes to mind?   By-the-way, isn’t it easy to see how someone can be all over the map on what’s in the 4% vital few areas are, and yet it’s so critical?

Here’s my take on it on three primary 4% areas that CEOs have to execute successfully:

  1. Every CEO has to verify and deliver a point of view about the answers to the same three questions that small business owners have to address (above), with the expanded challenges of:
  • Negotiating through politics to find the truth and keep an eye on results,
  • Choosing between alternative sources of resourcing to fund the mechanism for addressing those 3 questions and
  • Deliver through an expanded set of “others” with an expanded set of risks.
  1. Every CEO has to develop a strong team, they simply can’t afford to do it alone, like a small business person can; and they have to manage up to a board, which is non-existent in most small businesses.
  2. Finally every CEO is faced with what I call the “missionary challenge.” That is, they have an incumbent tribe or culture who has a customary, preferred world view and way of doing things, and yet they are hired to change things for the better.   They are inevitably confronted with the need to change or “convert” the tribe on some degree to a changed world view, or culture, in order to meet the board’s expectations for results.  The conversion isn’t complete until the existing culture has adopted the perspectives and processes the “new” CEO wishes them to embody and is delivering to an increased set of target outcomes. Piece of cake right?  Hardly, but here’s where it gets even more interesting, at least to me.

Square Feedback Loops

CEOs, VPs, business owners tend to fail while often feeling like they are doing the right thing, making the right choice.  I have seen multiple instances in which the CEO misses accurately executing the 4%, but at the same time, believing they absolutely have it dialed in.  CEOs are especially prone to believe in and stick to their identification of the 4% drivers, and not adapt or revisit as they move forward, even when the results aren’t there to validate their point of view, style of leadership or business decisions.  So what causes this big gap between internal perception (I’m doing the right thing), and external realities (it’s not working)?FeedbackLoops

Functionally I see executives develop this gap for a variety of reasons, but in each case they have a diminished ability to receive and integrate feedback that otherwise would help them make the corrections needed to be successful.  I call this functioning with “Square Feedback Loops”. 

Here’s what I mean by that.  Think of a typical feedback loop, as being a circle, where you can hear and integrate feedback, regardless of which angle or position it’s coming from.  As your ability to elicit and use feedback, (ex. from past success, fear, defensiveness, hubris, insensitivity, etc.) diminishes, your feedback loop begins to look like a square, where most feedback bounces off, unless it comes in at just the right angle.  Often that means you only listen to feedback that is consistent with your current mind set, and fall into operating in an “echo chamber.”

Here’s a couple of examples, in hopes this will make it easier for us all to avoid them:

  1. We simply don’t prioritize or attend strongly enough to the 4%, putting our effort into other activities that are either more interesting, or less anxiety producing. It’s the new business person buying business cards, and renting an office, but not yet completing their research on the market. It’s the CEO who feels comfortable holding court in their office, in meetings and reviewing power points, or hiring or assigning another VP to handle that issue (even though the effort is going to fail because they are going up against much more powerful cultural forces).  We ignore the warning signs in the feedback loop.
  2. We actively block or suppress the power of the feedback loop. Sometimes you can just avoid validating any your business assumptions before, during or after the failure completes itself. Sometimes we block it more deceptively by seeming to be receptive to feedback, but actually be impervious to it by one’s prodigious capability to rationalize, refute or intimidate other individuals from engaging with them in a feedback based course of action. 
  3. The psychology of rationalization and defense mechanisms, as well as cognitive dissonance all buttress the practicality of how easy it is to avoid hearing (and responding) to what inevitably means a change in plan. It is extremely common to under-estimate the amount of challenges one will encounter in navigating through the series of changes needed in every improvement target or outcome. The feedback loops begins to generate signs that the process is more difficult than expected, the results more challenging to obtain, and then if we aren’t careful, our defense mechanisms step in to provide a comforting but false sense of being “right.”  All three moves end in predictable failure.

Bottom Line: Want to ensure you avoid the most common reasons executives fail?  Make sure you:

  1. Accurately execute on what represents the 4% of your scope of activities that are critical to your success.
  2. Excel at maintaining and responding to an active, diversified and accurate feedback loop.

—————-

References:

http://www.washingtonpost.com/blogs/fact-checker/wp/2014/01/27/do-9-out-of-10-new-businesses-fail-as-rand-paul-claims/

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/06/21/261696/index.htm

http://www.forbes.com/sites/kenmakovsky/2012/03/22/the-reason-ceos-fail-an-update/ http://insight.kellogg.northwestern.edu/article/rationalization_in_decision_making/

http://en.wikipedia.org/wiki/Cognitive_dissonance

http://en.wikipedia.org/wiki/Post-purchase_rationalization

http://scan.oxfordjournals.org/content/early/2010/07/09/scan.nsq054.full

http://www.texasenterprise.utexas.edu/article/do-you-make-buying-decisions-based-logic-or-emotion-tale-two-chickens

 

 

 


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