An outline of the ten commandments of business failure.


“I like to study failure… we want to see what has caused businesses to go bad” Warren Buffett

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Business Failure
Image credit: Investment Master Class
Business Failure

Most business schools spend time studying the ingredients for business success.  Many of the Investment Masters acknowledge the benefits of inverting a concept, looking at an investment question or problem in another way.   Instead of asking what are the ingredients that make for a successful business, try to identify what the commonalities are that will kill a business. Identifying these factors can help you avoid potential losses and identify businesses worth pursuing.

[drizzle]The book "The Ten Commandments for Business Failure" by Don Keough is a great starting place. Don Keough, a philosophy major, a former CEO of the Coca-Cola Company, is a close friend of Warren Buffett and sits on the Board of Berkshire Hathaway.   The book is introduced by Warren Buffett.

Mr Keough notes "A company doesn't fail to do anything.  Individuals do, and when you probe a bit you usually find that failure lies not in a litany of strategic mistakes - though they all may be present in one form or another - but the real fault lies, as Shakespeare noted, in ourselves, the leaders of the business"

"Businesses are the products and extension of the personal characteristics of its leaders - the lengthened shadows of the men and women who run them.  They are the main actors on the business stage and when, through one of more personal failings, they take a business in the wrong direction, then the business is headed for failure".

Mr Keough recognises the commandments aren't "startling breakthroughs in management thinking.  They just make common sense" Mr Keough challenges the reader to "Show me a failed business, even one based on the latest wikinomics, and I will bet you with considerable assurance that their leaders have violated more than one of these commandments .  One step towards failure unchecked, leads to another".

I've outlined the Ten Commandments and added some comments along the way..

1) QUIT TAKING RISKS - when you are comfortable in your position there is a temptation to quit taking risks.  The one constant for a business is change.  A business must adapt to change, try out new products, processes and services and respond to changing technology, economics and customer needs.

In light of the speed of technological change disrupting industries it is paramount businesses continue to evolve.  Evolving means taking risks.  I recently read an interview with Jorge Paulo Lemann, the 19th richest person in the world, and a founder of 3G.  3G is an investment company that has had enormous success buying and growing global businesses.

"Something that I always thought college doesn't give is the ability to assess and take risks.  It will teach you how to assess risks mathematically or theoretically, but hardly.  And in general, it teaches you not to take risks, which is to say be careful.  And I think in life, you have to take risks, and I think the only way you learn to take risks is practicing, practicing.  So I practiced on the waves, playing tennis tournaments, later in business etc.  I only mention this because I think a lot of people study hard, and I think in order to do more, or do exceptional, you have to take risks"  Jorge Paulo Lemann

In the book 'Adapt - Why success always starts with failure', Tim Harford discusses failure when there is a pathological inability to experiment. He offers a method for experimentation known as the 'Palchinsky principles'; first, seek out new ideas and try new things; second, when trying something new, do it on a scale where failure is survivable; third, seek feedback and learn from your mistakes as you go along".

2) BE INFLEXIBLE - companies, and investors, that refuse to change when it is clearly evident a strategy or process isn't working are bound for failure.  The newspaper companies that failed to adapt to the rise of the internet are a case in point.   They lost their edge in real estate classifieds, employment advertising and general advertising.  So too have the TV networks that failed to recognise the global reach of the internet will far surpass free-to-air and cable networks limited geography.

Mr Keough believes "flexibility is a continual, deeply thoughtful process of examining situations and, when warranted, quickly adapting to changing circumstances. It is, in essence, the key to Darwin's whole notion of the survival of the fittest.  Flexibility.  Adaption"

3) ISOLATE YOURSELF - CEO's who isolate themselves from their businesses or who surround themselves with only "yes" people are likely to fail.   Managers that do well understand their marketplace, understand their customers, their staff and their competitors.

Mr Keough points out Charles Kettering, the great engineering genius who helped steer GM during its glory years, said "Don't bring me anything but trouble.  Good news weakens me".   If you isolate yourself you will not only not know what you don't know about your business, but you will remain supremely and serenely confident that what you know is right.

So too, the great investors are seekers of truth.  They ask what they do and do not know.  They look to have investment ideas tested.  

4) ASSUME INFALLIBILITY - Mr Keough notes "Annual reports often amuse me, particularly the letter to shareholders.  In one report after another, even if the company has had a thoroughly disastrous year, the chairman's letter is frequently an artful exercise in finger pointing at a number of causes ranging from unforeseen currency fluctuations to the unusually active hurricane season".

Once again, like good investors, managers must acknowledge and address mistakes, learn from them and move on.   Ignoring or sweeping problems under the rug or finger pointing will lead to failure.  "If you want to increase your chances of failure, deny the possibility that you are not always 100% perfect in your judgement'  Ignore the fact that sometimes others do know a thing or two".  Do the same in investing, and you'll fail too.

5) PLAY THE GAME CLOSE TO THE FOUL LINE - trust is an essential foundation of any business.   Mr Keough notes "All business finally boils down to matters of trust - consumers trust the product will do what it promises it is supposed to - investors trust that management is competent - employees trust management to live up to it's obligations" .

Many of the great investors focus on companies whose culture is win-win.  Over time studies shows businesses with good cultures outperform those with poor cultures.

6) DON'T TAKE THE TIME TO THINK - There are plenty of example of business failure which could have been averted if management stopped to think about the consequences of their decisions.   Being human, business managers suffer the same emotional biases investors do.

Confirmation bias, greed and fear and groupthink are a few examples.   Like investors, managers can test ideas, study similar situations/mistakes, and invert concepts to aid their thinking process.  Mr Koeugh notes "If you want to fail, don't take time to think.  If you want to succeed, take lots of

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