Ineffective Management Style
A president or founder of a company often is reluctant to delegate authority or refuses to do so. No decision, big or small, can be made without this individual’s blessing. As a result, the rest of the management staff gains no solid experience or feeling of vested ownership in the business. Dishonesty or fraud may exist, yet go undetected or unreported. The board of directors may be non-participative and ineffective. In such situations, if the president suddenly becomes incapacitated or dies, the entire company is in danger of collapse due to the resulting leadership void.
The business has yielded to pressure to diversify to reduce risk. However, too much diversification may cause a company to spread its managerial, financial, and competitive resources too thin. As a result, the business becomes vulnerable to loss of market share to better competition. Risk reduction by diversification is not bad but it has its optimums, beyond that more diversification only leads to marginal risk reduction but does burden management.
Weak Financial Function
A company with excessive debt, stringent covenants, and inadequate equity capital is operating with little or no margin for error. Credit is overextended, inventories are accumulating, and fixed assets are underutilized. The introduction of better working capital policies and improved capacity utilization decisions are clearly warranted in such cases. Yet, incumbent management instead often engages in debilitating attempts to grow the company out of its problems. A weakened financial condition has led to the company developing an adversarial and unproductive relationship with its lending institution(s). Fearing that its loan relationships and facilities may be in jeopardy, the company tries to conceal financial information from its lenders. Telephone calls from the bank are not returned. Interim or periodic reports are not filed. Since money is the lifeblood of most any business, this kind of lender relationship only leads to more trouble and compounds the difficulty of managing the declining business operations.
Lack of Operating Controls
The company is operating without adequate reporting, accountability, and responsibility mechanisms. This is tantamount to flying an airplane without an instrument control panel. Management decisions based on inadequate, untimely, or inaccurate information can make a bad situation considerably worse.
Changes in the product and customer marketplace have bypassed the company, leaving it with sagging sales and declining market share. For some businesses, the source of the deficiency is technology; their equipment or products and services have become obsolete. For many others, the problem lies in sales and marketing; the company hasn’t kept pace with the needs of the marketplace or the ability to distribute its products effectively to the customer base. A customer base that is coming more and more demanding seen the wide choice available in a globalized world.
The business is growing rapidly. A business that is a success at $5 million in sales a year can become a dismal failure at $10 million. Companies achieving fast growth from concentrating on boosting sales often overlook the effects of that growth on the balance sheet and the cash requirements of funding it. Growth often carries a very high capital investment requirements, including significant investments in R&D, capacity, and working capital. Leveraging a company to meet these increased funding needs typically means that management must operate with little or no margin for error. In addition, growth has led to overwhelming the capabilities and effectiveness of management and employees alike. Staff is not able to work successfully at the new level. For example, management of engineering operations for a company with 12 plants is much different than managing a similar business with perhaps one or two plants. The same challenge applies to others in key positions in marketing, sales, operations, and manufacturing. A company can grow beyond its ability to manage.
Precarious Customer Base
The business relies on a few big customers for most of its sales. If a manufacturer selling to large retail chains has two customers representing 60 percent of its business, the company obviously is vulnerable to the financial condition of its customer or the possibility of new suppliers displacing its relationship. The loss of just one of these key customers could put hundreds out of work and send the business into bankruptcy.
Family vs. Business Matters
Family issues can cause business decisions to be made on an emotional basis rather than on sound business principles. Sibling rivalry has ruined many privately held companies. Deciding which relative should run the business after the founder’s retirement or death can be one of the most difficult challenges a business can face. Divorce can also shatter a business, leaving it in fragments. Nepotism can cause bright, skilful managers who aren’t part of the family circle to take their talents elsewhere.
Operating without a Business Plan
Armed with 15 or 20 years in the business, management often operates a growing company by intuition and emotion. Its plan may change overnight because it is based on management’s own "feel" for the market. In some cases, the business plan exists in everyone’s head rather than in writing. The result is that plans are carried out according to individual interpretation. Moreover, plans are inadequately communicated to employees
Cohen & Simons
Achieving Sustainable Value.
We put in Place Whatever it Takes...
Genève, September 2010