Management: After The Flood

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"Failure is simply the opportunity to begin again, this time more intelligently." --Henry Ford

Like practically any self-respecting politician, most CEOs are rarely willing to admit they have made a mistake. Better to blame something outside their control--the economy, changing tastes, even the weather--than take responsibility for a bad earnings report or missed sales forecast. But the truth is that corporate America has more than its fair share of management failures, setting aside cases of fraud or accounting shenanigans. In fact, despite the unique circumstances in different industries, companies tend to stumble for the same insidious reasons--reasons that often flow from the egoistic pursuit of scale or an unwillingness to face up to the changing market.

Some degree of business failure, to be sure, is an essential part of capitalism. There is still the inevitable weeding out of underachievers that economist Joseph Schumpeter termed "creative destruction." And no doubt many companies respond to missteps by becoming stronger. "Every company will have mistakes," says Harvard Business School's Rosabeth Moss Kanter, author of Confidence: How Winning Streaks and Losing Streaks Begin and End. "Some deal with them better than others."

But mistakes do not lead to improvement when management passes the buck. Not only does the blame game increase the likelihood that companies will repeat the error, it can also turn off investors. A recent study by the Stanford Business School showed that the stocks of firms that publicly accepted responsibility for a down year instead of blaming external, uncontrollable forces tended to do better the following year. Indeed, the truest test of management may be its response to the challenges of failure--its ability to learn from its own or its peers' mistakes and take appropriate action. With that in mind, here's a guide to four of the most common missteps businesses take. The next time your firm errs in one of these ways, don't say you weren't warned.

TOO MUCH OF A GOOD THING

Consultants, investment bankers and press conference--calling executives like to call them "transforming transactions." Shareholders usually come to think of them as blunders of epic proportions. They are the multibillion-dollar megamergers, like AT&T's purchase of cable powerhouse TCI or AOL's marriage with Time Warner (the parent company of this magazine), that are borne on the winds of "synergy" and often find their roots in the weaknesses of the parties' core operations. The reality is that while small, incremental deals can be a key to success, very few megadeals ever deliver on their much hyped promise. On the contrary, 70% of these combinations fail to generate lasting shareholder value, according to Mastering the Merger, a new book by consulting firm Bain & Co.

Misguided acquisitions, though, are just one way companies become too big for their britches. More often a solid business simply tries to grow too fast. That certainly seems to be the case with Krispy Kreme, the North Carolina doughnut chain that until recently had investors and customers eating out of its hand. In the past year, its stock sank; the company suffered its first loss since going public in 2000; and sales at stores open at least 18 months, which had been regularly posting double-digit gains, went flat.