Why Companies Fail (2004)

Capitalism forever? Why Companies Fail 

Sohail Inayatullah

“Why companies fail,” a remarkable essay by Ram Charan and Jerry Useem in Fortune magazine (May 27, 2002, 47-58) offers ten reasons to explain the crash of great companies and three ways to prosper.  While focused specifically on companies, what Charan and Useem miss is that their analysis can be employed to understand the globalized system of capitalism that sustains these companies. 

“Companies are born, companies die, capitalism moves forward. Creative Destruction, they call it.” (48), what US Treasury Secretary Paul O’Neill calls “the genius of capitalism” (48). But economic and meaning systems (that frame what it is that we do when we wake up in the morning) also fail.  First, is the problem of success. “A number of studies show that people are less likely to make optimal decisions after prolonged periods of success. NASA, Enron, Lucent, Worldcom – all had reached the mountaintop before they ran into trouble.” (50). Might not this be the case with the world capitalism system itself, 500 years of success.  No one can see that it too might fail, we are vested in it, from superannuation to life in the Plaza, capitalism defines what we do and how we do it. Fish cannot see water nor can we see life after capitalism. Those at the center, who are mostly deeply vested in it, especially can not see its future.  

The basic assumptions of endless consumption and growth is not really contested. Maybe we might vote green or recycle but our bank account is still with a bank, which is foundational to the capitalist system. Even if we bank in a cooperative bank, they too must negotiate the larger monetary system. But assumptions we must question.

Cisco, did not, write Charan and Useem.  “Cisco, more than any other company, was supposed to be able to see into the future. The basis of this belief was the much vaunted IT system that enabled Cisco managers to track supply and demand in “real time,” allowing them to make pinpoint forecasts. This technology, by all accounts, worked great. The forecasts, however, did not. Cisco’s managers, it turned out, never bothered to model what would happen if a key assumption – growth – disappeared from the equation.” (50). Even when things were looking bad, CEO John Chambers was still projecting 50% growth. He said: “I have never been more optimistic about the future of our industry as a whole or of Cisco.” (50).  

As 14th century macrohistorian, Ibn Khaldun wrote in his classic The Muqaddimah (An Introduction to Hisory): ” At the end of a dynasty, there often also appears some (show of) power that gives the impression that the senility of the dynasty has been made to disappear.  It lights up brilliantly just before it is extinguished, like a burning wick the flame of which leaps up brilliantly a moment before it goes out, giving the impression it is just starting to burn, when in fact it is going out” (Khaldun 1967, 246).

Thus, the paradigm that informs how we see and create the world is not questioned. Why is this so. For companies that fail, Charan and Useem,  quote Jim Collins, author of Built to Last and Good to Great. ” The key sign – the litmus test – is whether you begin to explain away the brutal facts rather than to confront the brutal facts head on.” (52).  

While for companies the brutal facts are often an unsustainable business model, cash flow problems, too much risk, and acquisition lust, for the capitalist system as a whole, the brutal facts (taken from the United Nations Human Development Report, various years) are:  

  • While there are still 840 million people malnourished and 2.6 billion people have no access to basic sanitation, the world’s 200 richest people more than doubled their net worth in the four years to 1998, to more than $1 trillion  
  • The assets of the top three billionaires alone surpassing the combined GNP of all Least Developed Countries (LDCs) and their 600 million people.  
  •  People in Europe and North America spend $37 billion a year on pet food, perfumes and cosmetics, a figure which would provide basic education, water and sanitation health and nutrition for those deprived.  

Writes Sarkar, ” When the whole property of this universe has been inherited by all creatures, how can there be any justification for the system in which some one gets a flow of huge excess while others die for a handful of grains?” (www.prout.org and in Sohail Inayatullah, Understanding Sarkar. Leiden, Brill, 2002).  

Of course, it could be that others are just lazy or just not smart enough or too corrupt or too feudal or too … or perhaps we need to face the brutal facts: (1) capitalism has succeeded for the last 500 years, recreating the planet, bringing untold wealth and now placing the entire planet in jeopardy (2) capitalism can create wealth but distribution remains a quandary (3) all systems come and go, and new ones can and will be created.  

Perhaps it is time to move away the metaphor of the jungle of evolution (survival of the fittest) and design and create a system that works for all – humans and gaia.  And perhaps that would be the greatest genius of capitalism, self-destruction, so that a new system can emerge.