Three keys to enterprise success (or failure)

There’s ample empirical evidence to show that many publicly listed and private companies, across all industries, continue to underperform. Some of my own research, as well as research by EY1 and McKinsey,2 indicates that more than 40% of publicly listed firms consistently underperform—with the return on investment capital being less than the cost of capital—the other 30% barely exceed cost of capital. Many private family-owned companies around the world also underperform.3

Much has been written about what makes companies succeed, including classic books like Built to Last, Good to Great, and The Discipline of Market Leaders.4 As these works demonstrate, companies can take different pathways to success—from manufacturing great products in mature industries to creating previously unimaginable innovations, from having visionary leaders to leveraging better organizational structures or focus, and from providing better value for money to just being in the right place at the right time. In fact, the list of pathways goes on and on.

Given these various routes to success, why do so many companies continue to struggle with underperformance—even in the absence of strong competition? Of course, if a company has no claim to fame (product/solution), no “stickiness” with its customers (aka customer loyalty), and no courage to make bold decisions, it is likely to struggle and even go under. But for many companies, the problems aren’t so obvious. These companies seem to be mired in what I call “a no person’s land”—a limbo state where they’re neither going bankrupt nor creating value for stakeholders.

In my experience, both in global consulting and in running my own firms, companies are more likely to underperform if they lack what I call the “3Cs”: capacity, capability, and character. Let’s take a closer look.

Capacity
Capacity is about matching business requirements to financial and human resources. Some companies become so lean and mean that they leave no slack in the system. Their focus is on cost reduction instead of value loss. This actually creates a vicious cycle, as lack of capacity leads to underperformance, which then leads back to underinvestment in capacity. Moreover, lack of capacity prevents these organizations from being able to plan for future capacity.

Capability
Lack of capability (which includes a lack of appropriate business application software) is another issue that seems to be endemic. Some companies have people that may not have the capability to match either their current job requirements or the changing needs of the marketplace. These organizations also typically underinvest in skills training because they fear that adequately trained people will simply leave for better jobs elsewhere. Moreover, many members of the C-suite don’t know what they don’t know, and—worse—some think they already know everything. These individuals don’t spend enough time reading and reflecting on the changing business landscape—often because they’re too busy.

Character
The third key to enterprise success is character, which differs from culture. Character is what defines a company to its stakeholders. I have seen companies that don’t care about relationships or partnerships and whose procurement policy is to “get three quotes” and beat up suppliers on prices—theirs is a purely transactional character. Some companies don’t even consider the lifetime value of their customers or business partners (e.g., suppliers) or the careers and long-term success of their employees. Naturally, these behaviours don’t build loyalty among stakeholders. So why would good customers, business partners, or employees want to continue doing business with or working for them?