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How to Avoid Business Failure

Paul Carroll, co-author of Billion-Dollar Lessons, talks about the fallacy that strategy doesn't matter, the importance of naysayers, and the need to gauge competitive threats carefully

Most of the mistakes driving the current crop of corporate failures probably could have been avoided, says Paul Carroll, co-author of Billion-Dollar Lessons. The book analyzes 750 significant business collapses over the past quarter-century and identifies why they failed. Many of the book's principles can be extrapolated to the small business owner, Carroll recently told Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

Why study failure?

I realized one day that every business book I was reading was looking at business successes and trying to teach people how to be like those guys. And it seemed to me that if you just try to learn from successes, you're missing a big part of the picture. To really understand the game, you have to talk to the winners and the losers.

How did you choose which failures to study and write about?

We looked for the biggest failures among large companies in North America, and we had a team of 20 researchers investigate them over 18 months. We applied screens to get down to the 750 that we analyzed.

What was the biggest question you had about these flops?

We wanted to know if failure could have been foreseen. We guessed that one in five would be obvious, but in fact, it was closer to one in two. We found that 46% of the failures could have been foreseen.

What was the No. 1 cause of failure?

It was misguided strategy, which is interesting, because there's this idea—a fallacy, really—that business strategy doesn't matter, it's all about execution. That was completely wrong. You can't just figure things out as you go along. Strategy failures were far more common than sloppy execution, poor leadership, or bad luck.

What kinds of strategy mistakes were most common?

Going outside of your core business model to expand into a new area. Typically, companies that stayed close to their knitting didn't have big problems. But Avon (AVP) decided in the 1980s that it wasn't really in the business of selling cosmetics, that it was a culture of caring. They decided to start selling medical equipment and operating retirement homes, which turned out to be not such a good idea. We looked at a cement company in England that was one of the biggest players in the cement business, but they decided they were really in the business of helping homeowners. They started selling lawnmowers and went bankrupt.

How does a small company that wants to grow avoid over-extending with that disastrous kind of merger or acquisition?

Don't expand beyond what you know. If you're McDonald's (MCD), "Do you want fries with that?" typically works for you. But if you're selling hamburgers and you decide to put greeting cards in the store, that's a stretch. If you're thinking of buying something, don't get carried away by the prospect of how great it is. Task someone with the job of raising the objections: What if the economy goes south? What if sales figures aren't as good as they look? What if a key person leaves? What if we have a culture clash? You need to have somebody who is there just to raise every possible objection.

Why does every company need a naysayer in the ranks?

Because there's a tendency to get moving on something and then constantly confirm that you're right to do it. If you like the idea, of course you want it to be right. But it's important to have some debate and even some role-playing about all the possible things that could go wrong. Companies that do well tend to have a culture of encouraging disagreement.

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