Wednesday 20 June 2018

Most firms 'fail due to wrong strategy'

Dubai, September 1, 2009

Only 16 per cent of companies fail due to economic crisis, while 54 per cent fail due to wrong strategy, according to a study by a leading management consultancy firm.

The majority of all insolvencies can be traced back to questionable strategy and investment decisions, according to A T Kearney.

Instable cost structures, insufficient liquidity and belated respectively inconsistent management response to the crisis are among the most frequent reasons for company insolvencies. This is the key finding of a study in which top-management consultancy A T Kearney surveyed more than 1.200 insolvencies.

Insolvencies are often a result of incorrect long-term decisions. In particular hasty expansions before the crisis are now severely punished as uncontrolled investments have eroded financial means to adequately respond to the crisis, according to the study.

The natural reasons for corporate insolvency such as excessive cost structures (39 per cent) and insufficient liquidity (38 per cent) follow on rank 2 and 3. However, the fact remains that the top eight reasons for company failures are internal issues, from failed strategies to cost structure to inadequate controlling.

“The current economic and financial crisis drastically unveils the failures of the past. Managers then often react too late and again lack strategic foresight. Enterprises are paralyzed; although the crisis is omnipresent it is often underestimated and counteractive measures are taken too late,” said Robert Ziegler, vice president, A T Kearney Middle East.

Organisations often respond too late and too slowly. Most corporate crises have their origin in strategic decisions that had partly been taken long before the crisis without anybody recognising the impending imbalance of the company in time.

Basically, only 15 per cent of the enterprises in a crisis situation pursue an overriding strategy in the sense of 'Sustainable Restructuring'. Most enterprises focus their counteractions on operational areas and mainly react with freeing liquid capital (62 per cent), cooperating with customers and suppliers (46 per cent) and implementing cost reduction programs (42 per cent).

An unexpected finding of the study is that management adheres to traditional patterns of behaviour and strategies and responds either with delay or inconsistently, even if they recognised the crisis on time (34 per cent).

“Often the principle of hope predominates and companies believe that they will be less affected by the crisis than others,” said Ziegler.

Another key reason for corporate insolvencies is the mutual dependency between suppliers and customers along the value chain (23 per cent) which in particular applies to key industries with many network relationships and based on division of labour.

Although major reasons for corporate crises can be spotted on a strategic level, most enterprises implement mainly short-term, operational measures to respond to a crisis. Almost 62 per cent of the companies take measures to ensure liquidity when they face insolvency.

46 per cent of the companies surveyed employ cooperative solutions with customers and suppliers, while 42 per cent rely on cost reduction programs and 34 per cent take debt and equity capital measures. Only 33 per cent of the enterprises change their strategic orientation in a crisis situation.

“Lack of management response to shifting markets and environment can be fatal,” said Ziegler. “Coordinated action is needed to avoid company crisis. Most enterprises still have sufficient scope and are not limited to short-term response and sooner or later demand will recover. Companies should therefore implement short-term measures to ensure liquidity and at the same time realign their long term strategy.”

Most frequent reasons for insolvency:
• Incorrect strategy/investment decisions: 54 per cent
• Cost structur

Tags: business | management | economic crisis | A T Kearney | companies failure | insolvency |

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