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Six factors that can cause companies to fail have been identified in a new study looking at the collapse of telecom giants WorldCom and Nortel.

WorldCom was the largest bankruptcy in US history when it filed in July 2002 with $35 billion of debt, while Nortel Networks was once the powerhouse of the Canadian tech industry before it went bust in 2009 following an accounting scandal.

Loizos Heracleous, of Warwick Business School, and Katrin Werres, senior industry analyst at Google, found the two cases had valuable lessons for corporations and set these out in a paper for the Long Range Planning Journal.

Professor Heracleous said: “We identified six interrelated factors of strategic misalignment, the processes that can lead to corporate failure if left unchecked. Once strategic misalignments are established these then spread to other areas inside the organization. In the latter stages significant gaps are created between the strategy and competencies of the firm, and between strategy and the demands of the competitive environment, which leads to corporate failure.”

The paper ‘On The Road To Disaster: Strategic Misalignments and Corporate Failure’ looked to identify typical patterns of strategic misalignments and found six factors:

  • Factor one: Ineffective leadership and a passive, dominated board of directors.
  • Factor two: Aggressive growth strategy (for example via acquisition), or over ambitious investments, funded by easy credit and overvalued stock.
  • Factor three: Lax strategy execution (for example insufficient post-merger integration).
  • Factor four: Misalignments at the organizational level from duplication of processes leading to inefficiency, while downsizing leads to the loss of talented people.
  • Factor five: Further misalignments at organization level, i.e. the culture becomes unproductive and inward looking, and core competencies weaken. These are exacerbated within an unforgiving environment (for example industry hit by an external shock like the 2007-08 financial crash).
  • Factor six: Strategy and core competencies are not aligned with the requirements of the competitive environment, leading to failure.
Read a copy of the paper here (PDF).

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