[1] In a 1992 article, Miller noted that successful companies tend to fail precisely because of their strengths and past victories, which engendered over-confidence and lulled them into complacency.
The characteristics that drove their success such as tried-and-true business strategies, dauntless and self-assured management, signature products and the reciprocal action and overall combination of all these elements when employed in excess may ultimately lead to declining sales and profits and even bankruptcy.
This may be profitable in the short run as companies continue to specialise and improve in a certain product or strategy, leading to higher efficiency, sales and growth as they cultivate their competitive advantage in that particular area.
Standard economic theory explains the high rate of failures as an inevitable result of companies taking rational risks in the face of uncertain situations.
A study of letters to shareholders in annual reports, for example, found that executives tend to attribute favourable outcomes to factors under their control, like corporate strategy or R&D programmes.
[5] In making forecasts about a project, executives and their subordinates typically have a preliminary plan drawn up by whoever proposed the initiative, which is then adjusted based on market research, financial analysis or their own professional judgement, before deciding how to proceed.
The initial plan tends to accentuate the positive because as a proposal, it was designed to make the case for the project as compelling as possible, thus skewing the subsequent analysis towards over-optimism.
Executives often fail to build in enough contingency funds to cover overruns because they are anchored to their original cost estimates and do not sufficiently adjust them to account for possible delays, problems and expansions of project scope.
A study by Rand Corporation found that the construction costs of 44 chemical-processing plants owned by major companies such as 3M, DuPont and Texaco are, on average, more than double the initial estimates.
[5] In making forecasts, executives tend to focus on their own company's capabilities and plans and are thus prone to neglect the potential abilities and actions of rivals.
[5] The Machiavelli factor is defined by Flybjerg in his review of Lovallo and Kahneman's work in 2003 as the deliberate "cooking" of forecasts in order to get ventures started.
Flyjberg opines that adjusting forecasts due to political pressures can hardly be called optimism or a fallacy – deliberate deception would be more accurate.
The study covered 7 decades, and in that time span, forecasters made constant errors of the same magnitude and frequency, leading to repeated cost overruns and demand failures.
As the market environment evolves, the fresh competitive formula that led to a firm's initial success instead becomes a rigid set of rules that dictate and confine their strategies.
[7] According to Sull's paper in 1999, active inertia – an organisation's tendency to follow established behavioural patterns – encompasses and details the ways success can eventually breed failure.
[8] Strategic frames are the mind-sets that help managers evaluate how and what the business is doing, judge the market they are operating in, determine the importance of each segment of customers and decide on how to best increase the value of their firms.
At its foundation, National Westminster's executives committed to a clear set of strategic frames—retail banking is stagnant and UK suffering irreversible decline.
Compaq's quality-at-any-price processes served the company well in the early days of the PC industry when customers worried about the product's usability and low-cost alternatives were rare.
Major airlines historically competed on the strength of their hub-and-spoke systems in which the carriers controlled valuable real estate at hub airports and a fleet optimised for this business model.
Managers commit to external relationships by investing in specialized facilities to serve a key customer, for example, or writing long-term service contracts.
For example, in the 1980s, Kirin Brewery was slow to offer trendy dry beers, which were increasingly popular among younger drinkers, because they did not want to estrange their main market of Japanese businessmen.
Daewoo owed much of its growth to cosy relationships with South Korea's General Park, who ruled the country with an iron fist for nearly two decades.
However, this new system becomes destructive precisely because the commanders no longer need to meet face-to-face, which consequently weakened mutual trust, thus undermining the organisation.
[17] They failed for several reasons:[17] In Fresh & Easy's case, TESCO's confidence in bringing its successful concept of ready meals to the US market contributed heavily to its failure.
Firestone's long-standing success gave them a strong, unified sense of their strategies and values, their relationships with employees and customers and their investments and operating processes.
They made tires for which there was not enough demand because their budgets encouraged excessive investments in capacity, driven by frontline managers who did not want their own plants to close.
Laura Ashley expanded her business not for profits, but to protect and promote British values, which she felt were threatened by sex, drugs and miniskirts in the 1960s.
As more women entered the workplace, they began to prefer more practical styles over Laura Ashley's romantic garb, which was dismissed as suited to milkmaids in the 1880s rather than CEOs in the 1980s.
Apparel manufacturing was also transformed by the fall of trade barriers – fashion houses were moving production offshore or outsourcing it entirely in order to cut costs.
[20] In 1982, David T. Kearns took over as CEO and quickly launched initiatives to hedge their share losses – cutting costs and reinforced quality control through its benchmarking program – and was successful.