Recognizing a Declining Business

In the past week, we have taken the time to look at characteristics of successful companies. In case you missed one of the posts, feel free to catch up by reading them in order (links below):

  1. How Successful Businesses Plan For Growth
  2. How Successful Companies Market
  3. How Successful Businesses Manage Their Finances
  4. How Successful Businesses Manage Their Operations
  5. How Successful Businesses Create Positive Cash Flow
  6. Revenue, Cost & Capital In Your Business
  7. How Successful Businesses Maintain Organizational Morale

This week, we are “flipping the equation” on you and examining what a business in decline looks like. As you track with the principles shared and lessons learned, you may find yourself to closely resemble a declining business in one way or another. Don’t despair! Knowing what needs to be fixed is important. You are that much closer to success than someone who doesn’t even realize that crisis is around the next corner because of ignorance.

No one is consistently successful. When things start to go wrong, however, the shrewd executive must recognize those events that are catastrophic and those that are not. Early warning signals of imminent business decline can occur both inside and outside a business. Changes in the operating environment due to external and internal elements may signal the beginning of decline. Once an executive team determines that the business is showing some symptoms of decline, the next step is to determine whether the decline is shaping up to be a twenty-four-hour bug or a terminal disease. Can it be treated? Can it be cured?

The Stages of Decline

Stages of decline include early, mid-term, and late periods, and recognition of these stages has an impact on the steps to reverse the decline. In early decline, it is very probable that the business can be totally saved and profitability restored quickly–often within a matter of months. In mid-term decline, the business has been suffering some erosion of value, and it may take a year or more to restore the value and resume profitable operations. Finally, there is a late decline. Sadly, fewer that one-third of companies in this type of serious trouble are able to reverse their decline and emerge on the other side “whole”–with existing management, ownership, and operations intact.

Before examining the warning signals of decline, we should look at the root causes leading to those signals. The earlier these causes of decline are observed, the easier it is to resolve them. The most common causes of decline–from both internal and external elements–are as follows:

The Causes of Decline

  • management by exception rather than by flexible planning
  • delegation without inspection or control–no feedback, review, or reinforcement
  • vertical organization chart with little if any interaction between departments (silos)
  • managers with responsibility for more than five direct reports
  • employees with more than one boss
  • chain of command broken when employees think necessary
  • breakdown in formal communications
  • overreliance on strategic plan
  • overreliance on management by objectives
  • senior managers’ abuse of outside activities and company benefits
  • marketing the wrong products
  • marketing in the wrong locations
  • aging workflow management techniques
  • inadequate research
  • inadequate staffing
  • inappropriate sales methods
  • unresponsive financial information systems
  • loss of competitive advantage
  • displacement by competition
  • changing technology
  • buyer preference changes
  • regulatory changes
  • economic changes
  • inadequate understanding of buyer needs
  • inadequate information flows, both between business functions and between company and customer
  • one department or business function dictating the mission, goals, and objectives of the company

All of the above causes for business decline are valid, and any one of them can precipitate the downfall of even an experienced team. Recognizing the warning signals of decline is the next step in righting the ship…

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