Sunday, November 25, 2012

Why Do Companies Fail?

The business press has a cosy relationship with managements.  They need that relationship in order to get access to them for stories.  The older journalists are also biased towards management, and they tend to see unions as a problem.  Consequently, the standard message that we get from the business press is that firms fail because their market changed.  We are seldom told that a business failed because its management was incompetent.  Of course, it is the job of management to navigate a business in a changing world.  We don't pay them huge salaries to run a business that has no challenges.

This article (via Mark Thoma) documents the failure of Hostess, the firm that gave us Twinkies and Wonder Bread.  Management had a pretty good handle on its problems.  It failed because it did not execute against its plan.  Its relationship with private equity investors and hedge funds did not help either.  It went through CEO's almost as fast as it assumed debt that added to its costs.  Labor union give backs to management saved the firm $110 million per year but management did not use that money to take the actions that were needed to save the firm.

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