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Sports Authority’s Bankruptcy a Reminder to Ratchet up Your Company’s Robustness

Screen Shot 2016-03-07 at 11.18.57 PMMartin Reeves is Senior Partner, Boston Consulting Group and Director, BCG Henderson Institute. He is also co-author of “Your Strategy Needs a Strategy: How to Choose and Execute the Right Approach.” Please visit the original piece to leave any comment.

Sports Authority filed for bankruptcy a few days ago, rocking the bricks-and-mortar retail industry to the detriment of its employees, its private equity holding company (Leonard Green & Partners), and loyal customers. Could this sad outcome have been avoided? Almost certainly. Sports Authority was hit by Target, Kohl’s and Walmart’s attempt to enlarge their sporting goods portfolios and competition from online retailers.

But Sport’s Authority’s fall reflects a wider phenomenon. The mortality rates of companies – across all industries – have increased significantly. Our analysis of entry, growth, and exit patterns for 35,000 publicly listed US companies since 1950 revealed a dramatic trend. Public companies are perishing sooner, with few surviving into their 50s and 60s. The five-year exit risk stands at 32 percent today—up from just 5 percent 50 years ago. Equally troubling, increased mortality affects companies of all ages, in all industries. Size provides no refuge either: as we noted in a recent article, only 7 percent of companies that are market share leaders today are also profit leaders in their industries—down from 25 percent in the 1960s.

What’s going on? Several forces are converging to test businesses’ robustness including:

  • Greater diversity. Businesses face increasingly diverse environments with respect to predictability, malleability and harshness, and each environment requires a tailored approach to strategy and execution, as explained in our recent book, Your Strategy Needs a Strategy.
  • Increased interconnectedness. Businesses are more interconnected. Multinationals move goods, services, and capital around the world. Ecosystems are proliferating, with companies forging interdependencies across industry boundaries. More connections mean more vitality—but also a greater risk of shocks’ propagating throughout the system.
  • Accelerating change. Business conditions are shifting more rapidly, with companies moving through their life cycles twice as quickly as they did 30 years ago, something we explored in a recent post.

How can companies bolster their robustness in the face of such forces? We recommend six tactics in our recent Harvard Business Review article “The Biology of Corporate Survival.” These principles are proven to help both natural and managed ecosystems endure, so they can help businesses endure too.

  • Maintain heterogeneity. Make your business sufficiently diverse in terms of people, ideas, and endeavors. Greater diversity helps you adapt to environmental change. To foster diversity, hire people with varied personality types, educational backgrounds, and working styles.
  • Employ a modular structure. Highly modular systems—those characterized by loosely connected components—impede the spread of shocks. That makes the overall system more robust. For example, Toyota just announced that it would create separate companies (Lexus, Toyota, etc.) instead of just handling the different brands as business units.
  • Preserve redundancy. Have different components of your business play overlapping roles. If one fails, another can fulfill the same function. For instance, cultivate partnerships with multiple suppliers for critical components of your most important products.
  • Expect surprise while minimizing key sources of adverse risk. Consider how your business model could be superseded and what to do about it. Look especially for potential blindsiding by mavericks on your industry’s periphery. Ask yourself, “If the mavericks’ idea proved successful, how would that affect us?” Then replicate, acquire, improve or build defenses against the idea.
  • Employ adaptive learning. Empower frontline employees to consider challenges—and experiment with innovative solutions. Ensure that the best solutions get scaled, by diverting (if necessary) resources from less successful or older products and businesses.
  • Foster trust. Make sure you’re adding value to your business ecosystem even as you seek to maximize your profits. You’ll build trust between your firm and other stakeholders, which strengthens the ecosystem overall, further protecting it against shocks.

Rising mortality among businesses is an increasing threat, and will likely remain so for the foreseeable future. Leaders need to consider not only how strong their game is, but how long it will last. But understanding the dynamics of business environments and being able to bolster robustness can mean the difference between survival and extinction.

Wondering how robust your company might be in the face of increased complexity? Find out, by testing it with the BCG Robustness Calculator.