How to pull a failing company out of a death spiral
If demand for your products and services is declining, find out why. And if change is needed, do it immediately
I was on kid duty yesterday and had to get different boys to different places within a narrow time frame. We barely had time to grab some brunch, but we had to eat. WhatsApps and SMSs were buzzing furiously to co-ordinate the eat-and-disperse mission. We had to leave in time to meet the primary objective by 12.15pm, latest.
First choice was full, plus a 20 minute wait, second choice had a 15 minute queue, but third choice was practically empty, as were most of the other restaurants in the centre – death spirals had already begun.
We ate an entirely tasty, specialist meal. People rushed off to their various destinations, as I paid the bill. I did a quick reasonableness test, and a cost per customer assessment (I know, I can’t help it), which showed that we were paying well above the going price for an equivalent quality meal in the centre, yet we were at our third choice, nearly empty restaurant? A classical death spiral. This restaurant, to maintain quality and margins in the face of declining client demand, had to increase its prices to cover continuing fixed costs – often the beginning of the end.Price-sensitive customers will now join the other customers who have left (some of them perhaps even temporarily) which will result in demand dropping even further. With fixed costs still the same, you’ll now have to increase prices even further, and so the downward spiral begins. Soon enough you’ll cross the tolerance price line for a good meal, and the business will die.
Death spirals are found in other circumstances, perhaps figure skating and aviation being the best known. In ice skating it’s on purpose – a very impressive move in pair figure skating, when the male pivot centres on one toe and the female partner is flung around in a circle, parallel to, and barely above, the level of the ice – as many spectacular scores as tumbles result.
In aviation it starts with a mistake. When a pilot mistakenly believes the aeroplane’s wings are level and acts to correct this, when in fact they are not, when instruments indicate they are not, and when there is no visible horizon to provide a physical reference, a pilot’s misguided corrective actions can, purposefully (if unwittingly) fly an aircraft into the ground.
The common thread in death spirals is that the first error is a consequence of either not having, or choosing to ignore, the facts in front of you, which would suggest a different course of action to that which you have chosen to follow. This results in an initial wrong decision (usually being that you stick to what you’re doing, despite increasing evidence that it is not yielding the right result), which is then fatally compounded by an insistence on doing even more of the same as conditions continue to worsen.We see so many examples of this in business. In fact, in the “survival of the fittest” game that is business, this is the most reliable eliminator of once dominant enterprises and business models. Indeed, it is the death spiral phenomenon that has made space for new winners by killing off the losers in the technology, media, taxi, healthcare, energy, and so many other industries.
Once you’re in it, a death spiral is very, very, very difficult to get out of (impossible with the same management), but it is possible to avoid.
First and foremost, you have to face the facts. If demand for your products and services is declining, find out why. In so doing you may discover a truth that you don’t like – that doesn’t matter. Truth is truth, and you’d better change what you are doing or producing, or otherwise welcome to the spiral! When change is recognised as necessary, do it straight away. Kodak would have fared so much better had it earlier conceded that digital was going to virtually replace celluloid in film.
We see changes happening today in energy, or logistics, to choose only two industries close to home that are having to manage a different environment, product set, competition, and the demand curves that characterise these changes.
Once you accept the truth, adopt it. Stop repeating what you’re doing and invest, invest, invest (most often at the cost of immediate returns and popularity) in the different future and client universe that you see before you. To do so will require of you to be bold, but not to do so is just stupid, if not suicidal.
Mark Barnes is the CEO of the Post Office.