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August 26, 2014
The Dismal Science
The Threat
by Adam Smith

What attracts people to particular companies? Why are companies successful over the long run? These two questions have been on my mind lately. Over my career, I have worked for companies with widely different business models.

One company I worked for depended on constantly coming up with innovative new ideas. The company’s main advantage was with the engineers it employed. The company was absolutely atrocious at controlling costs. New products that had little or no competition allowed the company to make lots of money on each item sold, and they could absorb their inability to control costs.

Another company I worked for was really good at controlling costs. Not a lot of big ideas were coming out of that group, but they were very good at producing a quality product at a low price and the customers responded by buying their product.

Of these two companies, I really enjoyed working for the second much more than the first. It is great working for a company where everyone actually works. Like really works.

Having a CFO say, “Hey I can get that done myself — don’t worry about it” would be a miracle in most companies. But in that company it was common. To me, it just feels better when everyone is helping out instead of having certain people just sit around and think of things for other people to do.

What is the killer for these two companies?

The death knell of the first company is that other companies become better at innovating than they do. This is exactly what has happened and the company no longer exists in its prior form. (Sales of this company were in the tens of billions of dollars.) When the company tried to compete on price they utterly failed. The fall was fast and furious. The market really is brutal.

The second company dies in a different way. The people that made the company so successful were there when I got started. They understood what it took to be successful year after year in such a competitive environment. Then the people that built the company started to leave.

At first, the new people could not execute the changes they wanted to make. The new people that were brought in would say, “That’s not the way we did it at XXXXXX (name of failed company).”

There were enough of the old guard left in management so the new ideas that did nothing to increase revenue and just added to the cost of the business were rejected. But eventually enough of the builders were gone and the new blood started forcing out more of the old guard till there was nothing left to protect the business from these “brilliant” people that came from other failed companies to run a successful one.

This type of company dies a slow painful death.

The company makes lots of money so adding a person here or there really does not make a difference, does it? Adding a whole new level of vice presidents is really needed and what is the harm? We make so much money, right?

The new buzzword in business is “innovation,” and so we need to be just like Google and have an innovation center, right (even though our customer will never pay for the cost of an innovative product)? And so it goes on and on.

Every year there is something new to spend money on that neither increases revenue nor saves money. The company painfully, slowly, loses its competitive advantage on cost and never seems to be able to get it back. By the time management tries to revert to the original core values, there is no one left that knows how it was done. But they really know how to have meetings with a lot of people that do absolutely nothing to make the company successful.

To answer my questions at the beginning of the article, the first company attracts people that want to get paid a lot of money for attending meetings.

The second company attracts people that like to work.

What makes a company successful over the long run? Really, I do not think that any company is protected from incompetent management, so all are vulnerable. But, somehow passing on the core values and knowledge from one managerial generation to the next is necessary, and then hiring competent people makes it sufficient for future continued success.

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