(MoneyWatch) COMMENTARY Hands down, the number one problem in business is that you almost never know you're in trouble until it's too late. The reason is simple. Decision-making is always a gamble. You place your bet and await the outcome.
That's why they call it risk-taking. Sure, you can hedge against excessive risk but that can be expensive. Not to mention all those unpredictable factors that are out of your control. No, there's just no way around it; inflection points are awfully hard to predict.
That's why analyst ratings on stocks are more or less worthless. When the tech bubble was bursting and all the communications stocks were plummeting, all the analysts had "buy" ratings on them right down to the bitter end. The logic, I guess, was if Juniper's a buy a $200, it's definitely a buy at $50.
The reverse is also true. As of today, just 4 of 47 analysts have a "buy" rating on. Only one analyst has a "buy" on and nobody thinks Radio Shack's going up. Does that mean they won't come back? Of course not. I'm sure the situation was the same for IBM and Apple before Lou Gerstner and the return of Steve Jobs, respectively.
But hey, wouldn't it be great if you could actually foresee disaster before it strikes? That may be hard but it's not impossible. There are signs, if only executives and business leaders would learn what former Intel CEO Andy Grove tried to tell them: "Only the paranoid survive."
Thinking back on hundreds of corporate failures, including quite a few I got to see up close and personal, there were always warning signs of pending doom. Here are my top seven. You can pay attention or live in denial. It's your call.
Your salespeople are panicking. The first and best early warning sign of business trouble always comes from sales. After all, they're on the front line talking to customers every day. And they're usually paid on commission, so their livelihood's at stake. I've seen lots of sales VPs fired because their CEOs were in denial. You know what? Every one of those companies went down the tubes.
You're staying the course when your lieutenants are saying, "Change direction." I mean, why hire highly compensated executive talent if you're not going to listen to them? I call it, a disease that afflicts leaders who believe that doing the same thing will somehow lead to different results. The causes are unknown.
You're winning really big. This may be counterintuitive, but in today's highly competitive global market, it's true. If you're dominating a big market, your profit margins are huge and there are no competitors in sight, you may as well have a giant bulls-eye on your company logo. Competition is coming, guaranteed. Besides, the truth is that nobody questions success. It's a real problem.
You're afraid to cannibalize your existing products. Believe it or not, this still happens all the time. Why do you think Best Buy's online buying experience is so poor compared with Amazon's? To protect its brick and mortar sales. Why did Panasonic wait too long to get into LCD panels? To protect its plasma display business. That's one of the reasons why it lost over $9 billion last year. The lesson is simple: If you don't cannibalize your own products, your competitors will do it for you.
Revenue growth and profit margins are eroding. Not to state the obvious, but long before a business really heads south, there's almost always a bending over or flattening of the growth or profit curve, meaning growth is slowing and profit margins are shrinking. It's not that executives don't notice. They do. The problem is the inevitable two quarters of excuses that somehow don't seem to be affecting competitors, followed by another two quarters of finger-pointing and lame ideas that don't work. By then, it's too late.
Conventional wisdom says you can't lose. When everyone agrees that you just can't lose, when your whole management team is so on the bandwagon that it's practically tipping over with confidence and certainty, that's when you need to worry. There's probably some groupthink or sugarcoating going on. The status quo, inertia, overconfidence and yes-men have one thing in common: They all kill companies.
Your plan has one little flaw: Reality. Behind most companies is a vision, strategy or plan that, for one reason or another, won't work. Just the law of averages at work. The good news is it's really easy to find out which side of the coin flip you're on. When you pitch people, ask them if it makes sense to them. If you don't ask, they won't tell. Most CEOs don't ask. For years Sony has marketed a magical CEO Howard Stringer try to sell it never gets old.. There isn't, but watching former