Fallen companies rarely make it back to the top

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Competitive advantage is bound up with a company’s history and needs to be matched to market opportunity. When it is lost or the market evolves, the consequences are generally fatal.

General Douglas MacArthur, expelled from the Philippines, proclaimed “I shall return” and arrived three years later as pro-consul in Tokyo. Arnold Schwarzenegger has repeatedly fulfilled his promise “I’ll be back”.

But in business, they rarely come back. The great names of global business a century ago included US Steel, International Harvester and American Tobacco. Midland Bank was once the largest financial institution in the world. ICI – Britain’s biggest industrial company for most of the past century – dominated the chemical industry across the empire. Pan American and Eastern were America’s leading airlines, when Sears was as dominant a retailer as Wal-Mart is today. These market leaders not only lost pre-eminence but ceased to be significant players in their industries.

In the 1980s, the management of AT&T believed that if the company freed itself from regulatory restriction by relinquishing local telephone monopolies it could reinvent itself for the world in which computers and telecommunications were emerging. Their vision of the evolution of the industry was right: the hope that their company could play a big role in it was wrong. When a company loses the top slot, it rarely regains it.

So the apparent renaissance of Marks and Spencer, which last week reported strong recovery in sales and profits, may be an exception to the rule. There are others. IBM was humbled when the personal computer it had itself pioneered took away much of the mainframe market it had dominated. But, the company restructured. Never to recapture its former glory, but again to be one of the best regarded companies in its industry. BMW is also a remarkable comeback story. The company was twice on its knees. Once in 1945, when to be Germany’s leading aircraft engine producer was an unenviable and unviable position. Its troubles were compounded by Soviet seizure of its main plant. Again in 1959, when unsuccessful diversification brought it to the edge of bankruptcy. In the following decade, the company would establish a seemingly durable position as one of the world’s best regarded automobile businesses.

Competitive advantage is bound up with a company’s history and needs to be matched to market opportunity. Loss of competitive advantage is generally fatal. US Steel declined in part because of complacency, but more because competitive advantage in steel production no longer rested on owning large plants in the US. American Tobacco failed to sustain its marketing capabilities in the face of innovative competition from companies such as Philip Morris. AT&T’s strength rested on its monopoly and there were nimbler rivals in markets it aspired to enter.

Other businesses begin to fail when their competitive advantages remain intact but markets evolve in a way that makes these advantages less relevant. There is more hope here, as IBM illustrates: the reconfigured business recognised that its strength had rested less on the technical excellence of its hardware than the quality of its customer support. Sears, however, failed to reassert its reputation with customers and strengths in the supply chain when the shoppers of middle America began to drive to out-of-town malls. Under Herbert Quandt’s leadership, BMW established a new market segment – the high-performance saloon – which utilised its capacity to use a German workforce to achieve precision engineering in mass production.

M&S is an intermediate case. In failing to adapt to changing retail trends in the 1990s, the company eroded but did not altogether destroy its customer relationships and supply chain strengths. Not quite Eastern Airlines – whose competitive advantage had vanished, though its market grew – nor yet a BMW, whose competitive advantage remained intact as its market vanished.

But the prognosis for M&S is better than for many other businesses facing market turbulence. If Europe’s energy companies lose the protection of vertical integration, can they find new roles? Can telecom giants reinvent themselves where control of the last mile of wire is no longer decisive? When the historic sources of underlying competitive advantage have gone, businesses rarely return.

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