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Long Range Planning

38/3 June 2005



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Special Issue


Adrian Wilkinson and Kamel Mellahi Theme Editors

Organizational Failure


Charles Baden-Fuller Editorial

The dividing line between success and failure can be quite narrow, and this special issue on Organizational Failure emphasises that unpleasant fact. So why is this really so, and what can we do about it? Adrian Wilkinson and Kamel Mellahi have assembled four wonderful pieces which may help us understand why this is so, and what can be done about it. Jerry Sheppard and Shamsud Chowdhury tell us why the famous Canadian department store T. Eaton Co. Ltd. fell to ruin and Kamel Mellahi describes the road to failure of giant Australian insurer HIH. With careful analysis we can see where they slipped and fell. Many small mistakes assisted these two downward paths; individually these were not catastrophic, but collectively they were so.

Will we learn from these stories or other mistakes? At the individual level, we surely do learn. But the organizational perspective is much less optimistic. Philippe Baumard and Bill Starbuck provide an excellent empirical study to show that organizations too often learn very little from either small or large mistakes, while, more optimistically, Mark Cannon and Amy Edmondson offer a structure for learning from mistakes which includes recognising and analysing them, as well as engaging in deliberate experimentation. They confirm that imbuing an organization with a culture of learning from mistakes is difficult, but vital.

In the 21st century, we know we have to combine the spirit of entrepreneurship, that views failure as something to move forward from, with the learning view that failure can be useful experience. Thanks to this special issue, we now recognise the necessity of shaping the organizational agenda along these lines. The solution is surely a leadership challenge. Changing attitudes to failure and getting the necessary systems in place has to start at the top. And if led from the top, then there is a chance that longevity and quality of organizational life will improve.

As editor I thank all the authors for their work, and the two special issue editors for assembling such fascinating pieces. They have done much shifting and shaping to produce an excellent issue with an important message.


Adrian Wilkinson and Kamel Mellahi Introduction to the Special Issue a.j.wilkinson@lboro.ac.uk

The articles in this Special Issue can be divided into two groups: those on ‘Failure’ (i.e. organisational failure) and those on ‘failures’ (i.e. non-fatal ‘individual’ failures, which might be contributory causes towards eventual ‘Failure’). The first pair of articles address the issue of understanding the causes and processes of organizational failure and offer ‘cautionary tale’ views of whole-failure-journeys from which lessons can be learnt on a ‘there-but-for-the-Grace-of-God’ basis. The second pair discuss the problems associated with whether and how the failure of individual ventures can yield actual learning (or not).


Jerry Paul Sheppard and Shamsud D. Chowdhury Riding the Wrong Wave: Organizational Failure as a Failed Turnaround sheppard@sfu.ca

What stages does a troubled firm go through as it lurches towards failure? How long might it take? And is failure inevitable, or can declining firms be saved – and if so, how? This article categorizing the elements of failure or turnaround in a four-stage model, and illustrates the model with an in-depth analysis of the journey of T Eaton Co Ltd, for 130 years a proud retailing icon - with knighted executives, Hollywood customers, the first Canadian stores to offer electric lights and elevators - to a grim and shameful end of take-over by rivals and repeated bankruptcies.

The authors map out Eaton's 50 year decline (as first Sears and then Wal-Mart enter the fray) by contrasting their story with those of the struggling-but-gradually-succeeding Hudson Bay Company (dating back to 1670), and the more dynamic reactions to the threat of US encroachment by Canadian Tire. Their advice to managers includes distinguishing decline from hiccups, recognising changes in environment and maintaining clarity of identity, being steadfast and decisive about acquiring funds and then using them to make effective, decisive and timely strategic changes.


Kamel Mellahi The Dynamics of Boards of Directors in Failing Organizations K.Mellahi@lboro.ac.uk

The collapse of the giant Australian insurance firm HIH and the ensuing Royal Commission has allowed researchers highly unusual access to the writhings of a board in turmoil. The author takes full advantage to deconstruct the HIH story and examine board dynamics at HIH over four stages, labelled Conception, Warning Signals, Rebellion and Collapse. He shows how the eventual failure had its roots in two major blunders (entering the UK and re-entering the US), followed up, as management sensed the alarm bells, by two more rushed moves – acquiring FAI and the Allianz JV.

At the same time, he tells the story of how the CEO's power increased as he stamped out rebellion and strangled the Board's access to relevant information, while the well-paid Board members, their power decreasing, moved from being unaware, to uncomprehending, to not being told and finally to burying their heads in the sand. His recommendations for Boards to understand their business, and to show experience, determination, vigilance and a willingness to act are set against the awful picture of the price of HIH's board members' cosy non-intervention.


Philippe Baumard and William H. Starbuck Learning from Failures: Why It May not Happen wstarbuc@stern.nyu.edu

Organisations need to learn if they are to succeed – and it has been claimed that as failure is more threatening than success, it is more likely to lead to learning. But do firms learn from failure? And do they learn more from large or from small failures? Finding little research into these questions, the authors contribute a study of 7 small and 7 large failures at an anonymous European telecoms giant, grouped according to category pairs to compare across the size divide.

Working through the failures, the authors find that the company learned ‘disappointingly little’ from its experiences. While small failures gained attention and some incremental learning ensued, too often they were dismissed as experiments, and learning was never allowed to challenge core beliefs. In the case of large failures, where the length of time involved for the full picture to develop meant true costs were often hidden, and specific managerial responsibility dimmed, failure was most often blamed on the unexpected effects of exogenous environmental causes. Pervasive problems included the lack of effective reporting, (often detailed implementation difficulties rather than questioning the venture as a whole) and lack of direct financial and reputational links between managers and venture success.


Mark D. Cannon and Amy C. Edmondson Failing to Learn and Learning to Fail (Intelligently): How Great Organizations Put Failure to Work to Innovate and Improve aedmondson@hbs.edu

Amid all the exhortations to learn from failure, firms must still search for advice as to how best to achieve this most-desired outcome. The authors have researched widely about how such learning does, or should, occur. From a wide canvas of examples (mammograms and pediatrics to banks and space shuttles) they identify three key processes – identifying failure, analyzing failure and deliberate experimentation – as the bases for beginning to learn, as well as two types of barriers – technical and social – which act as obstacles to learning.

This matrix yields six recommendations for management action, which the authors suggest are implemented as an integrated set of practices. They also point to the necessity of establishing a new managerial mindset where failure is seen as an inevitable aspect of operating in a complex and changing world, the critical first step in a journey of discovery and learning. In such a culture messengers are not shot and leaders ‘walk the talk’, while ‘failure parties' honor intelligent experiment and the winner of the ‘no-nuts award’ takes pride in the fact that his mistake has saved his company a lot of money.


This issue is available in full on-line at www.sciencedirect.com

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