Every morning, between 6.15 and 6.25 am, I listen to the BBC Today programme’s business slot. In between the froth of share prices and currency rates, there’s usually a story about the real economy and some firm doing well or struggling. I always feel sorry for the interviewer, trying to sum up in a few seconds what is usually a very complex business story. Although I allow myself a “tut” when they over-simplify, it makes me feel lucky really. As an academic working in the area of strategic management, I get more than 10 minutes each morning to think about why some companies succeed or fail. I get to study hundreds of companies and read lots of other people’s research too. So I ought to have a more rounded explanation of why some companies succeed and others fail. And I do, although I’d struggle to fit it into a sound bite.

I should start by saying that sometimes there’s no rational answer. Pharmaceutical giant Roche is flying at the moment due in part to being in the right place (the anti-viral market) at the right time (a swine flu epidemic). BA is taking a pasting due to a collapse in business travel. Neither can really claim much credit or blame for the market. But the area I’m interested in is when success or failure can’t be put down to luck. Why, for example, are the mighty Microsoft and the once-mighty Yahoo struggling to catch Google, who only a few years ago was a minnow? How come Apple has trounced companies like Sony and Nokia? Why has BSkyB thrived whilst ITV appears to be in terminal decline?

Well, the fundamental answer to the question about success and failure is “it depends”. Every business story can be explained from at least two angles. Ask one academic and they’ll explain it in terms of assets like patents and brand names. Ask another and they’ll tell you it’s to do with the intangible culture of the company. Yet another will explain it in terms of strategy. Truth is, each of the perspectives tells part of the story and none of them tell the whole story.

That said, some academic explanations of corporate success or failure seem to be better than others, in the sense that they are better at explaining what we see happening in the real world. For example, One of these strong explanations is called “dynamic capabilities theory”, which was first proposed by Teece in 1997. He defined dynamic capabilities as “the ability to integrate, build, and reconfigure internal and external competencies to address rapidly-changing environments”. In other words, changing what you’re good at to suit the market. Sounds plausible doesn’t it? But like all good answers it begs another question; in this case, how do some firms come to have such chameleon-like ability?

Recently, Danneels has tried to figure that out. He narrowed it down to five factors:

• The willingness to cannibalize ideas from other people
• Allowing constructive conflict within the company
• Being able to tolerate failure
• Being good at understanding how the market will change
• Having a bit spare time to think and experiment

To me, that list makes a lot of sense. Not only can I see how those habits might allow a firm to adapt its capabilities to the market, I can also see how they point to differences between successful and unsuccessful firms. Just try reversing the list for a second:

• Our business situation is unique and different from other firms
• We’ve got to get everyone’s buy in and build consensus
• We must be held accountable for our actions
• We’ve got to focus on the here and now
• We’ve got to be lean and mean

I would guess that many people would recognise that second list as describing, at least in part, the thinking in their own firm. Uniqueness, consensus, accountability, focus and efficiency are the buzzwords of many executives. Yet if Danneels and Teece are right, they are a pretty good recipe for failure. Those five words, although they sound good, make firms into endangered species, unable to adapt when things change.

So, if I’m ever invited onto the Today programme and forced to come up with a sound bite about how to be spot the difference between successful firms and failures, I think I’d have the answer: Beware of buzzwords and read the research.

Find out more

"Dynamic capabilities and strategic management" by David J Teece, Gary Pisano, and Amy Shuen
In Strategic Management Journal, volume 18

“Organizational Antecedents of Second Order Competencies” by Edwin Danneels

In Strategic Management Journal, volume 29

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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In times of economic crisis, repetitive negative media reporting can dampen consumer demand and seriously erode business confidence. As with other discretionary costs many businesses begin to question the value of their advertising. The Lord Leverhulme cliché re-emerges:

"I know half of my advertising spend is wasted but which half’. In recession should advertising expenditure be curtailed or aggressively used to boost demand?"

Current declining media revenues indicate companies are cutting back as recession bites, arguably putting sales and industry jobs at risk. Advertising spends can be an indicator of how confidently marketers believe in their brands. Weighing up product, targeting and competitive ramifications, they must decide whether to pull back spending or push harder.

At risk are market share, visibility, customer loyalty, even shareholder confidence in the organisation. Short term battening down hatches, hoping it all will blow over, can be costly. However, studies of previous recessions suggest that continued advertising spending increased sales, market share and brand reputation in the long term.

Advertising plays an important catalytic role in building brands, sales, jobs and funding media. Its power lies in accentuating the positive, now a scarce commodity. Nonetheless the ad industry is often charged with creating false needs and overconsumption, perhaps questioning the value of advertising in terms of its potential to be both a wasteful activity and efficient economic force.

The demise of household name retail stores, banks and traditional media may reflect the evolutionary reality of the market and changing consumer expectations. Advertising insights and creativity remain as essential as ever to reflect the zeitgeist. Innovative new digital technologies, social networks and so forth make advertising effectiveness increasingly measurable, arguably less wasteful.

The sad fact is recent irresponsible and unethical business practice seems to be institutionalised. The culture of steroidal market growth, overproduction, overconsumption, overpayment, over looking; has inevitable consequences and externalities: (credit crunch, fuel crises, global warming, pollution, stress, obesity, etc).

Eventually everybody hurts in the interconnected age.

Eventually everybody hurts in the interconnected age. Social responsibility and sustainability are not fashion items, practitioners must reflect on whose interests are being served. Moral muteness and myopia are no longer excusable; clients and agents need to walk the talk. Advertising has an instrumental role to play but must make nobler moves not try to get ‘more bangs for their buck’ using cheap, deceptive, misleading or offensive tactics.

The current global belt tightening echoes the World War era in the UK when advertising focused on public morale, resource management and regulation of behaviour. Brands survived by adopting utilitarian, anti-waste, less frivolous appeals.

It may be that a return the organic wartime marketing diet could yield sustainable green shoots where ‘less is more’. It may be naive to expect a paradigm shift to a lean yet agile responsibility culture where business uses advertising to promote and share ethical values over sharevalues.

Perhaps the big challenge of the recession is not the value of advertising but the values of advertising. Responsible marketers and advertisers are conscious of consequences, doing things right and doing the right things.

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Give yourself an unfair business advantage with the Open University Business School

It's a creative process - and a convoluted one: How do adverts get made?

The valuation of brands and other significant intangibles has been controversial since the 1980s when international businesses started to buy national or regional brands and extend them globally. That process made it clear that some companies had significant assets whose value was not shown in the balance sheet and was not reflected in share prices either.

The value of brands - BA and Virgin airlines.

A number of competing models have been advanced to grapple with the measurement problem. A simple one would be to assess the ‘rent’ that can be earned from a branded good. This asks how much the consumer would pay for a branded good, say a Philips long life light bulb (€8 in my supermarket) as against the supermarket’s own brand (€5). The €3 difference, after adjusting for the retailer’s margin, is the rent. You then multiply this by the expected volume over a forecasting period (say five to ten years) and discount to get a present value.

Another way of getting at it is to look for an independent lamp-manufacturing business within Philips (a cash generating unit in the jargon) and look at its income and expense. Once you have deducted direct costs, depreciation for equipment and cost of capital for the tangible assets involved, whatever margin is left can be considered to be the brand value. As before, this needs to be forecast for a period ahead and discounted to give a capital value.

Both of these are approximations, and assume that what is left after deducting observable inputs to the model can only be the brand, whereas a more sophisticated analysis would suggest that there are a number of other potential contributors to this difference.

Brand valuation models look at the current value of the brand, and approximate what it would cost to buy the brand at that time. However, most elements of company balance sheets reflect the cost of acquiring assets at the time they were bought (i.e. ‘historical cost’), not at their current value (known as ‘fair value’ in accounting).

This causes an inconsistency in accounting because only the brands a company acquires in the market place appear in its balance sheet. A brand the company has itself built up over time is not reflected. Its costs have been expensed as incurred and so there is nothing to put in the balance sheet. You will look in vain for Cadbury or Nestlé in their owners’ balance sheets.

Is this a problem? Arguably this is where analysts earn their money, by pointing out value drivers not visible in the balance sheet. Also the balance sheet is not expected to show the current value of the company’s assets. Standard-setters see it as an inconsistency, but have more important inconsistencies to occupy their minds.

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Sharpen your business skills with the Open University Business School

Who shapes the look of a brand vision?

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

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