- Bankruptcies will occur in the coming months.
- Thomas Cook is an example of the fall of a giant.
- Will British company De La Rue be strong enough to survive?
It may seem that market leaders sit on the top of the world, but in reality, some of those sharks are just destined to hit the bottom. Why? Let’s see how some obvious mistakes can drive companies into a trap.
Sitting in the comfort zone
Unwillingness to leave the comfort zone is a most common cause of a collapse. Why do companies keep repeating obvious mistakes?
The news of the bankruptcy of the world-famous travel group Thomas Cook came at the end of the holiday season 2019 and a few days before negotiations with a strategic investor, the Chinese Fosun fund. It was unexpected for tourists, but Thomas Cook’s colleagues just saw it coming.
At first glance, there were plenty of reasons for the crash: a change in the demand structure associated with the mass departure of customers to online travel aggregators, such as Booking or Expedia, and a drop in travel demand in the UK because of Brexit. Another blow was the abnormally hot summer of 2018, when a significant part of Europeans preferred rural tourism over international travel. Meanwhile, Thomas Cook was increasing its share in local markets, which eventually cost the group hundreds of millions of pounds and created a large debt burden. At that, since 2011 all Thomas Cook’s activities had been directed only to pay off debts.
Was it possible to prevent the fall? Probably yes. The problem was that the company was focusing on the convenient mass product, not taking into account new market trends, such as a sharp increase in independent tourism and rather predictable changes in preferences (for example, the turn to domestic tourism). Uniform business model in different markets also played a role. Sitting in the comfort zone, Thomas Cook was downplaying the treats, and opened the eyes when it was already too late.
Victim of ostensive circumstances
Often, a giant falls not because of one particular circumstance, but under a flurry of minor reasons. It’s like stones falling from a rock: one small boulder is harmless, but a stone fall may cause significant damage and even destroy everything.
The British company De La Rue, which has been printing money for 140 central banks of the world for more than 150 years, is on the verge of bankruptcy. The company’s debt has already exceeded its capitalization, and top managers are fleeing.
In the years preceding the crisis, the company was significantly expanding its production capacity, but competition for its basic products – cash and security papers – increased, and manufacturing margins fell. In addition, De La Rue was affected by loss of a contract for the production of British passports, unpaid debts of customers (primarily Venezuela), and corruption scandals in which the company was involved (like in Sudan). As a result, the firm is now unsure of its future: “We have concluded there is a material uncertainty that casts significant doubt on the Group’s ability to continue as a going concern”.
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It may seem that the company has become a victim of circumstances. However, this is not quite so: in fact, misfortune is by no means the main problem here. There were numerous structural management flaws, such as inadequate analysis of the competitive environment and production capabilities while planning production, errors in financial planning like relying on one big customer and signing contracts with the not-so-reliable client and others. In such a situation, unfavorable external circumstances became not the real reason, but rather the last straw, although things might seem completely different to onlookers. At the same time, a well-thought-out holistic management approach and a grain of salt in business planning could help prevent these problems.
Moving too fast
Fast growth is a double-edged sword. On the one hand, the dizzying leap from zero to an international giant looks amazing, and not every company is even able to do it. On the other hand, not everyone can glide gracefully on the slippery slope.
The problems at WeWork, which The New York Times called “one of the world’s most valuable start-ups”, became apparent in September 2019, when the company applied for an IPO. The firm’s reporting showed that the company spent too much but did not earn enough due to aggressive growth. In the third quarter of 2019, WeWork’s operating losses amounted to $ 1.25 billion, more than twice as much as for the same period last year.
In addition, on November 19 last year, Reuters reported that New York State Attorney General Letitia James launched an investigation against WeWork’s founder. As a result, the company started teetering and nearly lost its largest investor: Japanese SoftBank backed off a $3 billion tender offer for WeWork’s shares.
In this case, the explosive growth brought nothing but problems. The corporate structure and business model were simply lagging behind, while hasty preparation for the IPO and its subsequent cancellation caused significant damage to the company’s reputation. In addition, the success drove the company’s founder, Adam Neumann, over the edge: several newspapers published articles describing Neumann’s substance abuse, inept management and wasteful lifestyle.
Many of these problems could have been avoided if the company had developed organically and devoted more resources to the long-term planning and profitability analysis. What happened is understandable: many managers shudder at the thought that they need to slow down at the peak of growth. However, sometimes it can be useful to remember that hasty climbers have sudden falls.
Death by natural causes
Some firms just reach their limits and end their existence. The long-term accumulation of external and internal factors affects the company as a system. As a result, the organization hits the point of no return, after which it dies or transforms.
Flybe could not boast a large size compared to other airlines. However, it was of great importance for the transport industry of its country. The company served remote and inaccessible locations, in many of which the main competition was only rail or ferry. This is why Exeter MP Ben Bradshaw went so far as to describe Flybe as a UK strategic asset, and the UK government took certain initiatives to bail out the airline.
However, this was not enough, and the fall in demand in March 2020 was the last straw. Then, the airline stopped operating all flights as the unexpected outbreak of the COVID-19 coronavirus became the biggest blow to the global tourism industry since 2001. Afraid of catching the infection, people started refusing flights, and countries locked their borders to prevent the disease from spreading. As a result, Flybe lost a significant part of its revenue, the lookout seemed rather blue and the company’s management had no choice but file for bankruptcy. It occurred despite the help of Connect Airways, a consortium led by Virgin Airways, which has invested more than £ 135 million since 2019 to keep Flybe flying.
The Flybe case is perhaps one of the few “deaths by natural causes” in the business world. Neither the state financial assistance, nor attempts at restructuring helped the company secure its place in the sun. The small, but nonetheless important airline has exhausted itself in the modern world of low-cost airlines, long routes and constantly changing circumstances. Flybe’s business model cannot be called outdated, and not only market causes are to blame for its collapse. Rather, it is an accumulation of internal and external factors, such as long-term financial problems, an incredibly competitive market and unfavorable external circumstances, which ultimately ended in a signature on the bankruptcy petition.