In classic Greek tragedies, the hero often turns inward, choosing to believe in his eminence despite signs to the contrary. He assumes the decisions that brought him greatness remain valid, and he actively shuts out other people. Meanwhile, his world crumbles around him. It's an age-old lesson but one that modern executives and small-business owners should take to heart: Just because you've made it to the top doesn't guarantee your spot there. Make any one of these five classic mistakes, and your rapid decline will quickly outpace your upward struggle.
Harboring a false self-image. "We were a successful sales organization, but our credibility with customers was based on the underlying research we brought to problems," says Morton Wise, a member of the Rotary Club of Hanover, N.H., USA, and a former director of the now-defunct investment banking firm Rothschild, Unterberg, Towbin. "Unfortunately, the president didn't understand that, so when he needed to cut costs, he cut back on research. Almost instantly, our sales melted away." Wise's story is a warning to all: Make sure you truly understand the reasons for your success. They're not always as apparent as you might think.
Falling back on yesterday's answer. One of the most common causes of business failure is the executive or owner who refuses to recognize changing customer needs. Whether it's Encyclopedia Britannica sticking to print when customers were flocking to CD-ROMs or Rubbermaid pushing innovation when Wal-Mart demanded lower costs, the net result is the same: lost business. Sometimes the only solution is wrenching change, and successful entrepreneurs must be ever watchful and ready to act.
Embracing the fallacy of first-mover advantage. Many entrepreneurs mistakenly believe that if they are first to market, they will gain an unassailable advantage over the competition. Unfortunately, any such edge will be short-lived unless the first mover can build "barriers to entry" that make it difficult for newcomers to take over market share. By failing to convince customers that competitors offered inferior wares, companies as diverse as Webvan, L.A. Gear, and Encyclopedia Britannica all fell victim to this mistake. Says Barnes & Noble chairman Leonard Riggio: "They were going to be first movers and take over the world, but they were overextended from day one."
Closing down dissent. Small-business owners are used to having it their own way. Often, they've built a company from scratch with little outside help. Yet when they close themselves off from dissenting points of view, they literally bet the company that they are always right. Schwinn Bicycle Company did exactly that as it rolled toward bankruptcy. When criticism surfaced, says one former manager, president Ed Schwinn often left the room saying, "Guys, this is not going in the direction that I wanted it to." By ignoring bad news rather than facing up to it, Schwinn set the gears of failure in motion.
Disrespecting competitors. What ever happened to eToys, the online toy seller that thought it was much better at selling toys than bricks-and-mortar competitor Toys 'R' Us? The Internet retailer wrongly assumed that selling online was a different business, when it was really just a different distribution channel. "We've been doing it longer -- they can't catch us," one eToys senior manager reportedly boasted at the height of the Internet boom. What eToys forgot on the way to bankruptcy is that Toys 'R' Us had even more powerful advantages, such as established customers, experience in the toy business, and the heft to ensure supplies of hard-to-get hot toys. As eToys learned, disrespect is the first step to disaster.
Sydney Finkelstein is the author of Why Smart Executives Fail (Portfolio, 2003) and a professor at the Tuck School of Business at Dartmouth College. Why Smart Executives Fail was one of Fortune's Best Business Books for Summer 2003 and was an Amazon No. 1 bestseller in both the U.S. and Japan. "A landmark book, certain to become a classic."--Warren Bennis