LEARNING FROM CORPORATE COLLAPSE: By recognizing the warning signs of fatal failures in corporate strategy, risk managers can help their companies course-correct before it is too late.

• Author: Hodge, Neil

CORPORATE HISTORY is littered with examples of major companies that adopted the wrong strategy and paid the ultimate price. For instance, even though the firm had been a digital pioneer, photography behemoth Kodak failed to foresee how quickly the world would embrace digital images and was never able to catch up with the competition even after eventually changing tack. After 124 years in operation, it filed for Chapter 11 bankruptcy protection in 2012.

Similarly, Research in Motion (RIM), the producer of BlackBerry handheld devices, ignored the threat of Apple's iPhone when it debuted in 2007 because RIM's technicians thought it was a substandard device and the company felt confident about its strong market position and two million users. The rival product proved a hit with the public, however, and BlackBerry fell out of favor. RIM could not replicate its earlier success and, in 2013, it was acquired by a group of investors and broken up.

As these and hundreds of other examples illustrate, strategic missteps can often have dire consequences. To some extent, this is the nature of business competition and can never be eliminated, but understanding the contributing factors in critically failed strategies and recognizing the warning signs can help companies spot flawed moves and attempt to course correct before failures become fatal.

Strategic Disconnect

When companies fail, blame is usually laid squarely on executives for making two common mistakes: First, they focused on the company's historical performance and ignored what was happening in the wider market; and second, they were reluctant to dump a strategy that was not working until it was too late.

There are several other reasons that poor strategic direction is allowed to continue. In many cases, companies fail to learn from the experiences of others. "Organizations tend to have this bizarre belief that the same problems won't hit them--especially if the company is in a different industry sector--or that they are capable of dealing with them differently and successfully," said Mark Brown, vice president and senior risk practitioner at enterprise risk management software provider Sword Active Risk.

Executives also often fail to fully appreciate what risk management can actually do. "Most organizations say that they have an enterprise-wide risk management system in operation, but relatively few have full executive buy-in or an acceptance from boards that they are ultimately responsible for it," Brown said. "As a result, there is a disconnect about what executives should be doing and a false view that the risk management function prevents all risks."

Personality can also have a sizeable impact on the direction of a company. According to Val Jonas, CEO at software firm Risk Decisions, "executive ego" can play a major part in preventing risk management (and others) from challenging boardroom decision-making and the rationale underpinning corporate strategy.

"Some boards tend to believe in their own intuition rather than actual evidence," she said. "Boardrooms are where key decisions are made and executives are in that room because they have made quick decisions in the past and they probably have had a good hit rate, or at least they did early on in their executive careers. As a result, executives feel that they have good instincts and they...