Business Growth & Strategy

When Did Bankruptcy Become A Business Strategy?

When did filing for bankruptcy become a part of corporate strategy? It seems to have become formulaic within modern business practices. Mismanage the business, amass debts that you cannot repay – then casually ease into bankruptcy court and turn on the public relations machinery to spin the whole thing as a positive for the customers and employees. Although creditor driven bankruptcy does occur, it is far from the norm. In the overwhelming majority, the decision to file bankruptcy has been made internally by the executive team as a path out of their troubles. So why has it become more acceptable for so many businesses to announce filing for bankruptcy? When did the stigma become passé?

How Did It Get Like This?

Maybe it all began back in 2007 when we saw so major financial institutions start failing. 2008 brought an onslaught of major bankruptcies (e.g. Washington Mutual, IndyMac Bank and Lehman Brothers), perhaps leading us to the edge of the slippery slope that we now find ourselves perched upon. If all of these major corporations can go bankrupt, what does this reflect about our societal values? By 2009, it had became less shocking to hear about companies like General Motors, Chrysler and CIT Group failing. These were institutions that our country was built upon, yet their inability to manage their way out their financial problems seemed to be just collateral damage in the wake of the world financial crisis. In 2010, Blockbuster and a slew of well-branded household names like Guaranty Financial, Reader’s Digest and Six Flags got caught on the slippery slope and went down as well. Even in this year’s World Series of Major League Baseball, the Texas Rangers franchise was in the midst of bankruptcy proceedings. All preconceived notions of stability seem shattered and the term bankruptcy is no longer uttered in ashamed whispers.

The Airline’s “Plan-B”

“Bankruptcy is a strategic move to strengthen our business.”  Heard that one before? The pattern of bankruptcy as a business strategy in the airline industry is certainly familiar to all of us. Just look back at recent years…United, Northwest, US Airways, Delta and now American. It is arguable that unyielding labor unions and spiraling fuel costs may have forced the airline’s hand in some cases, but was bankruptcy the only option? On the one hand, the airlines have followed a continual liturgy of cost management efforts by reducing customer services and loyalty program perks. Give them credit for that.

The strategy seems to be, “let’s continually diminish the customer value proposition by slashing the cost of customer-facing services to the point where our airline has no distinguishing characteristics to entice travelers to think of us first.” In reality, has cost management really been that good? In one case, the announcement that a major order of new aircraft had been placed came days before the news of bankruptcy.  It begs the question, was such a massive capital investment wise if financial conditions were so bad and bankruptcy was looming around the corner? What discussions were happening amongst the executive team in the days leading up to the decision to replace a major portion of their fleet with the latest and greatest in commercial aircraft?

In Conclusion

It is a slippery slope folks. Every business needs to wake up and remember some basics.

  • Businesses must provide superior products and services
  • The products and services must be priced fairly and at a point the market will buy
  • Businesses must spend less than than they earn in order to recognize a profit

These basics tenants are that important. Our society should not condone gross financial mismanagement in major corporations.

Sometimes bankruptcy may be unavoidable, but there should be some shame in having to reach that point. It may be the only strategic move left to stay in business, but it should never become as commonplace as it has become today. As a society, our expectations of business ethics, sound management and fiscal responsibility should not be compromised. We are getting ever closer to the edge of the slope, where at some point an all-out slide will occur.

Category: Business Growth & Strategy

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Avatar About the Author: Joe Evans

Since 2006, Joe Evans has been President & CEO of Method Frameworks, one of the world's leading strategy and operational planning management consultancies. The firm provides services for a diverse field of clients, ranging …

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  1. Wink0711

    December 3, 2011 at 5:27 pm

    Great article!  Want to hear more from you….

    • You can find more from Joe here: http://blog.vistage.com/author/joe-evans/

  2. Larry Lanham

    December 8, 2011 at 6:25 pm

    Well Stated

  3. aboatsman

    December 19, 2011 at 12:17 pm

    Joe – great commentary.  While those that declared bankruptcy would say there are consequences I think too many folks continue to make decisions based on a hope for a better day – the impact of which that other business owners (suppliers) and shareholders – in the case of public companies – get harmed without and severe consequences.

    It would be great if there was a way to have a ‘business credit’ database (no – not Duns – as that is only as good as the reporting) where a business had to post verified financial data and if a ‘Z-Score’ or some other predicative indicator indicated good credit risk the company would get rewarded with the equivalent of an ‘A’ rating – such that a supplier could at least make an informed credit decision.

  4. Because of the current economic crisis, there are company owners who are looking for ways on how to deal with this – some put their businesses for sale or merging while other opt to file for bankruptcy. I agree with the above article that there are times when going under cannot be avoided and so we need to do our part in trying our best to keep everything afloat or seek advice to know the best way to resolve your financial concerns.

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