7-The Failure Behind Progress

A leader can look sturdy right up until it isn’t. Bear Stearns opened this piece back in 2008, gone in a matter of days. Toys “R” Us, Bed Bath & Beyond, and Silicon Valley Bank close it out now — three more failures from the last decade, each one different in its details and identical in its lesson: the company almost always breaks itself first, and the market simply makes it official.

Posted 3/24/08

Recently I had the time to visit my old neighborhood in New York, a typical set of brownstones on the upper east side of Manhattan. I lived there for two years nearly forty years ago. When I returned there, I entered a sort of time warp. Most of the buildings looked the same. The streets looked the same. The cars, if I ignore make and slightly smaller shapes, looked very similar. The laundromat I used still resides on the corner. Across the street was the deli owned by the same family who owned it those many years ago. Further up the street was a tiny grocery store where I used to buy the Sunday New York Times. But that had changed. Instead of the old Italian proprietor, the store is now under the management of an attractive thirty-something young couple.

But, really, a great deal had changed over these years. Virtually all of the other businesses that I had known and used were gone. The Carvel ice cream store was gone, but a few blocks away there is a Ben & Jerry’s. The once-new multiplex movie theater has been replaced by a Best Buy. None of the bars and restaurants I once frequented remained with the same name and ownership. All these things had changed. The old were gone, replaced by the new. Judging by the scant survivors, failure seemed to be the rule of the day.

McKinsey found the same thing on a much larger scale. A few years ago, McKinsey did an analysis of the original members of the S&P 500. This 500-company membership index started in 1957. Forty years later, in 1997, McKinsey found that only 15% of the original 500 companies were still among the S&P 500. And of those 15%, or 74 companies, only 12 had outperformed the average in the stock market. That’s only 2% of the original 500 leading companies. Not all of those companies have gone away. Some, of course, have gone away. Others have just slipped quietly out of the 500. They, like my old restaurants and businesses in New York, have been replaced by new companies.

We are, physically, better off from all this failure. Though, psychologically we seem to have progressed fairly little. Real, that is, inflation adjusted, per-capita consumption has doubled since 1970. Using a narrow focus to illustrate this phenomenon, you can see that most college kids have their own ipods, cell phones, flat screen TVs, DVD players and laptops. They choose from a wider variety of cuisines in their dining halls. Their rooms and accommodations are far better than their peers of forty years ago. Still, as much as the Vietnam generation felt that the country was falling apart, so these young people of today fear for the country’s future.

I have come to see it differently. Somehow or other, we have overcome most of the challenges that we faced forty years ago. Most of the challenges we have not overcome, we have surely made progress in addressing. By almost every measure of physical comfort, we are better off now than we were then. I am sure we will meet today’s challenges equally well. But along the way we are going to have to allow for failure…failure of ideas and failure of companies. Failure is the rule, not the exception, for companies and ideas. But out of these failures comes progress for us all. Bear Stearns is dead, long (whatever “long” is) live private equity firms!

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Update 9/24/26:

Failure is always the name of the game. A 2018 analysis found a range of 20 to 30 annual changes to the S&P index. Some are due to changes in sales growth and market cap, but most are the result of acquisitions and mergers. Some result from bankruptcies.

It is hard for many managements to accept that failure is the rule rather than the exception because failure seems to take place over such a long period of time. Recently, a brilliant analyst noted the following facts about failure in the stock market:

– A widely cited estimate claims nearly 52% of the Fortune 500 (a separate measure from the S&P 500) has ceased to exist since 2000, many due to bankruptcy. Where are Chrysler, Lotus, Sun Microsystems, Digital Equipment and Businessland today? While survivors, consider the difficulties of such erstwhile highflyers as AT&T, Intel, and IBM and many others that were once dominant but later fell on hard times, disappeared or were absorbed. Here are three other examples of recent memory.

–Toys “R” Us (Chapter 11 Sept. 2017, full liquidation 2018). The company proved unable to match innovations from Amazon and Walmart. In StrategyStreet terms, the company’s Function (Pattern: The product characteristics that affect how the customer uses it, essentially all of its features.) fell short leading to a loss of a Reliability (Pattern: The consistency with which a company delivers on its promises: reliability of delivery, of function, and of market presence.) reputation. Failure was fast and complete.

–Bed Bath & Beyond (Chapter 11, April 2023). Forbes traced the collapse to three causes: the company ran short on cash as store and payroll costs outran revenue, it pushed private-label goods (Price Leader (Pattern: A competitor or product offering below-standard performance at a very low price, selling more than half its volume below the Standard Leader’s price.) products) that customers didn’t want, and senior management applied a private-label playbook that didn’t fit the business operations and customer expectations. The company fell behind on payments to suppliers, who began demanding cash up front for all orders. The next step produced skimpy shelves, fewer sales, worse credit, and even less willingness from suppliers to ship. These were failures of Function and Reliability for both suppliers and customers.

–Silicon Valley Bank (seized by regulators, March 2023). SVB had heavily invested customer deposits into long-term treasury bonds, which lost value as the Federal Reserve raised interest rates; when depositors — concentrated almost entirely in the tech and venture-capital sector — rushed to withdraw funds, the bank was forced to sell those bonds at a loss and went from functioning to insolvent within two days. $42 billion left the bank in a single day, the largest bank run in history. A bank’s core Function is safekeeping and returning deposits on demand — that’s the whole Reliability promise. SVB’s duration mismatch and lack of depositor diversification meant it was only ever one confidence shock away from being unable to deliver on that basic Function. The shock came. The failure was total and nearly instantaneous.

–A 2018 study on the outcome of investing in stocks from 1926 until 2016 found that only 4% of the stocks produced all of the net wealth creation in the stock market during that time. Shockingly, 58% of the stocks failed to earn more than one month treasury bills over their lifetimes.

In the longer term, failure is the rule not the exception, especially in difficult markets. Success takes enormous discipline and consistency through both up and down markets.

By the way, how has business failure treated the students of 2026 compared to those of 2008? iPods and DVD players are obsolete; students today use smartphones, streaming services, tablets, Bluetooth speakers and smart TVs. No complaints there.

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Quick Hits

Five patterns from the StrategyStreet system this story confirms.

1. A leader’s failure is a decision, not a fate. Toys “R” Us didn’t fall to Amazon’s cleverness so much as to the $5 billion of leveraged-buyout debt loaded onto it in 2005; Bed Bath & Beyond chose the private-label pivot that broke its shelves; Silicon Valley Bank chose to park deposits in long-duration bonds with no diversification cushion. In each case, the market simply collected on a decision the company made years earlier.
2. Debt and duration choices can fail a company before a single customer ever leaves. Toys “R” Us carried roughly $400 million a year in debt service from its 2005 buyout, leaving nothing to invest in stores or e-commerce; SVB funded short-term deposits with long-term bonds and had no cushion when rates moved against it. Both failures were locked in at the balance-sheet level, long before Function or Reliability ever entered the picture.
3. Customers leave on Function and Reliability long before they leave on price. Toys “R” Us lost shoppers to Amazon and Walmart because it couldn’t keep pace with either; Bed Bath & Beyond’s empty shelves — the direct result of suppliers losing trust in its credit — were a Reliability failure, not a price one. Neither company was undercut on price; both were simply no longer dependable enough to keep buying from.
4. A private-label bet is a Price Leader move, and it only works if the customer actually wants a Price Leader. Bed Bath & Beyond pushed private-label goods that its own shoppers didn’t want, at the exact moment it could least afford a misstep — the wrong product-performance bet compounded the balance-sheet problem instead of solving it.
5. Company turnover is the market’s normal operating state, not evidence that something went wrong. McKinsey found only 15% of the original 1957 S&P 500 still on the index by 1997; roughly half of the Fortune 500 has turned over since 2000. Toys “R” Us, Bed Bath & Beyond, and SVB aren’t an unusual cluster of bad luck — they’re this decade’s entrants in a replacement rate that never stops running.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.