« How entrepreneurs miss the warning signs of potential failure » article de François-Régis Puyou pour Management Today


– Wannabe entrepreneurs can be so blinded by their dreams of success that they ignore early warning signs of poor performance and potential failure.

– Invoking popular myths about the difficulties entrepreneurs face in their early days, fledgling entrepreneurs mitigate anxiety about poor results by reframing their forecasts – with disastrous consequences.

The spectacular rise and fall of the energy, commodities and services conglomerate Enron, named ‘America’s most innovative company’ by Fortune magazine for six consecutive years, is the stuff of business legend. Its shares reached an all-time high of $90.56 in 2000, plummeting to 26 cents just over a year later when it went bankrupt, taking auditor Arthur Andersen down with it, after a complex accounting scandal was revealed.

Until the fall, Enron’s 20,000-plus employees were seduced by the magic of rocketing accounting figures and by being part of the ‘Death Star’ (as the company’s futuristic headquarters in Houston was dubbed). Academics have extended the simile further, characterising CEOs Ken Lay and Jeff Skilling as, respectively, ‘the Emperor’ and ‘Darth Vader’, and employees as ‘Masters of the Universe’, who together acted out a reality that convinced others – until suddenly it didn’t.

But employees’ and other stakeholders’ perceptions can be distorted, with dire consequences, in far more modest settings, as a new study from business schools Emlyon and ESC Clermont demonstrates. The researchers write: “Low-key productions grounded in over-optimistic accounting forecasts and accompanied by narratives built around inspiring popular characters may suffice for securing – at least for some time – a strong commitment to a failing organisation.”

Through an innovative immersive research project within a business incubator (‘Incubo’ – which offered workspaces to entrepreneurs), the academics chronicled the stories that the team told themselves and others, reinforced by reframed accounting forecasts, to persuade everyone that their business was viable when – with hindsight – it really wasn’t.

One of the researchers joined Incubo at its genesis and attended all forecast-reporting meetings. This allowed him to observe at close quarters the anxiety poor accounting forecasts generated in the team, how they overcame that anxiety by rationalising the performance as ‘inevitable’ in an entrepreneurial business, and how they rallied everyone around the flag again.

The fascinating dialogue related in the research paper shows that the team were so blinded by their dreams of success and their belief that their entrepreneurial spirit would triumph, that they ignored all the warning signs of potential failure.

In the very first meeting, three months in, faced with the stark realisation that they had generated just €7,600 and spent about €5,000 – excluding salaries and rent – they panicked, and then decided that to generate the €13,000-€14,000 they needed every month just to break even, they would launch a new product, quickly increasing the anticipated volume and price and extending the timeline for their plan to be achieved from one to three years.

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