Introduction If I had to pick one company in the world that exemplified consistent long-term growth, profitability and customer satisfaction, it would be Marks and Spencer . . . In terms of perform- ance no British company can match them. (Peter Doyle, quoted in Seth and Randall, 1999, pp. 123124) For over a century Marks & Spencer (M&S) has been a legendary UK retailing organization. M&Ss management, both its overall style and its individual leaders, have been acknowledged as exemplars of best practice. Peter Drucker (1974) described M&S as a managerial giant in the western world. Tse (1985, p. 1) noted that M&S has been widely recognized as one of the best- managed companies in Europe . . . as far as management excellence of the firm is concerned, the consensus is almost total in the trade, as well as in government and specialist circles. Kumar (1997, p. 823) commented that in almost every survey in the United Kingdom, Marks and Spencer tends to top the list of most admired companies and their St Michael brand is world renowned . Until 1997, a host of academic and business com- mentators could be drawn upon to make similar complimentary points. Since then however, the situation has altered. M&S is experiencing unpre- cedented troubles. The company has seen its sales stagnate, profits collapse and market share fall. Its reputation is much reduced both at home and abroad, where, for example, it has been fined by the French courts and severely criticized for its attitude and behaviour towards its workers. Whilst a restructuring plan is underway under new, non- British management, after 12 consecutive quarters of sales decline, considerable problems remain. It is fair therefore to say that the company has been publicly facing a survival crisis since 1998 (Bevan, 2001). The previously unthinkable, that M&S could lose its independence, has become a real possi- bility. How could M&S, which was so often hailed as an exemplar of retailing companies, and indeed British Journal of Management, Vol. 13, 1529 (2002) 2002 British Academy of Management An Exploratory Study into Failure in Successful Organizations: The Case of Marks & Spencer1 K. Mellahi, P. Jackson* and L. Sparks Loughborough University Business School, Loughborough LE11 3TU, *Coventry Business School, Coventry CV6 5LW, and Institute for Retail Studies, University of Stirling, Stirling FK9 4LA, UK email (corresponding author): K.Mellahi@lboro.ac.uk Marks & Spencer (M&S) was one of the worlds great retailers, enjoying legendary and iconic status, being often held up as one of the best managed and admired businesses in the world. Its fall from grace has been spectacular and dramatic and the company is currently fighting for its life. Based on extensive in-depth interviews with company managers and utilizing a case-study approach, this paper provides an exploratory study into failure at M&S and presents this in the context of the wider literature on organ- izational and managerial failure. It concludes that whilst external factors in the various trading environments affected the business, there were internal aspects of the crisis which exacerbated the situation and the problems. 1We acknowledge the constructive and helpful advice of the Editor and three anonymous BJM reviewers.Page 2of British business generally, suddenly find itself in such dire straits? The phenomenon of highly successful com- panies facing a survival crisis is not new (Anheier, 1999; Lawler and Galbraith, 1994; Miller, 1990). The corporate landscape is littered with the bones of bankrupt, but previously successful, corpor- ations. Several popular books describe collapses of successful companies (e.g. Miller, 1990; Ricks, 1983, 1999; Ross and Kami, 1973; Sobel, 1999). Notwithstanding the commercial importance of organizational failures, both at the corporate and business start-up levels, the topic is not a central theme of management research (Cameron et al., 1988; Sheppard, 1994; Whetten, 1988). Pauchant and Douville (1993) argue that whilst excellence is well-established within the literature on strategy (and indeed Marks & Spencer have been included themselves in a number of excellence collections), the study of failure is generally less common. Using a case study of M&S, this exploratory study investigates the process by which a successful company is engulfed by a crisis, and the causes that underlay the situation. The aims of the paper are to understand the causes of failure in M&S, to place this case study in the context of the lit- erature on organizational crisis and failure and to draw lessons from this analysis for management and future research. Organizational crisis and failure The meaning of failure, decline or crisis is problematic (Sheppard, 1994). Academics have defined each of the terms in different ways (Cameron, Kim and Whetten, 1987; Carroll, 1993; Dutton and Jackson, 1987) and there is little consensus about what each term precisely means. For the purpose of the present research however, we define crisis-failure as an event or condition (or a series of events and conditions) that could lead to severe market-share erosion (Starbuck, Greve and Hedberg, 1978). Symptoms include declining demand, sharp declines in sales and reduced or negative profitability (DAveni, 1989a; Hambrick and DAveni, 1988). The terms crisis, decline or failure will be used interchangeably in the present exploratory research, although we recognize that there are theoretical debates about the appropriateness of so doing. In this exploratory work, we believe that a broad approach is the most useful. Causes of organizational failure have been examined from at least two different perspectives. The industrial organization (IO) perspective locates the causes in the external environment (see Frank, 1988; Jovanovic and Lach, 1989; Lippman and Rumelt, 1982). The IO literature seems to indicate that the management of failing firms are the unfortunate victims of external circumstances, and that failure does not imply management ineffectiveness or inefficiency. The IO literature suggests a range of primary causes of crisis and decline. These include turbulent demand structure as a result of brand switching, changes in consumer tastes or cyclical decline in demand, strategic competition due to rivalry among existing com- petitors or new entrants (Baum and Singh, 1994; Frank, 1988; Jovanovic and Lach, 1989; Lippman and Rumelt, 1982; Sheppard, 1995), density of organizations and the natural selection process (Aldrich, 1979; Aldrich and Pfeffer, 1976; Amburgey and Rao, 1996; Campbell, 1969; Hannan and Freeman, 1978), strong unexpected environment jolts (Meyer, 1982), and techno- logical uncertainty due to product innovations and process innovations (Slater and Narver, 1994). It can be argued that organizational failure is a natural and objective phenomenon (Balderston, 1972), inherent to the efficient operation of markets. Life-cycle theory argues that organizations follow the path of inexorable and irreversible movement toward the equilibrium of death. Individuals, family, firm, nation, and civilization all follow the same grim law, and the history of any organism is strikingly reminiscent of the rise and fall of populations on the road to extinction (Boulding, 1950, p. 38, see also Downs, 1967, and in the retail context, Davidson, Bates and Bass, 1976, amongst others). This cycle of development and vulnerability is also at the heart of the Wheel of Retailing (Hollander, 1960), which is based on the notion that organizations commence as low cost/low price businesses, but that as the business develops so it trades up and adds services, ambience and other more expensive attributes. It therefore becomes vulnerable to leaner, newer entrants, which offer shoppers the lower prices they seek. Inherent in the Wheel of Retailing are concepts of change occurring in the environment (external), but also concepts of management separation from consumer realities, leading to an inability to respond 16 K. Mellahi, P. Jackson and L. SparksPage 3to threats to the business. Whilst not universally accepted, the concept of cyclical trends or tend- encies that need to be managed or overcome is an attractive one. This leaves open, however, the question of whether failure is due to these external factors or to management failure. Organizational studies (OS) literature places more emphasis on internal factors associated with failure (Cameron et al., 1988). Advocates of internal causes criticize IO literature on failure as being too rational, arguing that it presumes objectivity by ignoring the effects of internal factors and the misperception of organizational members in responding to external changes. According to OS literature, failure is a result of managements lack of vision and the lack of will and ability to respond effectively and make necessary adjustments to reverse the downward spiral of decline triggered by external factors. The literature cites as the main internal causes of a crisis, escalating commitment by management to pre-existing strategies and routines (Bateman and Zeithaml, 1988; Staw, 1981), blinded perception by management to their weaknesses and strengths, customers demands and competitors (Zajac and Bazerman, 1991), management malfunctioning (Argenti, 1976), strategic paralysis (DAveni, 1989b, 1990), threat rigidity effects (Staw, Sandelands and Dutton, 1981) and structural inertia (Hannan and Freeman, 1984). The OS literature further indicates that successful companies are susceptible to crisis for a range of reasons. Miller (1990) notes that success can breed over-confidence and arrogance. Ranft and ONeill (2001, p. 126) argue that high-flying firms, in the face of competitive pressures develop a form of cautious conservatism and perhaps arrogant disdain. This can be linked to the idea that success breeds failure and failure breeds further failure (Argenti, 1976; Cyert and March, 1963; Starbuck et al., 1978), in a spiral of decline. This process is explained in that organizations formulate heuristic programmes for dealing with recurring problems, and these programmes remain in use even after the situations they fit have faded away (Starbuck and Hedberg, 1977, p. 250). This often results in organizational inertia (Behn, 1977; Cyert, 1978; Kelly and Amburgey, 1991). As Kelly and Amburgey (1991) note, over time successful routines develop into habits. As habits, the routines become traditions, and hence, the effect of preserving the firms way of doing things. As a result, organizations that were the most successful in the past become the most vulnerable to failure in the future (Whetten, 1988), because they are conditioned to exploit their old advantages, and less likely to explore or react to new ones. In essence this argues that failure is linked to internal inadequacies in deal- ing with external threats. These inadequacies can be of a variety of types. Larson and Clute (1979) concluded that the characteristics shared by failed firms are directly related to personal decision-based characteristics of managers. Similarly, Argenti (1976) identified as causes for failure, impulsive decisions that ex- tended the organizations assets, not responding to change, an executive who is either too powerful or poorly informed and the taking of unnecessary risks. Starbuck et al. (1978) identified the source of a crisis in the misperceptions of organiza- tional members. Barmash (1973, p. 299) noted that corporations are managed by men; and men, never forget, manage organizations to suit them- selves. Thus corporate calamities are calamities created by men. Macoby (2000) describes how visionary managers can frequently be narcissistic in their behaviour and increase the risk of failure when business conditions change. When faced with a crisis, these narcissist leaders isolate them- selves from the advice of others, ignore words of caution, interpret criticisms as threat and fre- quently become myopic in their views (Macoby, 2000). This behaviour and attitude foster hubris because of exaggerated pride, self-confidence, or arrogance (Kroll, Toomb and Wright, 2000). As a result, in the face of declining returns to a once successful strategy, decision-makers will stick to the knitting and well-learned past routines and procedures may be continued (Staw et al., 1981). Staw et al.s (1981) threat rigidity effect theory argues that individuals, groups and organizations tend to behave rigidly in threatening situations. Keisler and Sproull (1982), quoted in DAveni and MacMillan (1990, p. 635), state that a crisis is expected to divert a managers attention away from the locus of the crisis because it creates noise that may keep the manager from considering rele- vant information about elements in the organiza- tions environment that are the source of the crisis. As a result, managers will not change their focus of attention in response to an externally induced crisis (DAveni and MacMillan, 1990); A Study into the Failure of Marks & Spencer 17Page 4rather they will ignore the external crisis and act as if the external crisis does not exist (Holsti, 1978; Starbuck et al., 1978; Whetten, 1980). Managers often fail to react to a threat because they were focusing on internal methods that were successful in the past (Starbuck et al., 1978). Years of continuous success lead many managers to ignore external crises because they perceive them to be temporary or inconsequential, thus failing to react to crisis as they overestimate the strength of their strategy and dismiss the seriousness of changes in the market place (Argenti, 1976; Holsti, 1978). The discussion of the literature above suggests that both IO and OS orientations have to be in- tegrated in the study of failure (see Witteloostuijn, 1998). A number of previous attempts have been made to integrate the two approaches (e.g. Levine, 1978;Witteloostuijn, 1998). Levines (1978) typology of causes of decline suggested a combination of factors: (1)organizational atrophy which is based on the success breeds failure logic; political vulnerability liability of newness; loss of legitimacy; environmental entropy a reduction in the capacity of environmental support to the organization. (2) (3) (4) While the first three are generally seen as internal, the last factor is external. A number of themes emerge from this literature review. First, it is suggested that it is a com- bination of internal and external factors that is responsible for failure. The balance amongst these will likely vary from company to company. Second, it is suggested that in successful com- panies, the distance of the management from the external realities of the business is an important internal factor in the ability to react to threats from outside. Third, the literature contains a large number of reasons for the environment becoming turbulent or changed and it might be expected that some are more important than others, and that some may be more difficult to react to than others. It should be noted finally, that most of the work cited above has not been undertaken in the retail sector, and thus by omission, the literature raises the issue of the applicability or otherwise of such factors to the case of retail failure. Marks & Spencer: the context Prior to its current decline, M&S had been one of the most successful British retailing companies. Figure 1 takes the simple measures of sales and profit to illustrate the previous success of the company and also the scale of the current reverse. Space precludes us from describing in detail the history of the development of Marks & Spencer from its family, market bazaar, fixed-price origins. A number of books by outside observers (Briggs, 1984; Rees, 1969; Tse, 1985), company leaders (Sieff, 1970, 1986, 1990) and internal officers (Bookbinder, 1989; Goldenberg, 1989) provide detailed insights into the development of M&S. There are also detailed (Bird and Witherick, 1986) and more superficial (Davies, 1999) academic attempts at exploring aspects of the companys development. Such was its image and success in the UK that its forays as Marks & Spencer abroad since the 1970s had become of interest to academics searching to understand the role of image in retailer inter- nationalization (Burt and Carralero-Encinas, 2000; McGoldrick, 1998). Marks & Spencers iconic status within the United Kingdom may often have puzzled those from outside the country. However, by 1998 the business had retail sales of almost 8 billion, traded from almost 500 Marks & Spencer stores around the world, and owned Brooks Brothers and Kings Supermarkets in the United States. It possessed a renowned private label/ retailer brand in St Michael, an enviable financial services operation and made over 1.15 billion profit before tax. It was estimated to have approx- imately 15% of the British clothing market in the mid-1990s (Seth and Randall, 1999). By any measure, this was a successful business. This enviable position had been achieved through a particular practice of retailing (see Rees, 1969; Tse 1985, 1989) and through activities as a rule breaker, in that M&S did not ascribe to many of the usual way to do business norms. Some of M&Ss unorthodox ways of conducting business played a part in differentiating it from the rest of British retailing. A number of these can be identified. M&S persisted in a buy British policy long after the rest of its competitors had sourced from cheaper manufacturing capacity abroad. This approach had long been believed to be what the customers wanted and desired (Sieff, 1990). M&S also had a peculiar aversion to marketing. It 18 K. Mellahi, P. Jackson and L. SparksPage 5appeared to have such a total belief in its offering as to negate the need to have marketers within the organization. Advertising in newspapers, radio and television was confined to new store openings and did not promote either the brand (another peculiarity in its well-known reliance on the 100% retailer brand St Michael) or its products. Its marketing strategy was to introduce new products in the hope that the customers would buy them on the basis of trust. If the lines were unsuccessful, the company used its pricing mechanisms to discount the goods quickly so as to eliminate the mistakes quickly. Another idiosyncrasy was the continuing refusal of the organization to allow the acceptance of major credit cards. In 1984, the company had successfully launched its own in-house store card, which had become the third most used card in the UK (after Visa and Mastercard). The vast majority of the card holders were women and the store card was regarded for a long time as the most successful of its kind in the UK. This reliance on the store card mitigated against the introduction of credit-card acceptance. Credit availability had become much more widespread in the late 1980s and 1990s and credit cards had become ubiquitous. There was the companys stance on retail loca- tion. Long regarded as the pillar of the high street and town centre, M&S was very slow to embrace the move to out-of-town retailing. Unlike many of its competitors, its retail locations remained primarily where they had always been the focal point of the town centre. It was not only its rule breaking strategy that distinguished M&S from other retailing com- panies. Prior to the crisis, M&S had been seen as part of the fabric of UK governance. Members of the company were utilized by successive UK governments; for example, Lord Rayner, Lord Stone and Sir Richard Greenbury were involved in the formulation of national policies as varied as the euro, arms procurement and inner-city renewal. It was believed that there was much to be learnt, for example, from the Civil Service or the Health Service emulating Marks & Spencers approaches to management and business (Chesterman, 1984; Howells, 1981). The company also had a high profile in each community in which it operated. For many years it was the largest corporate charity donor within the UK. Sieff (1990) noted that It is simply the only way to do business. We take profits out of the local community, we should therefore be seen to put them back. During the 1980s and 1990s, at least 70 members of M&S management teams were seconded to charities on a yearly basis, to give practical help as well as the direct monetary assistance. The company was also a leader in A Study into the Failure of Marks & Spencer 19 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 197819801982198419861988199019921994199619982000197819801982198419861988199019921994199619982000 1200 1000 800 600 400 200 0 m m Sales (m)Pre-tax profits (m) Financial year Financial year Figure 1. Marks & Spencer recent business performance