Written by Joss Duggan (Reading Time: 25 mins)

Every great company, no matter how dominant, is constantly battling an invisible yet relentless force: entropy. In physics, entropy describes the gradual decline of order into disorder unless energy is continuously applied. In business, the same principle holds true. Unless we’re being diligent, our organisations naturally tend towards stagnation, complexity, and finally decline; once a nimble, high-performing enterprise, now burdened with bureaucracy, risk aversion, and complacency.

Yet, business failure rarely announces itself with a single, catastrophic event. It is not an ‘explosion’ but an ‘erosion’ - a slow and often imperceptible decay. Processes that once drove efficiency become rigid barriers to change, leaders who once championed bold innovation start protecting their empires, market-leading products that once delighted customers turn into outdated relics as newer, more dynamic competitors emerge.

“How did you go bankrupt? Two ways. Gradually, then suddenly...”

— Ernest Hemingway

The most insidious part, is that this kind of corporate death happens slowly; creeping in day after day, so we don’t notice the gradual decay. Year after year, small compromises accumulate - decisions that prioritise short-term stability over long-term adaptability, policies designed to minimise risk rather than maximise opportunity, and an increasing reliance on what has worked in the past rather than what is required for the future. By the time these issues become undeniable, the organisation is often locked in a defensive posture, reacting to crises.

But this is where the analogy falters, because unlike death in living organisms, the death of companies is not inevitable; the most resilient recognise the warning signs early and take decisive action before decline sets in.

The question isn’t whether your company will face entropy - it will. The challenge is recognising the signs of stagnation before they become irreversible. In the article ahead, we’ll look at the life-stages companies go through, the reasons companies fail, and the warning signs that things are going terribly wrong…

Lifecycles: From Scrappy Upstart to Slow Giant

Companies rarely fail due to a lack of intelligence, talent, or resources. More often, they decline because the very mechanisms that once propelled them to success eventually become the shackles that hold them back. Growth breeds complexity, and over time, what was once a thriving, fast-moving organisation becomes slow, risk-averse, and bureaucratic. Worth mentioning that the first three stages are pre-requisites for successful businesses, but stage 4 is optional!

Introduction (The Startup Phase) – A company in its infancy is defined by speed and agility. Entrepreneurs drive every decision, wearing multiple hats and adapting quickly to market needs. There is little hierarchy, and failure is seen as an essential part of the learning process. Going from zero-to-one is hard and this period is chaotic and painful.
Growth (The Scale-Up Phase) – As initial success takes hold, there’s the feeling that we need to “professionalise” in order to scale effectively. Teams grow, hierarchies develop, and systems are put in place to streamline operations. While necessary for sustained expansion, this phase introduces the first signs of rigidity. Decision-making, once fast and instinctive, now requires approvals and adherence to formal processes…
Maturity – The company is now an industry leader, prioritising stability over change. Efficiency and consistency become the primary focus, with structured workflows and an emphasis on reducing risk. While this approach maximises short-term profits, it gradually erodes the organisation’s ability to adapt to disruptions. Leaders who once took bold risks now spend more time protecting existing revenue streams rather than exploring new ones.
Decline – The once-thriving company becomes entrenched in outdated methods, slow decision-making, and excessive bureaucracy. Market competitors, often more agile startups, begin to chip away at its dominance. Internal culture shifts from innovation to preservation, and resistance to change becomes a defining characteristic. By the time leadership acknowledges the problem, it is often too late to reverse course without significant restructuring.

It’s rare but not impossible to find leaders who can be brilliant at all stages of the life-cycle. Founders building from the ground-up, tend to have very different personalities (and risk tolerances) to those who manage the optimisation of a company at scale.

Understanding these phases is critical to put corporate failure in context. Once a start-up reaches ‘escape velocity’ and starts scaling, that’s where ironically things start to go wrong. The things that allow us to scale, are the things that become a straight-jacket and can eventually kill.

What the hell happened?! Why companies go to the wall

Every failed business has a story, but there are patterns that show up repeatedly. It could be strategic missteps, financial mismanagement, cultural decay, or market forces…but businesses that fail display the same problems against and again.

I. Strategic Failures

Losing Product-Market Fit

As a founder, you're obsessed with finding the holy grail of product market-fit (PMF), though it’s hard to tell when you’ve nailed it exactly. Building things that people don’t need is a key reason early-stage ventures go bust.

What's not written about though, is how companies can lose PMF, without even realising it, especially if customers are locked into long contracts, the revenue feedback loop is long delayed.

It's easy when you lose a big customer to chalk it up to other things outside your control, but in truth, it's because you're product or service just isn't good enough anymore and your customers are finding other ways to solve the same problem better, for less money.

II. Financial Mismanagement & Resource Allocation

Running Out of Cash

Even profitable businesses can fail if they mismanage their cash flow. High burn rates, underestimating costs, and poor fundraising strategies leave companies vulnerable when capital markets tighten. Many startups fall into the trap of raising funds at ever-higher valuations without proving profitability, only to collapse when investors demand sustainable unit economics.

Businesses must generate profit at the unit level. If customer acquisition costs (CAC) exceed customer lifetime value (LTV), or margins are too slim to cover operational expenses, the business becomes unsustainable. Many companies try to grow their way out of bad unit economics, but without a fundamental fix, they only accelerate their losses.

A company that derives too much revenue from just a few large customers is at extreme risk. If one key client leaves, it can trigger financial instability or even collapse the business overnight. Concentration risk is particularly dangerous for B2B companies that rely on a handful of major contracts. When customers hold too much power in negotiations, they can demand lower prices or extended payment terms, squeezing margins and leaving little room for reinvestment.

III. Internal Dysfunction: Leadership & Cultural Decay

Weak Leadership & Poor Execution

Strong leadership is critical in steering a business through uncertainty. Companies with indecisive, slow-moving leadership struggle to adapt to market shifts, fail to align teams with a clear vision, and often make reactive rather than strategic decisions.SILOS

Risk Aversion and Learned Helplessness

The answer to mistakes is more rules. Personalities who want control and are low on Openness to new experience are preferred. Netflix co-founder Reed Hastings has spoken extensively on why companies become bureaucratic and slow. His insight: rules are created in response to mistakes, and over time, those rules strangle the best employees.

Instead of allowing people to take smart risks, organizations add layers of approvals.
This leads to a stifling work environment where innovation is secondary to process compliance.
The most talented employees, who thrive in flexible, high-trust environments, leave.
What remains is a company filled with employees who are risk-averse and less capable of driving growth.

Toxic Company Culture & High Employee Turnover

A dysfunctional work environment drives away top talent, leaving a company with disengaged employees and reduced innovation. High turnover is not just expensive—it erodes institutional knowledge and slows down execution. A culture that rewards internal politics over merit also contributes to long-term decline.

As businesses scale, they inevitably shift from attracting high-risk, high-reward entrepreneurs to more conservative, process-driven managers. The very nature of a large corporation incentivizes stability and predictability over boldness and innovation.

Risk-averse employees thrive: As organizations mature, they develop incentives that reward predictability, discouraging individuals who thrive in fast-moving, uncertain environments. Employees who excel at maintaining the status quo rise through the ranks, while those who challenge norms often leave.
Bureaucrats over builders: Large companies increasingly favor people who are good at navigating internal politics over those who create new products, services, or markets. These bureaucrats specialize in risk mitigation and compliance, but they struggle to drive the kind of step-change innovation that propels a company forward.
Comfort replaces urgency: High-growth, high-impact employees are drawn to environments where they can make a difference. When a company stagnates, it repels the kind of ambitious, forward-thinking talent that could help it regain its edge.

Additionally, large companies tend to promote employees based on tenure and internal political capital rather than merit. This creates a leadership class that is more concerned with preserving their status than pushing the company forward. Over time, this results in an organization that lacks the bold decision-making needed to remain competitive.

One of the most insidious aspects of corporate hiring is that it only takes a single B-player in a key position to begin the downward spiral. B-players tend to hire C-players because they don’t want to be challenged or outperformed. This creates a slow but inevitable dilution of talent, leading to departments that underperform for years. A single bad hire, especially in leadership, can cause long-term damage, eroding the effectiveness of an entire function.

IV. Operational & Market Failures

Poor Sales & Marketing Strategy

A misaligned go-to-market strategy leads to inefficient customer acquisition. A business that overspends on marketing with low conversion rates or underinvests in sales development will struggle to sustain growth. The imbalance between CAC and LTV is a clear warning sign of a failing sales and marketing approach.

In the early days of a business, it's probable that the founder themselves is selling; then as the company matures, a sales team is hired to make these efforts scaleable. A winning mentality is crucial and this is what helps the company dominate in it's market. Revenues scale, a market equilibrium is reached, and there's less and less new business to go after...

In stagnant businesses, hard-nosed salespeople are no longer needed because existing customers generate most of the revenue. Over time, go-to-market (GTM) capabilities atrophy as new business efforts take a backseat to account management. Instead of closing deals, sales teams become "farmers," nurturing existing relationships rather than "hunters" who drive aggressive revenue growth.

While farming is important, without a healthy balance of new customer acquisition, a business will eventually erode as competitors lure customers away and market opportunities disappear.

Technological Obsolescence, Market Shifts & Losing Product Market Fit

Industries evolve, and companies must evolve with them. Businesses that fail to keep up with technological advancements risk being left behind. This is especially true in sectors like fintech, healthcare, and SaaS, where innovation cycles are rapid. Market shifts—whether due to changing consumer behavior, regulatory changes, or emerging competitors—can rapidly turn yesterday’s market leaders into today’s laggards.

Did your IT department successfully convince you that they’re a “tech” firm? CIO that want to be CTOs can be dangerous.

V. External Forces & Uncontrollable Factors

Regulatory & Compliance Issues

Regulatory blind spots can sink even the most promising businesses. Non-compliance with industry standards can lead to lawsuits, fines, and reputational damage. Heavily regulated industries, such as finance and healthcare, require businesses to navigate complex legal landscapes—failure to do so can be existentially damaging.

Macroeconomic & External Factors

Recessions, supply chain disruptions, interest rate hikes, and global crises (such as pandemics) can cripple even well-managed businesses. While external forces may be beyond a company’s control, its ability to anticipate, adapt, and respond to these challenges often determines survival. Companies that maintain strong financial discipline, diversify revenue streams, and build operational resilience are best positioned to weather such storms.

Warning Signs

Financial Red Flags

Cash Flow Crisis – The company is constantly worried about cash flow, struggling to make payroll, or delaying supplier payments.
Declining Revenue & Profitability – There’s a clear downward trend in revenue, and margins are shrinking.
Missed Targets – The company repeatedly misses sales, revenue, or profit targets, but leadership keeps moving the goalposts.
Mounting Debt & Covenant Breaches – The company is relying heavily on debt, struggling with interest payments, or breaching bank covenants.
Asset Sales & Cost-Cutting – Fire sales of assets, layoffs, or drastic budget cuts signal short-term survival tactics rather than long-term growth strategy.

Operational Symptoms

Bloated Cost Base – High overhead costs, unnecessary expenses, or an overstaffed, inefficient workforce.
Underutilized Assets – The company has expensive infrastructure, software, or teams that aren't delivering proportional value.
Inefficient Processes – Internal bottlenecks, excessive bureaucracy, or legacy systems that hinder agility.
Lack of Product Innovation – The company is resting on past successes and has no compelling new products or services.
High Customer Churn – Customers are leaving faster than they’re being acquired, often due to declining service levels or outdated offerings.
IT Failures - Everyone wants to be in ‘Tech’, even the IT guys. Repeatedly this leads to the IT department underestimating the size of a challenge and jeopardising millions in investment.

Cultural & Leadership Indicators

Frequent Leadership Changes – A revolving door of CEOs, CFOs, or senior executives is a sign of instability.
Erosion of Trust – Employees and investors have lost confidence in leadership.
Defensive Leadership – Executives become overly protective, refusing to acknowledge problems or blaming external factors.
Fear-Based Culture – Employees are anxious about layoffs, reluctant to take risks, and disengaged.
Talent Drain – High performers are leaving for better opportunities, often replaced by less experienced hires.

Market & Competitive Position

Competitors Are Pulling Ahead – Rivals are innovating faster, taking market share, or undercutting on price.
Loss of Strategic Direction – No clear growth strategy, just reactive moves to stay afloat.
Desperate Partnerships – The company is forming alliances that seem like short-term cash grabs rather than strategic plays.
Regulatory or Legal Issues – Increased scrutiny, compliance problems, or lawsuits impacting operations.

Investor & Boardroom Signals

Activist Investors or Private Equity Interest – If PE firms or activists start circling, they see an opportunity to turn things around.
Panic from the Board – A suddenly more engaged board, especially pushing for major changes, is a sign of deep concern.
Dramatic Restructuring Plans – Unplanned pivots, major layoffs, or radical cost-cutting measures point to survival tactics.

Awareness is the First Line of Defence

No company is immune to entropy. No matter how dominant a business may seem, the forces of stagnation and decay are always at work, slowly eroding its agility, culture, and competitive edge. The difference between companies that endure and those that collapse is not intelligence, resources, or past success - it is the ability to recognise and resist entropy before it takes hold.

The uncomfortable truth is that decline rarely announces itself with flashing warning lights. Instead, it manifests in small, almost imperceptible shifts, and like the frog boiling slowly in the water, no-one takes bold action when the rate of decay is so slow. Great companies recognise that the cost of maintaining the status quo is often far greater than the risk of transformation.

The question isn’t whether entropy will creep into your business—it will. The real challenge is whether you have the courage, clarity, and conviction to resist it before it’s too late.

In Part II, we’ll look at how companies can inoculate themselves from entropy and be constantly developing new upswings. We’ll then finish our series in Part III with a playbook for Turnaround Management and how CEOs can save a company in distress.

Corporate Renewal Part I: How great companies succumb to entropy