How To Tell If Your Company's An Also-Ran

If the core business slips or bosses refuse to tolerate mistakes, irrelevance could come next.

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Doing more with less is an all-too-familiar strategy for survival. But will it help your company get ahead?

Probably not. The recession that began in 2007 triggered a tidal wave of layoffs, cost-cutting, and downsizing that still isn't over. Many employers cut back to bare necessities, or less. Mediocre workers got axed en masse and even some integral staffers had to go. Computer upgrades, key investments, and future projects got put on hold.

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Corporate decision-makers may have felt there was little choice besides across-the-board cuts and a hunker-down posture. But that's not how the best companies think. When times get tough, the most innovative companies see opportunity, according to Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business and co-author of The Other Side of Innovation. The best CEOs scout for talent during a downturn, knowing that top performers might be more available than usual. They kill projects with the weakest likelihood of success but commit to less costly ventures with better prospects. And they look for ways to gain market share, knowing that competitors are probably sitting on their heels—and that better times will return.

Unfortunately, corporate America isn't Lake Woebegone and most companies are mediocre, with bosses who don't focus enough on the future or take prudent risks at the right time. That's one reason there's continual turnover at the top of most industries, with once-innovative companies frequently displaced by newer upstarts with more drive. Here are five signs that your company is destined to be an also-ran:

The core business is slipping. If all those cutbacks are compromising quality or causing market-share losses, your company is in trouble. At the best companies, CEOs safeguard the core business above all else, because the innovation needed for future success is only possible if the core business is strong and throwing off cash. And the annals of corporate wipeouts are filled with grandiose CEOs who failed to notice that the company's foundations were crumbling. If your company is losing market share, it's usually because somebody else is taking it. And once they get a little, there's no reason for them to stop.

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Good ideas never go anywhere. We all love to brainstorm and dream up the next Google or Netflix. But the real secret to innovation—which is how the best companies get ahead and stay there—is execution. "People equate innovation with creativity and it's not the same thing," says Govindarajan. "Innovation is the commercialization of creativity." And that's hard. The best companies don't just come up with ideas, they have established procedures for turning them into reality—and bosses who insist upon it.

[What's the dumbest cost-cutting move you've seen? Tell us at flowchart@usnews.com.]

The company rarely hires from the outside. Fresh ideas need to come from new places, and companies that expect mainline operators in their core unit to come up with cutting-edge innovations may as well ask the janitor to handle accounting. The most innovative companies often set their R&D departments or skunk-works groups completely apart from the main operating business. That helps both sides: The core unit needs to focus on staying competitive and profitable in a demanding everyday environment, while the innovators need to be isolated from those pressures so they can experiment and bring in outsiders to explore new ideas, even if they're radical. Companies that rarely seek ideas outside their ranks become insular and fail to question their own practices, which can be fatal. "If you want comfort, you're killing innovation," says Govindarajan.

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Bosses forbid mistakes. Innovation requires experimentation, and companies that build a better mousetrap often build a few worse ones before the breakthrough occurs. Yet many people, by nature, are afraid of mistakes, especially when layoffs are a constant threat. At moribund companies, a cultural resistance to mistakes breeds an aversion to risk, so nothing new happens. Since few industries are immune from the rapid change that technology brings, sticking with the same products or services is often a pathway toward obsolescence. The best companies, by contrast, institutionalize experimentation, reward risk-takers, and support those who make honest mistakes while trying new things.

Talented workers are taken for granted. It's reasonable to ask workers to pitch in during tough times and work a little harder. But companies that assume they can milk their best employees indefinitely will eventually face an unhappy surprise: When the cutting stops and companies start hiring again, prized employees will leave. Despite a sweatshop mentality at many employers, there are still a lot of companies that value talent and realize that top performers give them a competitive edge. Some firms are already on the hunt as they transition from a grueling period of cost cutting into the early stages of growing again. That will intensify over the next 12 to 24 months.

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The danger for many workers, however, is that they overestimate their value in the marketplace. Skills that were valued just a few years ago may no longer be in demand, and many companies now look for workers with multiple skill sets, in different disciplines. So if your company no longer seems to treat you like a prized asset, the first thing to do is ask whether you have the most relevant skills for the present and future, and you're contributing where you need to. If not, make changes, fast.