(FORTUNE Magazine) – WANNA BUY a goose? Al "Chainsaw" Dunlap, a.k.a. Rambo in Pinstripes, will sell you a whole gaggle of them -- cheap. Dunlap, a boisterous, back-slapping | fellow famed for slash-and-burn corporate turnarounds, recently came in to run financially crumpled Scott Paper, and one of his first priorities is to unload the company's stylish headquarters campus near Philadelphia. The three- building complex, complete with pond aswarm with geese, stands half empty, a monument in glass and steel to the failed ambitions that afflict many once seemingly unstoppable enterprises. Growls the 57-year-old Dunlap, with no detectable tolerance for such frailties: "The problems all start at the top, with the senior people going through the motions and the board accepting the status quo. They hire consultants and draw up plan after plan -- but somebody's got to execute, somebody's got to manage." Easy enough to say; why so difficult to do? About 50,000 U.S. companies reached the point of ultimate failure in 1989 as gauged by Dun & Bradstreet: They ended their business, leaving behind unpaid creditors. By 1992 the number of failures had nearly doubled, to some 97,000. Each year many thousands more head down the path to failure by losing ground to competitors or watching a key piece of business disappear. As salvage operators like Dunlap are quick to point out, senior managers at fallen companies must take the hit for these plummets from glory. But a close look at specific reasons for corporate failure is far more useful than finger- pointing -- you might even keep bad things from happening to your company. Why do corporations fall short of objectives, even when the suits on top aren't all that empty? Why do strategies that seemed eminently sensible turn out to be disasters? Just why do successful organizations, which once could do no wrong, suddenly begin to lose their way? Ask these questions of corporate executives, management consultants, venture capitalists, investment bankers, turnaround specialists, equity analysts, and portfolio managers, and you'll get a cautionary tale for anyone who hopes to keep a business clear of trouble. Below, by consensus of our experts, the six key chasms to avoid:

1 IDENTITY CRISIS. If failure has one overarching cause, aside from patently inept management, it is the nearly incredible reality that senior executives too often don't understand the fundamentals of their business. They neglect to ask central questions, such as what precisely is their company's core expertise, what are reasonable long- and short-term goals, what are the key drivers of profitability in their competitive situation. Says Stephen Fraidin, a partner at the Wall Street law firm Fried Frank Harris Shriver & Jacobson: "It is a stunning if disturbing fact of corporate life in the 1990s: A lot of senior people at very large companies have no idea what made their organization successful." Without an essential understanding of what the enterprise is all about -- some management consultants call it a "mental model" -- decision-making becomes capricious and the company drifts. A&P's top bosses, failing to understand that regional market share was the key to profits, close scores of stores in areas of the country the company once dominated. Revenues and earnings plunge. Jostens, the Minnesota-based purveyor of class rings, yearbooks, and other products to schools, boasts a 34-year record of consecutive sales and earnings increases until, in the late 1980s, it diversifies into computer systems, a field foreign to its senior executives. By 1993 the company is reporting a $12 million annual loss. Says Robert Renck Jr., a New York equity analyst who has followed Jostens for years: "Nobody was taking a hard look at what was going on -- nobody seemed to be asking the right questions." Somebody lost the mental model. One sign that a company is Clueless in Seattle, or wherever, is that top management starts succumbing to management fads. If you don't know where you're going, suggests the Buddhist aphorism, any road will get you there. Management by walking around is followed by quality circles, which are followed by matrix management, TQM, and several rounds of reengineering. The work force can become jaded in the process and suffer from what Peter Scott-Morgan, a director at Arthur D. Little, calls "change fatigue." The eventual result is often widespread worker resistance to new initiatives, which frustrates management further and can spiral into ever more draconian, equally unsuccessful efforts to motivate the troops. Says Scott-Morgan: "There is no evidence anywhere that ramming something down people's throats is an effective management tool." Another sign of cluelessness: a tendency on the part of management to diversify into fields far from the organization's essential core, frequently through unwise mergers or acquisitions. The underlying psychology is often clear enough. Says Lawrence Graev, a prominent New York lawyer and dealmaker: "The guys running big companies know they have a limited time to make an impact, and they can be tempted to look for a panacea. M&A can be a panacea." Problems crop up -- often -- when the new business turns out to be loaded with unanticipated mysteries no one around the place knows how to solve. Eastman Kodak thrived for decades in its camera and film businesses and then unaccountably moved into pharmaceuticals and consumer health products, with dismal results. Another niche player that failed to recognize, and stick to, its proper role: Subaru, the subsidiary of Fuji Heavy Industries that delighted customers through the late 1970s and early 1980s with cheap, sturdy, four-wheel-drive vehicles. Identity problems set in during the late 1980s, when management decided to expand into the mainstream with a line of midsize family sedans. Their efforts barely dented their new market, while Jeep and Ford ate into Subaru's primary four-wheel-drive business. Recently, management finally got the hint: After seven straight years of losses in the U.S., Subaru is slinking back to its original niche. But considerable damage has been done, much of it in sales forgone. Says Subaru chief operating officer George Muller: "Because of the way we positioned ourselves, deemphasizing our strength, we gave back at least $300 million to the market." Borden, currently being shopped around for a fire-sale $2 billion, with KKR the likely buyer, is perhaps the most egregious recent example of a company that forgot its raison d'etre. Between 1986 and 1992, management made over 90 acquisitions, buying up, among other things, small regional food companies. Problem was, Borden's chemical businesses, always a winner, prompted the rise of a parade of that division's leading executives to Borden's helm. These fellows, most with production backgrounds, had almost no feel for food- business marketing nuances -- how to take all those regional brands national, for example. Pretty soon, the nightmares simply wouldn't stop. Sales fell for 15 straight quarters. "To see a major food company of this size go into the dumpster is just amazing," marvels Donaldson Lufkin & Jenrette food analyst William Leach. "Frankly, I'm glad they're being taken over so I don't have to follow the company anymore.''

2 CAUTION: FAILURES OF VISION. With perfect hindsight, one can argue that the U.S. airline industry, on the eve of deregulation 16 years ago, should have anticipated rampant fare wars and begun getting costs under control. Tobacco companies should have foreseen a breakout of antismoking fervor, and the Big Three automakers should early on have detected the rise of Japan as a competitive threat. But no -- senior managers lacked the vision to see and plan for obstacles down the road. The problem, say the experts, is that too many companies are content to prepare their organizations only for the likely snags. It's easier on the brain, after all. But to survive, top managers must stretch their imaginations and work up wide-ranging creative paranoia. Says Tamara Erickson, an Arthur D. Little managing director: "You should ask yourself if your strategy is flexible enough to deal with the wildest-case scenario. You should contemplate the absurd and include it in your planning." In recent years one of the most common disasters stemming from management shortsightedness is getting stuck with yesterday's technology. The vacuum cleaner manufacturer contemplating a new product line should be pondering new materials that his customers will be using ten years from now and how they will be most efficiently cleaned. The steelmaker that fails to buy new equipment that knocks a few pennies off per-ton costs will almost surely surrender business to cheaper imports. Anteing up for R&D can help lower the risk of technological obsolescence, but at many failing companies such long-term investment doesn't quicken the pulse of short-attention-span executives. "It's like being the mayor of a large city -- you don't get much credit for repairing the roads and bridges," says Steven Gerard, chief executive of Rhode Islandbased Triangle Wire & Cable. The price of not paying attention to such matters can be steep. Book publisher Commerce Clearing House was a Wall Street highflier in the late 1980s, a top ten FORTUNE 500 performer in earnings per share and return on equity. But management failed to foresee that the accounting and law firms making up the bulk of its customers would turn to electronic databases for much of the information CCH had been providing. Says executive vice president Oakleigh Thorne: "It's like we were sitting there with our feet stuck in concrete." Similarly, Citibank's Quotron Systems once owned the stock-price data business on Wall Street, using proprietary hardware. The advent of powerful desktop PCs rapidly made many of its services irrelevant. Even if they avoid being trampled by galloping technological change, myopic managers run the risk of a hatful of other potential problems. Orit Gadiesh, chairman of the Boston consulting firm Bain & Co., warns clients to watch for what she calls "latent competitors," stealthy opponents who appear to be operating in a wholly different area but could move into new turf at any time. Example: Cable TV companies are taking on the Baby Bells head-to-head -- and vice versa. A little strategic crystal-ball gazing gets more important all the time. Few major U.S. corporations are preparing diligently for the enormous regulatory changes stemming from last year's Clean Air Act. Nor have many companies reacted aggressively to consumers' rapidly increasing interest in environmental matters. In a recent J. Walter Thompson study, respondents rated a declining environment America's third most important problem, behind only drugs and a soft economy. These concerns will create challenges and opportunities for a wide range of U.S. businesses, yet only a small percentage have responded to growing green fever. A constant observer of heads-down management, Gadiesh finds such torpor unsurprising: "It's like gravity, a force of nature. Managers go to sleep, and then comes disaster, because the rules of the game are changing in every business." 3 THE BIG SQUEEZE. The seduction scenario, perfected in the 1980s and still a winner, often begins with a deft bit of flattery. Wall Street Rainmaker A shows up and lavishes praise on the organization -- its high-quality management, its marketing wizardry, its stellar customer relations. This is an enterprise that could easily handle some added leverage, he says. Then Rainmaker B arrives. Besides, he adds, a heavy debt load actually makes a company more efficient because management has to focus and work harder. By now the CFO is getting plenty nervous, but Rainmaker C comes on the scene armed with cash-flow projections and promises of an upward-spiraling stock price. Everyone's gonna get rich -- rich. The boss can't sign the papers fast enough. But after the lawyers and bankers are long gone, the proprietors of an enterprise suddenly carrying a heavy debt load find out some awful truths about their new condition. Their deal may have brought a new prize or two to the company, a big dose of cash or a nifty acquisition, but it may also have robbed the organization of two of its most essential attributes: the strength to weather market downturns and the flexibility to respond to competitive challenges. The situation worsens in cases where lenders based their estimate of the organization's creditworthiness on asset values that plunge in tough times. Says Triangle Wire & Cable boss Steven Gerard: "So many of these deals are based on the premise that the music will just keep on playing -- but it never does." The band packed up abruptly for Gerard's own company, which specializes in electrical wire and cable products for the construction industry. The commercial real estate market tanked not long after an investment group had taken the company private in a $90 million leveraged buyout. Overcapacity and price cutting were everywhere in the industry, and Triangle, facing huge junk- bond payments, soon began to bleed. Losses totaled about $70 million during 1992 and 1993 before Gerard, who was a workout specialist at Citibank for more than a decade before coming to Triangle, stanched the flow by restructuring the debt and shutting down some peripheral businesses. Many companies have fallen into debt trouble by overreacting to the predations of corporate raiders. That was the story at USG Corp., the huge Chicago-based building products company. USG was a pretty obvious target during the rapacious 1980s, a highly profitable, low-cost leader in a number of key markets -- and sitting on more than $150 million in cash. When a gang of buccaneers from Texas began eyeing the company, management decided to respond with a $3 billion, highly leveraged recapitalization that tore up the balance sheet. When the recession led to slack demand for the company's products, the debt bomb went off; losses in 1991 and 1992 totaled more than $350 million. After briefly declaring Chapter 11 status and restructuring long-term debt, new management at USG has begun to turn things around. But the company has gone through the sort of crucible many organizations don't survive. Says chief executive Eugene Connelly: "With leverage, which was completely foreign to us, sheer financial survival becomes the story of your company. You find out who can produce and whether your employees believe in you." Another sure-fire way to get into debt hell is to overpay for an acquisition. That's how appliance manufacturer Maytag fell from grace. Hoping to diversify its product line and gain market share overseas, Maytag's managers in 1989 paid $1 billion for Chicago Pacific, owner of the Hoover brand, among other assets. Troubles merging the two operations have hurt, but the biggest problem is that Maytag simply paid too much. Concedes chief executive Leonard Hanley: "In the long view, it was correct to invest in these businesses. But the timing of the deal, and the price of the deal, made the debt a heavy load to carry."

4 THE GLUE STICKS, AND STICKS. To any avid sports fan, the final days of an aging champion are the saddest of sights. The old pro, relying on guts and guile, tries to eke out a few more homers or a few more touchdown passes before passing from the scene. But the competition has grown faster, stronger, more nimble. His skills have faded and the old tricks no longer work. Always better to leave a year too early than a year too late, mumble the sportscasters. A slew of once agile companies betray signs of an aged athlete's flaws each year, relying on outmoded models and vainly trying to recapture past glories. Complacency and bloat settle in, and the place takes on characteristics of Eastern Europe before the walls came down -- nobody works very hard, but employment is guaranteed. A major cause of such passive management is pure human nature: Most of us have big trouble rejecting or seeing the need to move beyond a technique or strategy that worked well in the past. As Arthur D. Little senior vice president P. Ranganath Nayak puts it, "Your success can often be the seed of your future failure." The management attitude that lets this happen is highly contagious. Mack Rossoff, a managing director at Dillon Read, observes, "When management suffers from this particular disease -- the inability to abandon strategies that no longer work -- you can usually predict that it will spread quickly all through the ranks." Scott Paper's Al Dunlap has little patience with top executives who cling to the past. "You can build on tradition, but you sure as hell can't live on it," he bellows. Dunlap has wielded his chainsaw relentlessly since taking over Scott last April, severing nine of 11 executive-committee members and about a third of the company's 30,000 hourly workers. The new CEO argues that a good hard shakeup is the only way to get competitive juices flowing again. "You're gonna get exactly what you demand as a manager," he says. "When you liberate the good people, you create an electricity and they recommit to their jobs." Complacency and bloat seem to afflict large companies almost in proportion to their size, with General Motors under Roger Smith often cited as the horrible model. In fact, argues Wall Street auto guru Maryann Keller, GM's top bosses recognized the need to shake up operations but over many years had built up such an intricate bureaucracy, with so many internal needs, that progress seemingly took an eternity. GM's story in the 1970s and 1980s, Keller has written, is not about corporate stupidity or self-serving leaders, but rather about a company "finding itself hopelessly tangled in a complex corporate culture that resisted change." As GM climbs impressively out of its hole, Digital Equipment takes the prize for today's large company most profoundly mired in bureaucratic muck. Founder and longtime CEO Kenneth Olsen, forced out at DEC after a power struggle in 1992, was one of his industry's visionaries, and DEC is still a premier provider of complex networked systems. But Olsen never did adjust well to adversity or change in the business environment -- "You can be sure our plan was perfect; it's just that the assumptions were wrong," he told a reporter from this magazine in 1991. The managers who have followed him are still struggling to trim a massive work force and refocus the company around its core strengths. Industry analysts give the new DEC team under CEO Robert Palmer at least a chance to rejuvenate the enterprise, which points up another need common to large companies on the edge of failing because of bloat and complacency: In almost every case, a new boss is a necessary part of a turnaround. From Kodak to Apple, from Goodyear to IBM, wise heads have decided that sitting management is incapable of making the changes necessary to refloat the boat.

5 ANYBODY OUT THERE? Stay close to the customer. Since this is the business mantra of the 1990s, the subject of dozens of management books and the favored topic of consultants from Maine to Marina del Rey, how could any company forget it? Yet many companies continue to fail precisely because they have lost touch with their most important customers. IBM was still pushing giant mainframes, which required hordes of white-jacketed technicians to keep them humming, when the whole world was cutting costs with desktops. Sears tried modest discounts to capture middle-class shoppers who had become beady-eyed bargain hunters at the likes of Wal-Mart. A.T. Cross, the penmaker, continued to turn out skinny little writing instruments and lost hefty market share to Montblanc's fashionably chunky offerings. Companies that turn out products or services with a traditionally short life cycle -- high-tech, retailing, fashion, entertainment -- are particularly vulnerable when they fail to detect and bend with shifting consumer winds. Case in point: clothing-store chain Merry-Go-Round Enterprises. A flashy, fast-growing outfit during the 1970s and 1980s, Merry-Go-Round began to falter in recent years when management failed to stay on top of fast-changing fashion trends among young men, who make up about 75% of its customers. All the really cool dudes had moved on to lumberjack shirts and blue jeans, but Merry-Go- Round featured the hip-hop look -- baggy pants and hooded sweatshirts. Inventories piled up, operating profits tumbled. When losses approached $40 million this year, the company went into Chapter 11. Sighs president Michael Sullivan: "The fashion environment went very conservative -- and what we picked didn't turn out to be winners." Whatever the business, really staying in touch with customers often involves a lot more than merely running marketing surveys and the odd focus group. Smart managers increasingly zero in on key customers who no longer want their product or service. The theory behind such exit polling is that you can learn more from your mistakes than from your successes. "GM would have known that it was failing ten years before it did if it had tracked customer defections," argues Frederick Reichheld, a director at Bain & Co. in Boston. Another customer-tracking technique: Consider the needs of customers all along the value chain, not just the end user. Every company must please a whole series of customers, depending on the business -- wholesalers, shippers, retailers, independent distributors. Only by meeting the needs of each group can management stay in the know. Former Ford chairman Red Poling, often found chatting up dealers, was among the more high-profile proponents of sensitivity to multiple customers. B. Charles Ames, the former Uniroyal Goodrich chairman now with the leveraged- buyout firm Clayton Dubilier & Rice, maintains that many companies fail customers because management simply hasn't trained or utilized its sales force properly. Ames contends that salespeople should be allowed to focus on a specific category of customer -- high-tech manufacturers, say -- to build expertise. Losing companies often make salespeople peddle a broad line of products to all customers in all markets or in a particular geographic territory. Ames also says companies too often fail to install any formal system for distilling and interpreting information from salespeople in the field. Most important, he says, management must assess the sales force rigorously, even ruthlessly: "You can't start solving customers' needs until you find out how many players you've got -- and how many cheerleaders."

6 ENEMIES WITHIN. "Why is it that I always get a whole person when what I really want is a pair of hands?" Henry Ford lamented. Understandably hostile workers rip apart and sink many a company whose top managers, whatever their public declarations, take that sort of narrow view of their employees. Strikes or hostilities are the obvious signs you've waited way too long to address this problem. During Eastern Air lines' final days, senior executives regularly received death threats in the mail; they posted security guards to watch their cars in the company lot. When a new general manager at Mack Truck was touring a plant in Pennsylvania a few years back, a disgruntled worker threw a bolt at him. "Morale was an absolute disaster --everyone self- protective, people trying to keep false pride," says Mack chief executive Elios Pascual. Less blatant but no less fatal are the cynicism and resentments that build when management preaches one doctrine and practices another. All too common example: Corporate leaders can scuttle a reengineering effort quite quickly if they pump up their own bonuses and order a new fleet of company jets while telling the troops to tighten belts. This brand of managerial hypocrisy goes well beyond pay and perks, and insidiously. Scott-Morgan of Arthur D. Little says far too many managers ignore the human dimension of day-to-day operations, taking actions that violate unwritten rules as well as their stated intentions. They preach the importance of teamwork -- then reward individuals who work at standing out from the crowd. They announce a preference for workers with broad experience -- then denounce job jumpers within the organization. They encourage risk taking -- then punish good-faith failures. Says Scott-Morgan: "It really is tantamount to managerial malpractice." Frederick Reichheld believes many future failures may take place because of the so-called new deal between workers and employers, in which traditional bonds of loyalty loosen or disappear. Current joke: The new definition of corporate loyalty is not looking for your next job on company time. In such a world, argues Reichheld, companies that offer employees a sense of long-term stability, if not old-fashioned paternalism, may better please ! customers and prosper at the expense of more soulless competitors. He cites, among other examples, the success of General Mills' The Olive Garden restaurant chain, which searches for managers with roots in the communities they serve, and Chicago's formidable Leo Burnett advertising agency, which works hard at employee retention by linking pay closely to performance and providing a more stable atmosphere than at most other ad agencies. Reichheld's thoughts on labor relations run counter to the prevailing wisdom. "It has become a radical point of view to suggest that employee loyalty might still have some value," he says wryly. But he may be touching on the most crucial reason of all for why companies fail: They follow the crowd instead of leading it.