Hello Innovator!

Last week, we discussed the commoditization/decommoditization loop. In doing so, we nodded to the death spiral, a situation in which a company attempts to rebound through cost cutting measures.

This week we’ll dive more deeply into the death spiral, how to recognize it, and how to escape it.

Here’s what you’ll find:

• This Week’s Article: The Corporate Death Spiral

• Share This: Recognizing the Corporate Death Spiral

• Case Study: How IBM Escaped the Corporate Death Spiral

The Corporate Death Spiral

Success is a dangerous thing.

It breeds confidence. And confidence, over time, hardens into certainty.

Companies that once thrived on experimentation, risk-taking, and innovation become fixated on efficiency, predictability, and control.

They shift from offense to defense, protecting what they have instead of pursuing what’s next.

This is how the death spiral begins.

At first, the shift is subtle. It follows reasonable strategic decision-making. Which makes it dangerously easy to get caught and sucked in.

First, a company doubles down on its most profitable customers, refining existing products rather than investing in unproven opportunities. Execs seek to drive up margins, so they cuts costs and outsources non-core functions.

Then, as revenue growth slows, investors demand answers.

Leadership responds by restructuring, trimming underperforming divisions, and setting ambitious—but often unrealistic—growth targets. On the surface, these decisions look like prudent management.

But over time, they form a pattern that slowly suffocates the company’s ability to innovate, adapt, and compete. By the time leadership realizes what’s happening, it’s often too late.

Market Expectations Fuel the Death Spiral

Public companies don’t just compete in their industries. They also compete in the stock market where valuations are based on both current performance and expected future growth. This is where the innovation premium comes into play.

The market rewards companies that are perceived as future growth engines. Investors assign these companies higher valuations based on the assumption that they will continue to expand into new markets, launch breakthrough products, and maintain a dominant position.

But when a company stops demonstrating this potential, their innovation premium evaporates.

Stock prices decline.
Investors demand immediate action.
Boards grow restless.

Executives are pressured to restore confidence, so they respond with cost-cutting, layoffs, and restructuring. These moves reinforce the very stagnation that caused the problem in the first place.

The Domino Effect: Why Cost-Cutting Accelerates Decline

Once executives decide they need to “restore confidence” quickly, they often take actions that seem rational in the short term but compound the problem over time:

Cut R&D and innovation budgets to protect profitability.
This, in turn, means fewer new products in the pipeline. This makes it harder to generate future growth, reinforcing investor skepticism.

Focus only on high-margin customers. 
By eliminating lower-margin offerings, execs are effectively ceding emerging markets to disruptive competitors who then grow stronger.

Push for aggressive efficiency gains.
Layoffs seem attractive and outsourcing becomes commonplace, both of which erode internal capabilities and create operational bottlenecks. In turn, fearful employees become risk-averse. Innovation stalls.

Divest “non-core” business units.
In an attempt to appear more focused, exploratory and innovation-focused business units are cut. In spite of the fact that these divisions control the company’s future growth potential, once they’re gone, the company’s ability to react to changing market demands is eliminated.

Implement cost controls. 
These cost limitations further restrict experimentation, making it harder to test new ideas. Without a pipeline of new opportunities, the company becomes stagnant, further confirming investor fears.

Set aggressive revenue targets. 
In an effort to appease investors, execs declare unrealistic revenue goals which pressures sales teams to chase large enterprise deals while ignoring disruptive shifts in customer behavior.

At each step, the company becomes less capable of adapting to change, even as external pressures continue to mount. Instead of breaking free from the cycle, these moves deepen the decline.

Once a company is in this cycle, it’s incredibly difficult to break free unless leadership recognizes that defensive maneuvers won’t restore investor confidence.

Only bold, forward-looking strategies will.

How to Recognize the Death Spiral

Not every company in decline is doomed, but there are clear warning signs that an organization is caught in the cycle:

• A shrinking R&D budget, even as competitors introduce new innovations

• A growing reliance on cost-cutting as a way to meet earnings targets

• A culture that prioritizes efficiency over experimentation

• Leadership instability, with each new executive promising a turnaround

• Market share erosion at the low end, where disruptors are gaining ground

• A declining stock price due to fading investor confidence in future growth

When these factors appear together, the company isn’t just struggling—it’s in danger.