Introduction
I’ve always been curious about why companies fail. If I can recognize specific issues from the outside, then surely the executives inside — many of whom are brilliant — can see them too. So why does decline still happen?
It’s rarely a single catastrophic event (like a bad hedge fund bet that closes the business overnight). More often, it’s a slow death, like Charlie Munger’s “boiling frog” metaphor — the water heats up gradually, and by the time the danger is visible, it’s too late.
As an investor, I had to build mental models to identify patterns that repeat across industries — tech, manufacturing, finance, even startups. The surface symptoms look different such as missed targets, poor morale, slow decision-making, failed transformations, but the underlying mechanisms are often the same.
Mental models became my way to see through noise, revealing how structural misalignments in incentives, information flow, and decision logic quietly erode even the best organizations.
After watching companies across industries and reflecting on my own experiences, I’ve come to realize that most failures can be attributed to three categories of challenges. Each is reinforced by incentives, often the invisible hand steering behavior in the wrong direction.
1. Strategy & Execution
The Challenge
Execution fails even when the strategy looks solid on paper, because the system rewards the wrong behaviors.
How it shows up:
- Teams create outputs (reports, presentations, pilots) that look impressive but don’t move the business.
- Quiet resistance -> Middle management resists change, citing dependencies and stalls or drags the initiatives
- KPIs measure “busy work” rather than true outcomes.
Root Cause: Misaligned incentives reward compliance, optics, or short-term wins over long-term value creation.
Mental Models
- Principal-Agent Problem – Agents (managers/employees) optimize for their own rewards, not the principal’s (the company’s) goals.
- Incentive-Caused Bias – When rewards exist, people shape reality to fit them, even if it undermines strategy.
- Inversion – Instead of asking “How do we succeed?”, ask “What would guarantee failure?” (from my experience, it is the most challenging question to ask in any product reviews, but in most reviews, it is not asked intentionally)
Real-World Example
- Nokia had brilliant engineers and a strategy to modernize. But middle management was incentivized to protect Symbian OS rather than embrace Android. Execution collapsed under the weight of misaligned rewards (Ref: additional insight here)
Top Questions to Ask
- Do our KPIs measure outcomes or just activity?
- In middle management, what behaviors would my incentives actually encourage?
- What would I do if I wanted this strategy to fail?
2. Culture & Leadership
The Challenge
Culture becomes a blocker when leadership behaviors create fear, silos, and suppression of talent.
How it shows up:
- Departments hoard resources to protect turf.
- Senior leaders feel insecure when subordinates shine, so they suppress talent.
- Dissent is punished, and “yes-men” are promoted.
- Internal politics matter more than delivering customer value.
Root Cause:
Incentives reward a behavior to safeguard their best interest.
Mental Models
- Boiling Frog Syndrome – Culture slowly changes, and that becomes the new status quo.
- Incentive-Caused Bias – Leaders act in ways that preserve status, not progress.
Real-World Example
- Kodak invented digital photography but suppressed it because leadership incentives prioritized film revenues. Innovators were silenced (ref: HBR.org)
Top Questions to Ask
- Who gets rewarded more: the truth-tellers or the consensus-builders?
- Are insecure leaders blocking talented individuals from advancing?
- If I shadowed a team for a week, would I see more energy spent on professional excellence or internal optics management?
3. Adaptability & Market Awareness
The Challenge
Even when organizations see disruption coming, they fail to adapt — paralyzed by their own success formulas.
How it shows up:
- Market shifts are justified as “not core to us.”
- Existing revenue streams are protected at all costs.
- Early signals (such as customer adoption and competitor moves) are often dismissed until it’s too late.
Root Cause:
Incentives reward today’s benefit (revenue and sured bonus) instead of experimenting with unknown (revenue lost with failure tag)
Mental Models
- Boiling Frog Syndrome – The market heats up slowly; decline is invisible until it’s irreversible.
- Second-Order Thinking – Every choice has long-run consequences that aren’t obvious in short-term metrics.
- Survivorship Bias – Organizations point to past successes as proof they’ll survive the next wave.
Real-World Example
- BlackBerry owned the enterprise market but ignored consumer smartphone demand. Leaders were rewarded for defending enterprise dominance, not pivoting toward consumer ecosystems. (Ref: hbr.org and Insead.edu)
Top Questions to Ask
- Are our incentives tied to defending the present or building the future?
- What weak signals are we ignoring because they don’t fit our current model?
- If a competitor killed us tomorrow, what would they have done?
Final Reflection
Incentives are the silent force shaping all three challenges: Strategy, Culture, and Adaptability. Each fails not because people are stupid, but because people are brilliant at optimizing for what they’re rewarded to do.
That’s why Charlie Munger’s advice resonates so much: “Show me the incentive and I’ll show you the outcome.”
From my vantage, to understand the incentives of individuals or teams, one must understand their metrics. When metrics are vague, vanity-driven, or activity-based, they reveal their incentives and hidden motivations. Leaders unaware may think they’re tracking success, but what they’re really tracking is noise.
I learned this first-hand. I did build OKRs for my large team (~50+), but it wasn’t effective. Then my VP trained me on how to build OKRs the right way. Everything changed: the team and I suddenly had a consistent north star. Decisions became easier, and prioritization was more apparent. OKRs worked like a compass, ensuring everyone was rewarded for moving toward the same outcome.
The trap:
- Activity-based KPIs → reward busyness, not outcomes.
- Example: Counting # of features delivered looks productive but may not move the needle. What matters is # of customer pain points solved permanently.
- Vanity metrics → look good on dashboards, hide real problems.
- Example: # of new users added may look nice, but leaky bucket, how many are leaving or not engaged anymore is a hard conversation.
- Misaligned OKRs → create local optimization at the expense of system-level goals.
- Example: A support team measured on # of tickets closed (may hit targets), but if repetitive tickets keep piling up, the real issues remain unresolved.
The opportunity:
- Ensure buy-in at all levels so OKRs aren’t just namesake statements on a slide deck, but become true operational drivers that guide decisions and trade-offs every day and directly connect to customer value.
- Use a small set of sharp, outcome-based metrics tracking OKRs.
- Continuously stress-test: “If this metric improves, does the business really get healthier?”
When incentives and metrics align, organizations thrive. Google’s success story is a live example.
When incentives and metrics don’t align, decline is almost inevitable. Like the frog in slowly boiling water, the organization may not notice until it’s too late. Metrics are the thermometer, but only if they measure the right thing.