How I know that companies won’t make it: Treating symptoms instead of analyzing causes – Management by Firefighting

China’s economic crisis is just a mirror: This phenomenon also threatens our industry

A dangerous complacency prevails in the boardrooms of Western corporations. While executives are busy with quarterly reports and short-term optimizations, a fundamental shift is taking place in the global economy that has the potential to destabilize entire industries. This shift has a name that most decision-makers are unfamiliar with and even less understand: Neijuan.

The Chinese term, which literally translates as "rolling inward," describes a phenomenon that extends far beyond China's borders. It is a form of self-destructive competition in which increasing effort and investment lead to diminishing returns. Companies invest more capital, more labor hours, and more resources, yet still achieve stagnant or declining returns. This economic involution is not simply intense competition, but a systemic failure in which the usual market mechanisms no longer function.

The relevance of this concept to the current global economic crisis can hardly be overestimated. Since 2020, "neijuan" has become the central buzzword of Chinese economic policy, and the leadership in Beijing declared war on the phenomenon at the Politburo meeting in July 2025. What initially appears to be an internal Chinese problem turns out, upon closer inspection, to be a warning signal for global economic structures. The Chinese solar industry, for example, recorded net profit margins of only 4.3 percent in 2024, while the four largest module manufacturers reported combined net losses of the equivalent of $1.54 billion in the first half of 2025.

These figures are not statistical outliers, but symptoms of a deeper crisis. In China, approximately 30 percent of all industrial companies are now loss-making, compared to seven percent in 2019. These so-called zombie companies continue to produce despite being no longer economically viable, thereby exacerbating overcapacity. In the automotive sector, capacity utilization in 2023 was less than half of the existing production capacity of 55 million vehicles.

Suitable for:

• China and the Neijuan of systematic overinvestment: State capitalism as a growth accelerator and structural trap

Anatomy of Failure: Symptom Control as a Business Model

The real problem, however, lies not in China's overcapacity itself, but in the way companies around the world respond to structural challenges. The inability to distinguish between symptoms and causes has developed into a chronic management failure that systematically weakens organizations.

When a company faces declining margins, the typical response is to cut costs. When market share shrinks, the marketing budget is increased. When productivity declines, new efficiency programs are launched. All of these measures treat symptoms without addressing the underlying structural problems. It's like a doctor simply prescribing painkillers for a headache to a patient with a brain tumor.

This symptom-fighting approach has developed its own dynamic. Organizations have created entire departments whose sole task is to respond to acute problems. Management has become accustomed to a permanent crisis mode that is considered normal. In the literature, this phenomenon is described as management by firefighting, a leadership practice focused exclusively on extinguishing acute fires without ever asking why fires occur so frequently in the first place.

The costs of this reactive management culture are immense, but are rarely reflected in balance sheets. Studies show that companies that operate exclusively reactively experience up to 30 to 40 percent shorter asset life cycles because preventive maintenance is neglected in favor of emergency repairs. Energy costs rise by 15 to 20 percent because poorly maintained machines operate inefficiently. Product quality declines, leading to customer complaints, recalls, and reputational damage.

But the greatest damage is intangible: the systematic erosion of organizational learning capacity. When companies only react to crises, they lose the ability to think ahead and act preventively. The best employees spend their time putting out fires instead of developing innovative solutions. Institutional knowledge about the true causes of problems is lost because no one has time to conduct thorough analyses.

Solution fixation as structural failure

Closely related to symptom management is a second phenomenon known in management research as the Solution Fixation Trap. This refers to the tendency of decision-makers to immediately search for solutions without truly understanding the problem. This fixation on quick answers is deeply rooted in modern corporate culture and is reinforced by various structural factors.

The quarterly reporting requirements of publicly traded companies are one of the key drivers of this fixation on solutions. When executives are required to deliver results every three months, there is little room for in-depth analysis or long-term strategies. Research shows that the pressure to deliver short-term results has increased significantly since the 2008 financial crisis. In surveys, 57 percent of executives cite economic uncertainty as the primary reason for increased short-term pressure to succeed, followed by higher executive profit expectations at 46 percent.

This short-term focus has far-reaching consequences. Companies are reducing investments in research and development, postponing long-term profitable projects, and foregoing measures to develop their human resources. In a multi-year study of US companies, McKinsey demonstrated that between 2001 and 2014, companies with a long-term focus achieved cumulatively 47 percent higher revenue growth rates, created more jobs, and delivered better overall returns for shareholders than short-term-oriented peer companies.

But the problem goes deeper than just quarterly pressure. Solution fixation is also a cognitive phenomenon. Experimental studies have shown that teams presented with potential solutions spend only half as much time understanding the problem as teams without preconceived solutions. They also generate significantly fewer alternative solutions. This is due to two psychological mechanisms: confirmation bias, in which people seek information that confirms their preconceived notions, and anchoring, in which the first presented solution serves as a reference point for all further considerations.

This pattern is evident again and again in consulting practice. Clients come with a clear idea of ​​what the solution should be and expect consultants to simply confirm their assumptions or implement their ideas. Any attempt to analyze the problem more deeply or to question the underlying assumptions is perceived as a waste of time. The question is not "What is the real problem?" but "How can we solve it quickly?"

The Firefighting Syndrome: Reactive Leadership and Its Costs

Management by firefighting is more than just an inefficient work method; it's a systemic organizational failure with cascading effects. When leaders constantly operate in crisis mode, a culture develops in which reactive behavior is rewarded and preventive thinking is punished.

The paradoxical dynamic is that those who extinguish fires are celebrated as heroes, while those who prevent fires from starting in the first place remain invisible. A manager who manages a production crisis and thereby saves a critical delivery receives recognition and possibly a promotion. A manager who ensures that a crisis doesn't occur through forward-looking planning and preventative measures goes unnoticed because success lies in the absence of problems.

This incentive structure leads to a dangerous self-reinforcement. Talented employees quickly learn that career advancement is achieved not by avoiding problems, but by spectacular problem-solving. They even have an incentive not to optimize systems because functioning systems offer no opportunity for heroic intervention. In extreme cases, so-called hero cultures emerge, in which employees consciously or unconsciously create or escalate crises in order to then emerge as saviors.

The costs of this culture are significant. First, the permanent crisis mode leads to exhaustion and burnout among employees. Those who constantly work under pressure without time for recovery or strategic thinking suffer long-term productivity losses. Second, resource allocation becomes highly inefficient. Emergency measures are almost always more expensive than planned interventions. Expedited shipping, overtime premiums, emergency repairs, and production downtime incur costs many times higher than preventative measures.

Third, the ability to innovate suffers. When an organization's best minds are busy solving acute problems, the capacity for innovation and strategic development is lacking. Companies in firefighting mode can only react to change, not actively shape it. This makes them particularly vulnerable in times of structural change like the one we are currently experiencing.

Understanding Neijuan: The Chinese Mirror of Global Dynamics

To understand the significance of Neijuan for Western companies, one must first understand the mechanisms that triggered this phenomenon in China. As part of its dual-circulation strategy, the Chinese government invested heavily in new economic sectors such as electric vehicles, battery technology, high-end manufacturing, and e-commerce. The idea was to make China less dependent on foreign markets while simultaneously becoming a global market leader in promising industries.

However, this strategy had unintended consequences. As various provinces launched their own programs and low barriers to entry enabled rapid market entry, explosive growth in production capacity occurred. Every successful initiative was immediately copied by other regions, leading to a race to the bottom. Market mechanisms failed because companies were guided not by actual demand but by the activities of their competitors.

The result is destructive competition in which companies systematically sell below cost. In the electric vehicle sector, capacity utilization in the first quarter of 2025 was significantly below the already low levels of 2023. In the solar industry, leading manufacturers were only producing at 55 to 70 percent of their capacity after administrative interventions were intended to remove some of the excess capacity from the market. Nevertheless, polysilicon prices rose by 48 percent in September 2025, demonstrating how distorted the markets already were.

The psychological dimension of neijuan is just as important as the economic one. The term was initially used by young Chinese to describe the hypercompetitive, but ultimately fruitless, struggle for conventional markers of success. The infamous 996 work culture, where people work from 9 a.m. to 9 p.m., six days a week, is a case in point. People work harder, not to get ahead, but simply to avoid falling behind. Progress becomes impossible because everyone is putting in the same amount of effort.

This dynamic is by no means limited to China. Western companies are experiencing similar phenomena, albeit under different circumstances. The platform economy, for example, exhibits classic neijuan patterns: Food delivery companies burn billions in venture capital in price wars without any improvement in basic services. Streaming services outbid each other with content investments while user satisfaction stagnates. Software companies constantly add new features that no one needs, just to avoid falling behind in feature comparisons.

Suitable for this

• China's "disorderly competition" – The fight against self-destructive economic dynamics (Politburo meeting on July 30, 2025)

The deficit spiral: From overcapacity to self-destruction

The overcapacities that characterize Neijuan are not simply a temporary imbalance between supply and demand. They are the result of systemic misincentives that lead to a self-reinforcing downward spiral. This spiral has several characteristic phases that can be observed across different industries and regions.

The first phase involves excessive investment, often driven by government subsidies, low interest rates, or investor FOMO. Everyone wants in when a new growth market is opened up. Capacity grows faster than actual demand because every player assumes they will be among the winners, capturing market share.

FOMO “Fear of Missing Out”, the fear of missing out.

Many invest not based on rational analysis, but out of fear of missing out on a lucrative opportunity when others are already getting in.

In the second phase, it becomes clear that demand is falling short of expectations. Instead of reducing capacity, companies intensify their marketing efforts and begin to cut prices. The logic is: If we can increase our capacity utilization, we will become profitable through economies of scale. This logic is rational for each individual player, but collectively it exacerbates the situation.

In the third phase, the price wars begin. Companies sell below cost to maintain or gain market share. Margins erode across the industry. Weaker providers go bankrupt, but their capacities are often acquired by competitors or kept alive through government aid. Overall capacity does not decline significantly, while profitability diminishes for all parties involved.

The fourth phase is characterized by deflation and stagnation. Falling prices lead to declining profits, which depresses investment and wages. Weak demand is further weakened by weak income growth. Companies cannot service their debts, banks become more cautious about lending, and the entire economy enters a deflationary vicious circle.

China is currently experiencing precisely this spiral. Producer prices have fallen for 33 consecutive months. Consumer prices are virtually stagnant. Youth unemployment is at 17.8 percent. Exporters are cutting jobs and lowering wages. The real estate crisis is exacerbating the feeling of declining prosperity and leading to even more cautious consumer behavior.

To Western observers, this may seem like a specifically Chinese problem, but the mechanisms are universal. Japan experienced a similar deflation trap in the 1990s, from which the country has not yet fully escaped. Europe struggled with deflationary tendencies for years after the 2008 financial crisis. And individual sectors in Western economies are also exhibiting symptoms of Neijuan: retail, the automotive industry, aviation, and increasingly, parts of the technology sector.

Industry focus: B2B, digitalization (from AI to XR), mechanical engineering, logistics, renewable energies and industry

More about it here:

• Xpert Business Hub

A topic hub with insights and expertise:

• Knowledge platform on the global and regional economy, innovation and industry-specific trends
• Collection of analyses, impulses and background information from our focus areas
• A place for expertise and information on current developments in business and technology
• Topic hub for companies that want to learn about markets, digitalization and industry innovations

Why companies don’t want to recognize the signs

Perhaps the most disturbing finding from the analysis of Neijuan and Management by Firefighting is not that these phenomena exist, but that companies systematically ignore or misinterpret them. This organizational blindness has structural causes deeply rooted in the way modern companies function.

A key problem is the fear of repercussions. In many organizations, bearers of bad news are punished. If a manager admits that the current strategy isn't working or that a problem is structural in nature and can't be solved with quick fixes, they risk their reputation, career opportunities, or even their job. This culture of blame leads to problems being obscured, downplayed, or couched in euphemisms.

Research on organizational learning shows that companies that stigmatize mistakes systematically learn less from their experiences. When mistakes can't be openly discussed, valuable information is lost. When analyzing problems is perceived as finger-pointing, such analysis is avoided. The result is an organization that makes the same mistakes over and over again because it never had the opportunity to learn from them.

A second structural problem is the lack of accountability for long-term consequences. Managers are typically rewarded for short-term results. If a strategy shows positive results in the first two years but fails after five, those responsible are usually already in other positions or companies. The negative consequences of their decisions are borne by others.

This temporal decoupling of decision and consequence leads to systematic perverse incentives. Managers have an incentive to maximize short-term profits at the expense of long-term sustainability. For example, they may cut research and development budgets, postpone maintenance, or lower quality standards to improve quarterly figures. The negative effects of these measures only become apparent years later, when others are responsible.

A third problem is the complexity of modern economic systems. The relationships between cause and effect are often non-linear or time-delayed. A decision can have positive effects in one area and negative effects in another. This complexity overwhelms both individual decision-makers and organizational learning mechanisms.

In addition, companies are often organized in silos. Each department optimizes for its own key performance indicators without considering the system-wide effects. The sales department maximizes revenue, production minimizes costs, and the development department focuses on innovation. These local optimizations can be suboptimal or even harmful globally, but there is no entity that sees and coordinates the overall picture.

Suitable for:

• Corporate bankruptcies in Germany: Wake up and stop blaming politicians!

The individual solution: Why standard recipes fail

One of the most important insights from the analysis of Neijuan and the associated management problems is that there can be no one-size-fits-all solution. Every company operates in a unique context with specific conditions, histories, cultures, and challenges. What works for one company can be disastrous for another.

This insight directly contradicts a fundamental assumption of the management consulting industry: that there are best practices that can be applied regardless of context. In fact, empirical studies show that the success rate of corporate transformations is alarmingly low. Depending on the study, the failure rate ranges between 70 and 88 percent. This means that the vast majority of large-scale change initiatives fail to achieve their goals.

The reasons for this systematic failure are manifold, but a central factor is the application of standardized solutions to non-standardized problems. Consulting firms sell frameworks and methods that have proven successful in other contexts. These are then applied more or less unmodified to new situations, without adequately considering the specific circumstances.

The problem is exacerbated by the pressure to deliver quick solutions. Clients don't want a two-year analysis phase; they want results. Consultants are under pressure to demonstrate added value quickly. The consequence is that problems are diagnosed superficially and ready-made solutions are implemented. These solutions may alleviate some symptoms, but the structural causes remain untouched.

The alternative to standard prescriptions is complex and requires patience, which is rare in today's business world. It begins with a thorough diagnosis that not only identifies the obvious symptoms but also understands the underlying systemic connections. It requires a willingness to accept uncomfortable truths and question sacred cows. It demands an individually tailored strategy developed from the organization's specific strengths, weaknesses, and opportunities.

This approach is not only more time-consuming but also riskier. Standard solutions have the advantage of having worked elsewhere, which provides a certain degree of security. Custom solutions must first be developed and tested, which is associated with uncertainty. Many organizations shy away from this risk and prefer to use familiar approaches, even if the chances of success are slim.

Structural transformation versus tactical firefighting

The fundamental difference between successful and unsuccessful crisis management lies in the distinction between strategic and tactical action. Strategic leadership means thinking ahead of the action, proactively creating and allocating resources, and positioning others for success. Tactical leadership means acting during the action, managing resources in the execution of plans. Crisis leadership requires both simultaneously.

Most organizations are structurally designed to excel in the tactical realm. They have processes for execution, systems for monitoring, and incentives for goal achievement. What's often missing is the strategic capacity to think beyond immediate execution and ask fundamental questions: Are we doing the right things? Are we solving the right problems? Are we investing in the capabilities we'll need in five or ten years?

This strategic neglect has structural reasons. Strategic thinking doesn't produce immediate, measurable results. A good strategic decision may not pay off until years later. In a culture that rewards quarterly results, strategic thinking is systematically undervalued. Leaders who invest time in strategic planning do so at the expense of their short-term performance metrics.

The problem is exacerbated when organizations enter crises. In crisis situations, the pressure to act immediately increases. Strategic thinking is perceived as an unaffordable luxury. Instead, tactical firefighting dominates. This reaction is understandable, but often counterproductive. Strategic thinking is especially important in crises because decisions are made under uncertainty and time pressure and have far-reaching consequences.

The challenge is to manage both levels simultaneously. Organizations need the ability to respond to acute problems without losing sight of the long-term perspective. They must be able to extinguish fires while simultaneously working to make the building fireproof. This requires a differentiated organizational structure in which different teams serve different time horizons.

Some progressive organizations have begun to institutionalize this separation. They are creating separate units for strategic innovation, shielded from the short-term performance demands of operations. They are implementing rolling forecasts instead of rigid annual budgets to respond more flexibly to change. They are defining metrics that capture long-term capacity building, not just short-term results.

The price of ignorance: long-term consequences of short-sighted decisions

The consequences of the management errors described above are not abstract or theoretical. They manifest themselves in measurable economic damage affecting companies, industries, and entire economies. The price of not understanding Neijuan, treating symptoms instead of causes, and remaining in firefighting mode is extraordinarily high.

At the corporate level, this combination of dysfunctional practices leads to a gradual erosion of competitiveness. Reactive companies lose the ability to innovate. They become price takers in markets they once dominated. Their best talent migrates to more agile competitors. Their cost structures rise while their margins shrink. At some point, they reach the point where they become zombie companies: formally still existing, but no longer economically viable.

At the industry level, these dynamics can escalate into systemic crises. If a critical mass of companies in an industry simultaneously falls into the Neijuan trap, a race to the bottom ensues from which no one can escape. The entire industry becomes unprofitable, investments dry up, and innovation stagnates. New technologies or business models from other industries or regions displace established players.

The automotive industry is a current example. For decades, companies optimized for combustion engines while ignoring the signs of electrification. When the transformation became inevitable, established manufacturers were poorly positioned. They now struggle with overcapacity in outdated production facilities, high switching costs, and innovative competitors that can operate without legacy burdens.

At the macroeconomic level, neijuan dynamics can lead to prolonged periods of weak growth or even deflationary spirals. Japan after the bubble economy of the 1990s is the classic example. China currently appears to be following a similar path, with potentially serious repercussions for the global economy, as China now accounts for over a third of global industrial production.

The global dimension should not be underestimated. In a closely integrated global economy, China is exporting its excess capacity and deflation. Chinese manufacturers sell their products on global markets at prices that local suppliers cannot match. This puts pressure on companies worldwide to reduce their costs, which in turn depresses wages and investment. A global price war ensues in which everyone loses except the consumers, who benefit from low prices in the short term.

But even for consumers, this gain is deceptive. Low prices caused by destructive competition are accompanied by stagnant or declining wages, job insecurity, and reduced product quality. The short-term advantage of cheap goods is more than offset by long-term economic uncertainty.

The question is not whether, but when and how these dynamics can be corrected. The Chinese government has begun to take action against Neijuan, but the measures are half-hearted and inconsistent. Capacity reductions are being called for, but at the same time, mass layoffs are being avoided for reasons of social stability. Price wars are being criticized, but direct price controls are inefficient and difficult to enforce.

Western governments are responding with protectionist measures: tariffs on Chinese electric vehicles, solar panels, and other products. These measures may protect individual industries in the short term, but they do not solve the underlying problem. They merely slow the global spread of the crisis while simultaneously reducing the efficiency of the global economy.

The real solution lies at the level of the companies themselves. They must learn to recognize neijuan dynamics before they become irreversible. They must develop the discipline to distinguish structural problems from cyclical ones and respond accordingly. They must muster the courage to accept short-term pain if doing so ensures long-term sustainability. And they must cultivate the organizational learning capacity that enables them to learn from mistakes instead of repeating them.

This requires more than new management methods or consulting frameworks. It requires a fundamental shift in corporate culture, incentive systems, and the way success is defined and measured. It requires leaders willing to ask uncomfortable questions and accept even more uncomfortable answers. It requires organizations that prioritize structural thinking over tactical firefighting.

The companies that achieve this transformation will be the winners of the coming decades. Those that continue to fight symptoms, resort to standard solutions, and remain in firefighting mode will become the case studies in future management textbooks on organizational failure.

☑️ Our business language is English or German

☑️ NEW: Correspondence in your national language!

 

I would be happy to serve you and my team as a personal advisor.

You can contact me by filling out the contact form or simply call me on +49 89 89 674 804 (Munich) . My email address is: wolfenstein ∂ xpert.digital

I'm looking forward to our joint project.

 

 

☑️ SME support in strategy, consulting, planning and implementation

☑️ Creation or realignment of the digital strategy and digitalization

☑️ Expansion and optimization of international sales processes

☑️ Global & Digital B2B trading platforms

☑️ Pioneer Business Development / Marketing / PR / Trade Fairs

Xpert.Digital has in-depth knowledge of various industries. This allows us to develop tailor-made strategies that are tailored precisely to the requirements and challenges of your specific market segment. By continually analyzing market trends and following industry developments, we can act with foresight and offer innovative solutions. Through the combination of experience and knowledge, we generate added value and give our customers a decisive competitive advantage.

More about it here:

• Use the 5x expertise of Xpert.Digital in one package - starting at just €500/month