The Idea in Brief
Giant investment write-offs. Shuttered business lines. Bankruptcy. The culprits behind these flameouts? Strategies so alluring they blinded executives to their dangers.
It’s tempting to embrace a strategy that helped another company strike it rich. But not every strategy works for every enterprise. To avoid falling sway to the wrong one, first understand the seven “sirens” accounting for most business failures, suggest Carroll and Mui. These include attempting to move into adjacent markets, using mergers to try capturing synergies, and staying the course when market signals point to the need for a new direction.
Then, when considering your next strategic move, designate devil’s advocates (people with no stake in the decision) to ask tough questions: “Is this idea realistic for long-term success?” “Has important information about the strategy’s limitations reached the right people?”
By objectively evaluating potential strategies, you stand the best chance of choosing the right one for your firm.
The Idea in Practice
Siren #How It Can Fail#Example#The Synergy Mirage: Seeking synergies by merging with firms with complementary strengths#Culture and systems clashes may prevent capture of synergies.#Insurers Unum and Provident (operating in the group and individual markets, respectively) merged. But the two sales forces had different skills and no desire to collaborate on cross-selling. Costs and complications raised prices. Unum undid the merger; its stock price plummeted.Faulty Financial Engineering: Using overly aggressive financial practices to drive growth #Flawed offerings that prove excessively risky long-term can result.#Green Tree Financial made a fortune offering 30-year mortgages on trailer homes. But trailers depreciate rapidly, leaving owners owing more than the trailers are worth. Defaults ultimately bankrupted the company.Staying the Course: Sticking to your current strategy despite market changes#Executives may underestimate the significance of market changes.#Eastman Kodak stuck to print photo processing in the face of a blatant danger (digital photography) because traditional processing’s margins were high. The firm’s delayed move into digital cost it 75% of its stock market value.Pseudo Adjacencies: Selling new products to existing customers, or existing products to new customers or through new channels#Companies may overestimate the transferability of their core capabilities.#School-bus operator Laidlaw bought into the ambulance business, figuring its logistics expertise would transfer. But ambulances are part of the complex, highly regulated medical business. Laidlaw struggled with negotiating contracts and collecting payments. It sold off the ambulance units at a considerable loss.Wrong Technology Bets: Overrelying on technology to create the next breakthrough offering#Technology-dependent strategies may be ill-conceived from the start.#Motorola was so enamored of its Iridium satellite-telephone technology that it failed to do objective market research. Customers rejected the system’s bulky $3,000 phones and high monthly charges; the venture folded after only a year. Consolidation Rush: Consolidating to reduce capacity and overhead as your industry matures#Executives may buy problems along with assets.#Ames Department Stores acquired discount chain G.C. Murphy, which had no inventory-checking system. Disgruntled Murphy employees reputedly stole goods off delivery trucks, then logged complete shipments into stores. Ames lost $20 million in merchandise.Roll-up: Combining huge numbers of small businesses into a large one to increase purchasing or brand power#Expected gains may never materialize.#Loewen Funeral Homes bought hundreds of independent funeral homes, anticipating a death-rate increase with baby-boomer aging. But the increase never happened. The cost of acquiring and integrating the homes far outweighed the slight scale gains. Loewen filed for bankruptcy.
Businesses rack up losses for lots of reasons—reasons not always under their control. The U.S. airlines can’t be faulted for their grounding following the 9/11 attacks, to be sure. But in our recent study of 750 of the most significant U.S. business failures of the past quarter century, we found that nearly half could have been avoided. In most instances, the avoidable fiascoes resulted from flawed strategies—not inept execution, which is where most business literature plants the blame. These flameouts—involving significant investment write-offs, the shuttering of unprofitable lines of business, or bankruptcies—accounted for many hundreds of billions of dollars in losses. Moreover, had the executives in charge taken a look at history, they could have saved themselves and their investors a great deal of trouble. Again and again in our study, seven strategies accounted for failure, and evidence of their inadvisability was there for the asking.
