7 ways to Fail Big - Lessons learned form the most inexcusable business failures of the past25 years October

19th, 2009 | Interesting Articles, Marketing Fundamentals, Sales, Strategy My summary of an article detailing seven of the biggest strategy failures made by big companies. HBR - Sept 2008 - pg 82-91 The Synergy Mirage action - Joining with another firm with complementary strengths. problem - Whole is not always greater than the sum of its parts. example - When Quaker Oats bought Snapple ($1.7B) to acquire its direct-store-delivery system they did not know that the established network of small distributors were resistant to sell other Quaker Products such as Gatorade. Snapple was sold three years later for $300M. Faulty Financial Engineering action - Basing long term strategy on unrealistic financial assumptions. problem - Clever financial reporting is risky example - Green Tree made its fortunes by offering 30 year mortgages on trailer homes. Following gain on sale accounting methods to record profits basing calculations on unrealistic assumptions about defaults and prepayments. Indiana based Conseco bought the firm for $6.5 billion dollars eventually taking $3 billion in write offs 2 years later. Conseco files for chapter 11 bankruptcy four years later. Stubbornly Staying the Course action - Increasing your investment in your current strategy despite strong market indicators problem - Execs kid themselves into thinking a problem isnt so severe until it is too late example - Eastman Kodak had looked into the threat of of digital photography as early as 1981 (introduction of Sony Mavica) but refused to acknowledge that print photography was a dying business largely because margins for print were high as 60% versus 15% for digital products. Over the past decade, Kodak has lost 75% of its stock value and has fewer than a third of employees compared to 10 years earlier. Pseudo Adjacencies action - Expanding into a related business by selling new products to existing customers problem - Lack of expertise in the adjacent markets. Over estimating the strength or importance of the capabilities in a core business and their hold on customers example - Avon made this mistake in the early 1980s when it tried to enter the healthcare industry by purchasing medical equipment rental businesses and

substance abuse centers. Justified as fitting into the corporate strategy of culture of caring Avon did not understand the regulatory realities of the business vs its core business of door to door sales. By 1988 Avon closed its health care business posting $545M in losses. Bets on the Wrong Technology action - Taking bold moves to find breakthrough products or services. problem - Great technology is only successful if it is rooted in good strategy. example -Motorolas Iridium satellite telephone business - a $5B venture that filed for chapter 11 one year after the phone system went live. Poor marketing grossly overestimated how much customers were willing to pay for the service. System was no doubt a leap in technology for the time but management refused to acknowledge that the system would suffer from the same system limitations as current cellular systems in the long run. Rushing to Consolidate action - Companies combine and reduce capacity and overhead while gaining purchasing and and pricing power (Sign of maturing industry) problem - Consolidation plays are subject to several kind of errors. First, you may be buying problems along with the assets. Second, systems that woks well for a business of a certain size may break as a company grows. Lastly, companies may not be able to hold onto customers of a company they buy, especially if they change the value proposition. example - When USAir bought Pacific Southwest for $385M and Piedmont for $1.6B the company tripled in size with a year. Service suffered as computer systems repeatedly broke and crews were pushed to their limits with new operating schedules. Before the merger the companies had profits 6 to 7% higher than the industry average. After the merger operating profits were 2.6% below the industry average Roll Ups of Almost Any Kind action - Taking hundred of small businesses and combining them in to one large one (increased purchasing power, brand recognition, lower capital costs, more effective advertising) problem - More than 2/3 of roll ups have failed to create value for investors often there is not much to be gained from achieving scale. Also when companies are making many acquisitions sellers often demand steeper prices causing the buyer to overpay. example - Loewen group bought up funeral homes in Canada and UA in the 1970s and by 1989 owned 266 homes banking on the demise of baby boomers generation. Unfortunatlety the spike in mortality never happened and there was not much to be gained by scale

because of heavy regulations on the funeral industry. Several years later Loewen filed for bankruptcy.