7 Ways to

Paul B" Carroll and Chuoika Mid

the most

Less'ons from

lnexcusabte business
f,aUur,e,s 'of the past 25, years

,8USIN!ESSES flA;CK UP !LOSSES

for lots of reasons-

reasons not always under their control. The

U.s.

airlines can't be faulted for thetr gnnlndillg foUowing the 9/11 attacks, to be sure. But in our recent study of 750 of the most significant U.S. business falfures of the past quarter centuJry, we fnundthat nearly half could have beenavolded. In most instances, the 3vOidaIJlel'i,3 scoesresu Ited fro:mfblwed

82 Harvard Business A·eview I Septembel'2,OOS I hbr,orf,l

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the company contlnues to cope with class a. Even when synergies do exist.hb r.prison.and. At that point.ly regulated medical business" Laidlaw stmgglecl with negotiating contracts and coBecting payments ~or its services.000 purchase.lly's alespeople would beable hJSeU the other's products. These flameouts .5eco.Butthey are alluring in ways that can tempt executives to disr.. A da11j_ng both Main Street and Wall Str. More1o. they could have saved themselves and their illvestorsa .nities.uaLify buyeu. Quaker never dug deep enough to understand Snappie's di tributors.:0'00 while ow~ng more than $49. too. Synergies can prove problematic in more subtle ways. Quaker Oats overpaid horribly for Snapple. If Sll bpeime rnortgage lenders and the ban ksthat supported them bad paid attelldan to the story of Gree ['I Tree Finanda I. Unum's sales on unrealistic . Faulty F. bought the firm forSo. the largest school-bus operator in North America.ch depreciate' rapidly arid can have a life:span as short as 10 years. a cOlupaHY seeks growth b}" Joining forces ~.ction suits f!"omclaimants. Quaker sold Snapple for $300 mill'ion. flgurlng its logisttcs expertise would carry over to that kind of enterprise .ioan.rithan' be dicey. COilseta ultimatellY tOok almost $3 billion in wl"lte-offs and spe- other firm that has complementary strenglhs.ega.:rcddanger signals. reps called on corporations to sell group policies. And dashes of culture.en Tree made its fortunes by offering 30-year G mortgage on trailer homes -whi. <I broader financial services company. wealtll for some compantes. Joining the two companies proved costlyand complicated. Take adjacency moves. E:>leClltives thought that each Gompa. They had different I hbr. The Whole isn't always greater than tine urn of its parts.lsht heavily into the ambulance business in the 19905. laidlaw. more fruitfuIopportu. Its stock price plummeted and is still less than half what it was iJl1999.ategles accounted forfailuTe.[ might be stuck witb an asset worth $25.or9 skills 84 Harvard Buslness FI·eview 1 September Z008 .. before selling off its ambulance units at a considerable loss. an aggress'ive posture t{lwal"ddenying claims. III this artide we'll descrtbe the seven risky strategie and offer advice On how to resist tl~eir charms.assumpt1onsabout defaults and prepayments. Just: three years after the acquisition.00'0 in principal.igh. anClevidence of tbeir inadvisability was there for the asking. respectively. basing its calculattons With profits based on loan origination. analysts wsrned that the' $1. an Indianabased life and health insurer.ctices don't necessarlly lead to fraud. and corporate officers may be exposed to massive fines and even .D!i!I. defaulting starts to look prettyattractive. At the ti me. Look at tile 1999 merger of disabiUty insurers uaum and Provident. Again and again in our study seven str.7billion price might be as much as $1 billion too high. Gr'eeo Tree foUowed aggressive "gain 011 sale" accounting methods to record profits. they've generated a tremendous amount of »hbLQrg and no particular desire to collaborate on cross-selling. Provident's crafted sales pitches for individua. The underlyi:ng business moves we discuss here aren'talways bad ideas. but they (. who fought efforts to' push Gatornde and other Quaker preducts. they might have reallzed :hm'l dangerous lending to unqualified buyers was. a home owne. as whel1lexeclJltives focus so much management time aad energy oncapturlng them that tbey Jose out Oil o!::ber. had the executives in charge taken a look at history. AI] the wbIle. sign"incant investment wrtte-otfs.l). skms. TIle stakes ate high . which provokeda series of lawsuits that imperiled UnumP'rovident' reputation and finances" Unum eventually ul1Ididthe merger.s billion iI11998 in the hope of creating.ls. d~oppir:lgthe Provident name and exiting the individual markettn 2007.eet of in the 199QS" re. Tile merger just ended up producing higher prices for everyone and. different customers through different models.involving Blfllil.seven Ways to Fall Big' stra~egies-t1ot mep( execution.cards. only to find itself stuck with a house 'of. whicb Ii)ClWorDs[f auudtll is where most: business literature plants slld'eshcw sbou:t h tiW to alillid 1I!III1r1l 'tile blame. there 1i'\'ilS also little lacentiveto q. which operated ln the gmllp and individual markets.cial Engineelrling Aggressive ffinaocial pra. excitement over them can lead a company astr.brands and repu- tations and even entire businesses call crumble as a censequence. Attracted by GreenTree'Srapidgrowtb. or banlrruptcies .It's pan or the inmcate and h. whicbit acquired to freshen up a dowdy brand and gain access to Snapple's direct-store~eUvery system and network ofindependent distrlbutors.ng ambulances isn't reaUya transportation bn mess .ay. however. the shuttering of unprofitable lines of business.Con. Three years after a $50. or systems can make it impossible to mchieve even synergies that seem easy and 'obvious.accounted ror many hundreds ofbillioIls or dollars ill losses. but tile' two busl- nesses served entire.great dew of trouble.age Ofte1l. It turned O~tt that operati. bOl.a11 The Synergy Mir. Frequently what appears to be an adjacent market turns out to be a different businessaltogether.ver.

Following a purge of.k's executives couldn't fathom a world in which hnages were evanesceruand never printed.~en Tree and its ensnfl~rling of coaseco illuminate 'two problems witl1 linancial el1gtneeriJ~g strategles: first.ors rewardincreased profits. however.1 cameras and didn't make a big move into the space until the April 2000..S. efficient machinery €lied for Chapter U ba. tbeycan produce flawed products.S. essentially erasing all profits.. they encourage further hopelessly optimistic borrowing to finance more Inve9tment.. Moore.il11atedthe Iluge recurring revenue stream tbat came from fUm and reprints (though some companies .can lead to disaster. and towels.now profit from recurring revenues from in k cartridges for printers). even when outside auditors have blessed them. As of 2007. the company shut down in 2003 and was li'l. digital photography. Green Tree's mode] was elega. '!"Wobankruptcies later. such as easy-creditmcrtgages. because pagers were essentially a fad that lasted ·only several years.and by 1995 reached annual sales of almost half It billion dollars. tile Mavica) but couldn't shake their attachment to prints and traditional processing.cia] charges related to Green Tree.450 lost:their jobs. and conseco early zooos It now has a share of the online ll'hoto-postillg market. textile industry. The company's SEC filings from the late 1990Sba.. 6.thlow-price Imports.A1tllough part of the company's rat. Mobile Media acquired other pagel' cumpal1ies and focused on designing new-generation technologies thtit nobody wan~ed. The margi~1s were hard to pass lip as well . hoping that efficiencies from scale wou.HP Redoubling yow: bwestment Stubborn. and prccessl ng. Theeconorrtics oftl1e new model don't measure up to the eco- hbr.60% on film. earned by the unit between 1994 and soos. which leads the company to scramble fOT even greater creativIty.ying tbe Course for its u. but its hesitation was coslt. until it is too late.nk~ mptcy protection in 2002reportedly tile third-largest bankruptcy in U. sueh techniques tend to veer toward fralld. They v.ptcy in January 1997. they'felIlOWerfully addictive: Iinvest. chemicals. CEO Steve Hilbert resigned in nomic! of the old.s. that attract customers in the short term bitt expose both buyer and seller to excessive risk oVer time. but pmowtexredoubled its acquisition efforts.. It isn't just fast-moving technology companies that fatally ignore new threats.'Uida:ted.ly:Over the past decade. versus 15% on digit<d products.lySta. Pager company Mobile Media hadeven less (If an excuse to stand by its strategy. like other aggressive practices.comforlers. because the machlne seized up as soon as the flaws in the underlying mortgage product became apparent. Companies also falter because tbey don't consider all the options. time preposterous. M()bi. Executives too often kid thernselees into tl1il1kil~g that a problem [sn't . But even as cellular technology followed.ld gIve it anedge.senio]' executives. But the bmJ1t ofthe decline in paging was borne by Arch Communications.ionale for keeping marrafaeturing ill the United States was to protect American workers. Koda. which.rerea status symbol in the IlUd-19901i.~e Media flled for ba. It grew steadiJy foll' de(:ades -largely through acquisition . The company fought ollly a rear-guard action against digita. Eastman I<odak stuck to its core in the faceof a b1atant danger. e had made a detailed analysis of the threats posed by digital technology as far back as 198:1(when Sony introduced the first conUlle rdal ·electronjc camera. bought Mobile Media in 1999. in yourcurrent stmtegyin response to market signals is a strategy initself. plants in 1998 alone. Kodak has lost 75%of its stock market value..org I September2008 j Harvard Business Review 85 . the United States began to phase out quotas On imports. TIle lise and fall of Gn. Ofher companies immediately began outsourcing production to developing countries . DigrntaJ reehnology also elim.e~y mention . 0 they could compete v". The layoff was the largest in the history of the U. SecomJ.at much higher rates .i. instead higbl. This is a common reason companies don't change course. the company had fewer than a third of the number of employees it had 10 yea rs earlier. COlllpanyexecliI!1:i . In 1994.but at the same. and Epson . history at tile time.SI} severe or delay any reaction.outsourdng as an optioll. when celt phones were still buLl<yancl calls expensive.flkrll.igiltillg the $240 million that Pi lIowte>:spent on new. Overly clever IinandaJ reporting is also risky.s law.nt in that the firm could bOT!"Ow short-term funds at low rates and lend . especially when it involves cutting corners to Increase profits and delhrer better bonuses. pmowtex: was all old-line company that manufactured piUows. and it.

by.1 safeguards against failure can ovel'Jook the quest:lons li)al ml. Limestone is used in steel production to separate impurities.emerge from bankruptcy D eVlsmg a new. guidIng princliple'5 that ensure conseuerNe disoourse. say.Seven Ways 10 Fail Big Pseud:o-Adjacenlcies strateglesettempt 'to build on core organizational strengtl'is to expand into a.eryone involved Understands 1he distinction between g:overmmee and mana.y could been up to such sc1Ufiny. Setting up <II fii na I: III e of daten se . al1d d~OISIOIl m<ilkers Can and' has Bl<pllcit license to ask lo.ooQ-footers. warts and all.. with $440 :million of debt. The i. had a rig()fOLl5 acq!..devlVs aclvC}CIl. creauI"I9 a !lnancial services W.IS who is truly separate from P~ecQl'iceplions of 1M "righI" answer and should Slay in the real world. is just one example.strategy. inc:~udes two reviews by pE!'Op'lawhQ were not persona~ly resist this approach on the grounds that il inlJiles directors to meddlf1 with their 8tuhorhy.ur research uncovered some members from coming Tnwith their own Any il1term!11 doubts were either muffled or unheeded.en Tree FinanCial.into limesscne. Such strategies are often sellsible. most of which was incurred as part oEthe push . so t~e internal devll's advOcale model has its Iln. however. iron ore was shipped on the Great Lakes. tile Conseco CEO who acquired Gre. That's why we r. which Oglebay didn't have In its ton. regional steel provlder.buy-in an otherwise controversial strategy. That required much smaller vessels.development process takes place.llon prooessand . that CEOs. panelwlil counter tha_t problem. merely for the sake of appearanoe<s and may strike back at naysayers. Steve HUber!. ulclependeol. selling new prodAdja(. Establlisb a I. unattainable forecasts. Panelists shourd setaside their own Mw hard rt is to tell a CEO that nis reusiog vision Un Hilbert"s case. After 1143 years the Cleveland-based company was looking to diversify because steel was in decline.a n LHltreate. CEOs often encoumge questions.) or· course. The ·company should define explicit parameters terthe soope and eonduet ohhe panel and ille ultimate use of its findings •. Limestone seemed like a. r:he goal Is (0 iigufl. ta~her Olan compare strategies with some model of perfeCtion.lts. Even 'com- I"snieS!ha'l ha~ stlong interna.ground ru.. TIle company filed for bankruptcy on February 23. but Mfore it'S roo late to turn bilek. Some GEOs have even usedlhe independent review as e 1001 'or get1Jllg the board's .. but limestone otten needed to be transported down even storiedlirms. It has many other industrial. in spite of ol.!\ODI 1 hbr. both honed by dozens O'f deals to Avoiding D1isasters: The Devil's Advocate over almost two decades. If ev.a.liFansparen:t to the beardl.ecommend tna.ugh qI.2004. a. or existing products to new customers Of especially in production.! . related business.:II~Martl ts flawed.:Ieal process of Pitney Bowes.lJaoause almost no strateg.wi~b !limits.8crack tearn.s:lfllsgYIS heady stuff.es since :WOD. Transparency is usually more pa'latalJle 10 quickly lose their objectivity. 1'1 [) mensr when the review tile. uses.les.every right to unclerstandiand react to CEOs' deoisions.imited (:harte:r and involved in the early plemning. logical choice becau e Oglebay's shipping business Will al.d deal !evel'. which jU!n underscores agendas.rd the end or tI'ls $lrategyformulation process.el'lltallulderstanding of the Jlme- 'through mew channels. Ground rules will also cliscourage panet exorbitant premIum for a company that was clearly imperiled.t oompanies institute a formal re\lliew by a. they have ..ght lInOOver unfounded assumptions. ucts W e-xisti11g customers. CEOs mary 86 Harvard Basiness Revie~v I Septembel'.company ~!lS acquired more than 80 compaol. It's bes1 to COrlvene the panel tow.()1J. 10 keep clear .nright s)<:eptloism from inves:torsand analysts it separate fram that process. but it lacked a fundam. Vi'll he paid an rigorous "fast chance" healing by an eaJective. the mail management .JBsttoms. Farone thing. o.Jt would . (Sea the sidebar. they fueled much of General Electric's growth under Jack Welch.rthe type of Queries that can produce useful InSights.o. "Ouest1Qns Every Company Should Ask:' f. whcich are removed before molten iron is turned into stelel!.-market iog it for its steel mills.e nt. or otherwise flawed minking.ready haut- fleet. Oglebay Nor- on rivers to get closer to customers. Oglebay began buying up Limestone quarries.gernenL As long as boards don'utfempl to take over the management of '!he bu smess.Jlsli. mostly on l.to keep the discussion lrom I:enging teo Farand IUfieomfortabte'~indings from being buried.'t olll whethenhs strategy is '!l'1e best alternative. Some companies sue(lsssfuUy use OJ devil's advoca1e 1l~vi6W earlie~ 10 build consensus or even use it after arHlequlsition to identify potential problems. Make the pltOeess. But in our re- search we found many cases wlJere ill-conceived adjacencies brought stone business.

" 5'Ummsil'les and I3v.ltfr. AfterselliQg of{its fleet piecemeal to retire its debt. GOod paneHsts must ha able to ask broad and epen questions that tease QU! the systems-level aSS:UITIP- liens.'1' Vill1~ Barabbal. not answers. the greaterrendency profile): ilndoverlyempathetlc who may ident*v tiC:fit lihis people. The purpose of the review is nOl to suggest alternative approaches.attempt to repllcOlte the !lftralegy . The credibility and eUe_ctlveness 01 tn8 revfew hinge 'on the credlollity and pOSition of the revlliliw's I.ulying assuml_.ent expenenees and persp.ol<lywith the man- that are.lt rook a total cnarge ofS545 milUonfordismantlingits health care business in 1'988.a:rnot.ectives and go lhrough a process of a.itive challenges.sjud~ acquisitions and mismanage cOlnpet. .growth markets without bav. not minor defects. detai~ed written.an~ h'o.e rjghtsu:lps were taken.of think. When regulators began threatening to cut rates.(. their ability to achieve in theirown market makes them overlyoptimistic about their prospects in others. Avon took a bath.nG overlooked the regulatmy realtrles.directly own.a. if malt is warranted.! not possible I[tllhe short win(lOw of me reView.' Bill a memor. Pitney Bowes'sfofmerCFO. Successful companies are particularly prone to this.lt's fmportant 10 head! off any .details and I'eave much to reader il'l1£!tptetatlo!'). and the man!lgers who designed the strategy wiHieel defensive 1t is. Two..lld stra~egy.ing any idea about whether they l'h&conduct of the rtMeW itself sl'lo\. Somemade a classic mistake: They jumped into hig'll. Theflrstwas that a change ill the company's core on iness. in the outcome of the revIew. notfhe process. Pivotal to its success. not replicate existing expertise . The J1eVleW should explorelacts.the pa nel fs not a smarter set of experts. FOCUSDI1 Ol'gani:o::e for'oS. the.8 bIllion write-down on it in zooo. deSIgned be ~estreinQd The.tioll'ls. ReViewers shou~d ask for .ptember 2007. Ian Milroff. such as ·cross-seWlng:.1." But these acquisitions did nothillg to build on Avon's core asset.s-playing that ujerTlJifiesareas Wnere ~he strategy may be vulnerable. The latter make i· easy 10 gloss oller the . Richard Mason. but attM vePo/least same t¥pe ot forma1 mspOAse ~o he work of the team should be built into the precess.le tof the plan and'readily accept ~heir assump~ions. l'he prodUct deal of the review should be iii report that might lead Inat seemed clesr In PowerPoil1t can 1i:1I1 epan when they're subjected 10 prose. a.ne-'i-eilvsl review.dlet-polr'lt formeJl.not spr.eadsheels and slides.arg ~ Sepltem. description of the strategy . issues.l'1dum demailldsclaritv aboul exactly who is cfoss-s:elllng to whom . 1M rationale for a deal mtght be summed up In ill phrflse. Four patterns emerged among the failed adjacency moves in our research. The company suffered big losses ln the ambulance business taking a $1. drove the move -wtmess Oglebay Nortonrs desperation to reduce its reliance 011steel. it was acquired by Carrneuse North America. Bruce Nolop.ons and then advocate their own po.w and why.tlon.I.leavethe pBltient chopped up on the table. One SUQh technique is the Strategic Assumptions SurfaCIng ancj Testing process. adjacency strategies tended to flop when a cornpany overestimated lts hold on customers. strategy will stand on ils h. including the acquisition of medicalequipment-rental businesses and substance-abuse centers .511ion (the greater !1'1. The goallsn'l to check that all tn. rather than somegn~at opportl.of. utilities looked for opportunities in other industries. a corp.U$ Il n aspects ·of the strategy QI.ms. and eonsequences of any 'S9.e bv expertise. inaUy. While thiS ml911n sound harsh.abate .ber 20108 I Har'Vllrd Business Re'lfiew 87 . or amotion. in wtlich it had 110expertise. inlv. Deliver ques. At the end of the day.nthesllCs the team's discussions andiindings. Morell'lan once weive seen leaders exercise !he equivalel"itofa "pockel valor' of a review team's findings. rust because people buy one servlce from you doesn't mean they'll buy others. An inc'erpenoent board member or some other sea:soned outsider familiarwith the organization. A corporate execuiive or manager flom a dIfferent uAlt mlgh~ tead a bus!ness-Unil-!fwel devi'l's advocate rel/iew.ararcfw .process to provide "b!f!t:lfef~ should .1 hDr.. A second was that the company lacked experrlse in the adjacent markets. The third recipe for disaster was overestimating the strength orimpcrtance of the capabilities in a 'core business.but never recover its footing. Aftel significant Josses. The final call belongs to manage'rnern. "I've been amazed at how many elements Oir· a answers. fell victim to thi type of thinking when it figured it could leverage its considerable expertise in logistics in the ambulance services business and wellton a buying spree. not feelings. leading. the school-bus operator. Laidlaw.ulityin the ad- jaC'ent market. In It parlicipartts-organizelnto 'groups wlth dillerg.ing. and 8S make poor panelijsts~ people who OQme ttl quick conclusi.a strategy justified by its '~cu!ture of caring. C'oll11etQ·l1:lg·sur~. Who should be outSide the management OlsstJctated t_hes1Jrate9lY. suCh as a retired executlve with nl) ax to grimJ.'" (See "Rules to Acquire By. In I:II.its door-todoor sales force'. and Jim Emshoff land taughf to us 1. The review team mignt well. it to mi.sader.'(l.IJG'cess. Avon made this mistake with a moveinto health care in the early 19805. Panel members should provirj·e ill fresh point of view. observed in this magazioe. em 6ge'15 responsib. personahlV types often Next examine and test the simteg.devWs advocate i$not an inqUisition.and rdr. several utilities seeking to expand in the rnld~198osfell prey to this kind . lhat's jus.y's und\.8 with the proposed strategy and have l1osiake.

live .osing $317million during its two years of service.Zayl'e. p[exity may lead to diseconosotesof scal:e.." it didn't define "reason <'!ble" as <If! 'initial outlay Qf about $]. with a diSiCOLlint faster del1ivery a:nd for bankruptcy 1112000and was liquidated in 2002. after Ames . For instance" vi/hen it asked ifcussomers ~". Federal Express made a similar mistake in tbe mid-1:98os witb Zap . without . USAil' bougn.. Disgruntled Murpby's ernp!oyees were reportedly stealing g. At 'the thne. sell and pocket the cash before industry conditions deteriorate.ZOD8 . To keep pursuing the strategies that produced these t:Olinllres~some quite spectacular . it ignored its own engineers' warnings that the ultnnate product would sbare the limitations of ear'ly 19SQS cellular tecbnelogy even as cell phones got better and cheaper with every passing year. Thougb there's moreglory in being the buyer.org 8:8 Harvard Business R. where they would :be fa>led to anotherprocessiag center. pioneered the concept of dlscount: retailing i. Motorola's Iridium sateUite-telephone unit . For another.. The project began ill.3 year after the phene :yst~m went.t WOll Id "fit in your poeket" assumed tbat yom: pocket would hold a brick. mi~ lion pretax write-off after I. As prices fell and the technology improved rapidly..ln fact the failure stemmed from a ~nisgllidedcap- tlvadon with technology. for wl1i(:h it paid $800 mtlllon. soon it seemed silly to use FedEx as an inter- The huge rewards £ot breakthrough products and services understandably inspire many companies to search relentlessly fur tile next Google or eBay or iPod.rketing. f·orone thing.. dose to the destinatiou. mail.red an enormous amount of sh ri nkage (industry speak for tbeft) because it bad no system for d~eckjng inventory..k-ofth:e plus mOlltbly charges and pricey rnln- utes. For instance. it suHe. Even as thecompany struggled to integrate G~C. Motorola was so enamored with its technology that its market research amounted to little more than marketiflg. a national presente.companies bad to go tal great lengths to deceive them sel YeS.lushing to IConsoliidate As industlies mature.aU within two hours. fax machines prefiferated. they could S'lmply leverage their customer bases and sell them products like life insurance. you may be buying problems along with assets.seven Ways to F'ail BiQ were qualifiedto oper-ate in them.oods offdelivery trucks and! then logging complete shipments lnto stores. Consolidation plays are subject to seveml kinds of errors.11 rura I areas four yean before Sam Walton Bot tnto the game. Murphy. Murphy In 1985.FedEx shut Zapmail down. development plans. and its descriptioJl of a phone tba.000. systems like accountlng. ~nits zeal compete with Wal·Mart.C._ysteulS that work well for a business of a certain size may 'break as a company grows. R. increased com .86. Ames again filed processing center. the number of companies in them diminishes.. The company filed for bankruptcy in 1:990 but recovered. and delivered by courier to the recipien:t. In 1987J Ames lost $20 rnillion worth of merchandise and couldn't te~1wlhy. But as Motorohl pursued its. After :ttruggUng IAriththe disastrollsa. but they ftmnd few buyers. legitimate problem: Celliphones werle expensive and lacked global connectivity. only to make tile same n:tist~e again.11IJJ1g.acquiroo discount Chain G. They thought.ey f I hbr.cqllisitionofHiIlsD:epartmentStores. bigger.ould Uke a global portable phone for a "reasonable prlce. it may be wiser to. Still.t Pacific Sontllwesi: Air for $385 million if the customer broughtthe documents into a fiedEx office. The moves didu't build on it's core strengLI"t =merrhandisi ng .is widely clted as a failure of executioner ma. Take the demise of Ames Department S~OFes The l.and exacerbated its greatest weaknesses: bac. The price was $35 for up to five pages. a glaring overpayment. Holdouts have an incentive to. and existing satellite alrernatlves were cumcersome and unrel iab!e. takeover. the 19'8os to solve 3. Our research shows that it Is sometimes better to sit back and let others fumble thmugb consolidation. were expensive and transmission quality was often poor. Ames madee series of acquislUI tions.a 5 billion venture that filed for Chapter 11 less than .eview I September. because t]. Ames repeatedly overluoked the fact that many of the' stores it boughtwere damaged goods. a service wi-lerehy couriers would pick up paper documents and deliver them to a nearby Amesls managers went for another. combine and reduce capacity and overhead and gain purchasing and pricing power. rew companies 01IVTIedax rnechlnes. un our research Bets on the Wrong Technology mediary. No amount ofluckor sophisticated execution could have saved them. taking a $340.ompall1Y .adequately COnsidering what it would take to win that battle. But it got reckless in its attempts to build we discovered that many technology-dependent strategies were ill-coIDcefvedfrom the get-go.

d. inves10r who funds tl)p brass . Alleas! once. Unum had exited the very ltne o. respeetl'lfely.ture. hOwever. Did anYQI'IEIask. Do w:i_1 iiilfor:rnat. where people can buy. help Mjc~osof1 avoid p-roduCit delays.tl1 at coMe with seah:!? Companies often now a particular hbr.and liabilities . For almost'a decad'e-Blfterward. Why did we gel out o. Loewen Group attracted numerous Inveslorsdunng rate 1980s :and early 19905. the revenue from picture we~sites and 0911 phone came·ras.rat!eg. "Warma bel? A side bel. USA:i"s acquisiti0ns ulpled the company's size in i'ust one year .dv.Jitential partJ'1&1'Sihip.!'ms'l Windows.asl(ecl. prosjlIer'eti ln lhe 19905 by selling 30-year mortgsg&SIO most Qf 11.aps. Bell wHI zero in on one number and ask the CEO. Plel'lty of . should oxploJe. yet thair eencerns eIther dfdn't rea~h or didn't Influenoe SIf8!legy makers.e· assessed Ifthe CEO gulps. (s lJery blUnt M\h ex('c'utives or firms in hi'S pertfull0. eapiliunng a greater share of sales of cameras and pnnters and.au. ove resli mate 1he power ot seale .y must be able 10 stand didn't up 10 the sunskin.van close calls. For il'1stanoe. A devil's advocale mjght have .o( haw t. the·triue !lidva!'Itages . Microsaft rou~ nely conducts Sl[nlllVS .e:rs7 Our research shewed that I.11987.t Green Tree sold rtself at bloated price to Ccmseco. !he business? Might we .t a far higher V<lllIatlQr'Itha n It now maRing 'IHated rnovss.d.e: HoW weuld \t look on the horn page of tile WaH Stiller Journal? Suoh a que. so oompanies l'1eed [0 a bit.gh it WOUld be to make a go of it In the p!:us'O!1al disebllity market. Bell knows he or ~he has doubts. When ney double In .aves. 01 in!JllleiWS a'boat stl's1:e'!Jles !'sac h decisiollil mlsk..AQla a nd fuji.llIul~ltiGn $'pree but en.r business that PrOllu. ItS' Yneral·liome a:G. and sell shares reflecting their honest asseS$mel1t of plan will play GUt.\" Have w. Bell had him ftre. for ~nstance. agement an accurate picture. IBM fast some ef!fQ:rt. which lBter filed for Chapter 1t.mtagecS. hey T unqu(l!lified blJryars on ware toolki ng at hiStQry Iilut wltl10ul nuance 811d conte$(1.on markels.stlon rnl!gh( hwe prevented some casssol reach tfie light persofl. ped. many 113M emproyees knew mat OS/2 didn't stand a chance ag. Jm"clid'esuch m. you and me.{fbr longterrm sue:cess7 One of ~he companies we ShJdie. Kodak. when an underpertorrnlng CEO didn't take the bel. not long before ~he merger. tsthal a sustainaele mode.shed when the death rate lapered 011 $2 billI enen Its OS(2 may qUBSI1 Would we ht em It1'Go~don Bell. Whsltcllinwe leslfJlfrom his'hliry1 any A tMugfltful ~eylew of the past flllgtn hal/'e prevent'SQ a num bar of 'lha failure'S we explored. iii prominem s·lart-ups. the fact that. Tyeo.h)lll allld dissent~ trailer horneii.ed opinions st!a~ghl to the tap. t the.and campletelY broLlQhtc. f~r $1. ft)r instance . When someone makes pre(j'ictions for company pelformance.draw some lessons about the abili I'll 10 cross-sel t bet\lj'eel1 indlvidual and gro.ke greater purchasing power-and routmely underestImate tne complexitie:s.up dIsability customers? A supertidallook ba~t Dan be counterproductjve.people at Unum had ~itsthand knowledge.. Thess are the issues that deviI's ad'Vooatas. inlemal and eXternal.Q oomplele the deal. CQuld have sold itself in the 199013or 1990s a.0'00 1:' Flegulalf eommunicat~on ehannels messaga challel'lg ing the strategy.Had they las eEl ItMlrstraoogies bY1fsjciflg a few10ugh questions. yet their oonvictia"s didn't get to tM In lI1e end. lis this 81 feaUstic st. mpai1iesareln just doine the ~ same tl1ing. or I eou1d l1ave moved faster into' the digi'lal world. twice as eftan.IsuaMy someone in the organ~zaMn recogn[zecl that a strate:g:v was daomed: Ihe information JUS! A strateg. Its mUla or e..the move tlopped.own Its information systems. !l. UnlJm~se>ee-cUI!Vesoverlooked ore.lent WillS bnngll1Q to the t~ble. b . Group ieaders knoWthal such surve.agers immediately rejeclEKi any p. And rn the has. set IJD like a stock market.the eompsrues weUl! in the groujl and Individual disaBility markets.org I September200a I Harvard Bus'iness Review 89 . prlncipa~ comp9tMrs i"fllm enG paper. One cnam we worked WIth sutlereda hi!lll-profile failun2 tharllm to anlll--ooillcaived joint VEll'I. Wnen insurer Unum merged with Prb'Videm ih 1S9S1n an anempt at syn erg)l .It doesn't necenairTly deliver presumed most of the companies In our study courd hai\l8 stopped themselves from a. get!) u nfiltar.ate a system (hat.•probablv wOtJldn'j have Llsed slJoh aggressive aeoountlng memods for aCCjulsitions if it had reaiized ~hey' d be s.ys can: happen at any time.(ou can take this notIon up II l"Iotch te engag8 il1 predicti. The strategy must alao be able 10w~lMr storms.cfilltinlzfld by the media.s~ze.f do give man- . Which tends m keep them honest The oorveys don'.$ mal'!.:H'~ing team members for !heir anonymous predictions about: wl1en a product win be deltvsred.ln thejlrfervor!. which depreciate rapidly and may l"Ia1o'6 a I)fe span as shert as 10 years. Green TrtleFloanG~al. Have weeonstdeired alii 'OIU opt!ions7Ihi& ql:l9stion IS aspects'lly important for coMpanies that stay the course.

fitable line of bus. ing. we narrowed the field to the companies from 1981 through 2005. Earning mounted. is to taJ<:e dozens.but we won't focus on those in tills article because for the most part theIessna is Simply "Don't do it.. let's IoQk at the fortunes of Loewen Group. court documents.ikeembalming. while the universe of companies was lar9'8 enough for us to g8neralT~e results. bulonly within talrly small geographic proxlmities. bankruptcies of companies the value proposition. Canada in t he ]~nOS and 198os. includIng !Rellters." blste. A national brand has little \'alue. We defined "Iail!. it grew quickly by buying up funeral homes in the U.s cost of cap l'tal. Loewen was sold to. As far as we can tell. the increase in the death Fate that Loewen had banked on when buying lip companies never happened. Working with leading Information vendors.S.. Butte. holding on to. than the industry average. and receptionists.lt was doing Ilkely as a.989. especially if tbey change operating lem.reased size improve the company'. we butl\ a database of more than 2. USAir and Piedmont had profits six to seven pen:entage points bi:ghe.the demise of baby boomers.6 billion_ The (:ompany almost tripled in size in iii bit more than i). Ames never considered. ¥et there wasn't much to be gained from achieving scale. (R:elaullclled under the name Alderwoads. Service suffered.Berore the merger.3. low-risk: businesses.create any value for investors. or a bankruptcy. Aided by researchers from OJ. ness..) Often roll-upscannoe sustain their fast rate of acquisition. Funeral home are steady. In the beginning.amond Mamlgemenl Technology Consultants.year. PhilIp Services. and more effective advertis- teeter behind f<lflure in 355. Furthermore. By 1. wri.ly \'\tithtne rules in Biloxi doesn't help much in. Ibecause reporting requirements ensured uniformily and access 10 cla1a. And last. its position and potentially selling out to Wal-Mart down the line.com. and businesa-schcol cases. hearses. and Bankr~ptcy. Thomson FirHlI1cial. greater brand recognition.1 funeral homes. public most SlgmllCBn '10 accounttor a major prob& new schedules. Nor didioc.S.acquiring and integrating the homes far outweighed the slight scale galns. Our analysis revealed that strategy had been ~he key go toe-to-toe with Wal-MJart.ith its methods of shaming the bereaved into buying more expensive products and. companies may not be able to hold on to customers pfa company they buy. and being peFceived 3.O!g OS . companies that sold il1amselves before l1evi. The 1I. so they already borrow at iow rates. and a nalysts were enthusiastlc about the company'sprospeers given the com- Ing "golden era of death" . with al] the cultural and op- 90 Harvard Business Review! September 210 I hbr. We also did a Uteratufe searcnto find ·Iallures that Roll-Ups of Almost Any Kin.l'egional retailer with a far more limited product line. Westarnergy. greater than $100 million le:xcluding. didn't show up In d'alabasesfor Instance.lre" as a significanlinvsstment wme~off. local newspaper coverage. and.buying a company or twoor foura month. To identify Ihe red lIags that might have alened manag amant [0 impendlng failure.. a sbutdewn of an unpm. because bereaved em tamers make choices based 01:1 referrals or previous experience. and crews were taxed to the limit by their About the Research Our research focused on the business failures among U.ng power. it acqui~ed 135 more the next year.d The notion behind roB-llps. Ames didn't have to With at least $5'00 mlilioll in assets in the last querrer hefore bankruptcy and wriTe-ofts and discontinued: operations.6 polnts below the industry <lVf!tage. Based ill Canada. after the merger operating profilts were 2. Fastforward several years and the company filed for bankruptcy.seven Ways 10 Fail Big' In 1\)87 to expand into Iil. and Tyeo . after relecrlng an attractive bid. other options may be preferable to being the lndustry's consolidator. tl'l fad. we also turnedto personal interviews.among them" Mel WotldCom.e<wyregulation of the funera 1 industry also limited econo- m:iesOf SI:<!Ile: KnOlllllnghow to OOl'lillp..e West and then bought archrival Piedmont for $1. Loewen often hid its ownership.S a local nejghbnrhood business is actuelly an advantage.. and Its infolrnationsystemsc:ouJdn't hand le the load.ad.'500 !aHures. all that matters is growth . The cost of . Loewen owned 1. Loewen could realize some efficiencies in areas l.l- 150 most meaninglful cases. services (such as naming its low-end casket the "Welfare Casket") .te-ofls for inprocess research and developmarrt). computers repeated Iy broke down 011 payday. BU'tresearch shows Ihiilt more than two-thirds of roll-ups have failed to .ng We were interested to find that many :ron-ups were afflicted by fraud . the same sultor for about a quarter oft he previous offer. And it damaged w hatever re putation it did have ~ . hundred 01' even thousands of small businessesand combine them into a large: one W'tth increased purc:hasir. lower capital costs. What's more.

what if thestock price drops by 50%? a/Unleashing the Killer App (Harvard Businel:'S School Press. the share pric-e must stay up to ke.mitate. knowing that the companyls in buying mode. hoping he'll ge'llosl. Perhaps that's an overly dramatic example. Worse.er ofCOnte~1 magazine . as Gillett IHoldings and others tried toroll up the market for local tetevlsion stations in the 19.ep the acquisitions going. Chunlila Mul (cilunka@biliion. 1 n another case. A roll-up is a nmmcial high-wire act.r Reprint R0809F To order.is hard to decipher at thl.~up. a coautho.." . which are inevitable. Investors know that profitability . sellers demand. worry about consistent profitability until the roll-up reaches a relatively steady state. tf not bi$lions. i6 Pallli. in pursuit of fuodamentallyflawed strategies. filed for bankruptcy protection in 19'91. AkUlles have <1 better-than-aveeage record on preven. sea page 12~. Gillett. He fives near Sacmmenl'o. which bought 12 stations in 12 months and then acquired a company that owned slx more.. Whel'l'yougoint:oarol. tactics.YOli need to. Leewen overpaid for marlY of its properties . Caiijbmio.or 20% or 50% . We know that companlesare capable of learning from failure.decline in cash flow for two yea:rs? If you're buying w~tb stock. Operating costs frequelltly oalloon as a res tilt.s point. 'Executives scrutinize healthy businesses: for best practices they might be able to i.cg. FOll" illett. Carron (pcw/{i)bflliandalJa:rlessons. or strategies.1998) and {I jello IV at Diamond Monacemcnt & Tedm%EJ' Consultants in Chicago. the stations began demanding prices equal to 15times their cash flow. steeper prices. and failed. roll-up strategies often fail to account for tOllgb times. debt what will happen if you have a 10% . AJI it-took to finish off Loewen was a small decline in the death rate.805. If they're purchased with cash.erational issues tha't accompany a takeover. 199:3) and tile fmmd..dQllarleSSQI1$.oom) is the aul:l!or a/Big Bines: The Unmaking of IBM (Crown. but we do believe that enormous value lies in learning from companies that have los( millions. given the right incentives. know 'exactly how big a bit you can witbstand.tlng disaster because their own personnel go down with customers.com)is stuck. in an effort to generalize from their traits. Final'ly. it was an unG expected TV adslump. Our research I'oaks 3t tile data that others tend to ~ol'e:CQm. B. and executives know that they don't have to. If companies are purchased witli The vast Illajodty of business research focuses on successful companies. debt pilecs up. so they focus onrevenne.pallies that 'tried to do the same thing as the winne. "We'lre sending Harkins on the Management Wilderness :Retreat. If you're financing with.

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