Debacles, failed Strategies and boondoggles.
What business owners should know from other businesses mistakes…
I remember reading an article back in school about The CEO of IBM. In the early 60s he called an executive into his office after that executive just lost 10 Million dollars in a Venture. Watson asked the man if he knew why he summoned him. The man replied “I assume you’re going to fire me.” “FIRE YOU?” Watson replied. “I just spent 10 million dollars educating you; I just want to make sure you learned the right lessons”
I am fortunate and privy to many of the details and operations of companies in the Internet Marketing world. I am in many masterminds and talk with many of the business owners about the REAL stories behind their companies.
It was so clear how prevalent this is within the Internet Marketing industry. So I wanted to share some of that info and relate it to my travels lately.
(The names and identity of the characters herein shall be withheld to protect the innocent.)
Seriously, there are plenty of educational business failures out there; however owners seldom learn the lessons to be had. From my talks with many of them, it’s clear that the tendency of the owners is to look at only the success stories (or what they are told or believe are the success stories, enough said) and say “I want to be like those guys.” Almost never do people take a systematic look at failures and say “Here is how NOT to be like those guys”:
You must not ignore the losers. I just cringe when I keep hearing people say things like “OH, did you see John’s new software? I’m going to implement that tomorrow” This is no a way to run a business. “push button, make money” is a pipe dream.
I see about six types of misguided enthusiasm strategies that are commonly associated with failures. It’s not that these strategies never succeed. They can and do. But it is just that they lead to failure often enough that owners should look for the warning signs.
One of the best ways to combat knee-jerking your business into oblivion on these strategies is to introduce disagreement into the strategy setting process in formal ways. Then potential problems are brought to the surface and evaluated rather than glossed over as owners try to get others to buy into their plan. Talk about no accountability…
I am going to use examples outside our industry to be politically correct. The point is to relate them to people you know or your plans. I’m sure you will be able to associate the blow to businesses you know.
Six Suspect Strategies:
It’s tempting to think that one plus one equals three, but sometimes one plus one equals one. Ha, sometimes negative one. Sears got tripped up in the 1980s when it bought the Coldwell Banker real-estate services business and the Dean Witter stock brokerage. The theory was that customers who came to Sears for power tools would also buy financial tools. But customers select stock brokers using different criteria than whether they’re sitting in the middle of a department store. Sears sold both businesses after frittering away the management attention that should have been focused on the looming onslaught named Wal-Mart. This can work sometimes but it is important not to get emotionally caught up in the synergy possibilities. You have to remember who you are talking to in the sales process but more important when you are talking to them. There should be more in your evaluation process of brining two companies or partners together than just the smell of money.
Sometimes, companies get too clever and come up with a strategy that works in the short term but can’t be sustained. This seems to be magnified in the internet marketing arena. I personally talked to many business owners that have done low priced, quick kill, product releases to make a couple hundred grand, to only look back at the, close to breakeven ROI, and regret it. The amount of work done, payouts to partners, the headaches of delivery for massive numbers of buyers, ect have put companies into tailspins and have taken their eye off the ball of the bigger picture; their mission and vision. Green Tree Financial led a surge in lending for mobile homes in the 1990s by offering 30-year mortgages versus the standard 15-year loan. But mobile homes can have a useful life of just 10 to 15 years. After three years, a $50,000 home could be worth $25,000 yet have $49,000 still owed on it. A wave of defaults not only took down Green Tree but also bankrupted Conseco, which bought it for $7.6 billion in 1998. How does this relate your ideas or people you know? Build a solid client base in a controlled factor, that you know will stick with you buy supplying them with outstanding products so that they won’t leave. Make them buy for the right reasons. Not because if they “don’t get it today” their life will be void of your brilliance.
People sometimes decide they can buy a bunch of small businesses or team up with other businesses and operate them efficiently as one business, but find the complexity overwhelming. It was hard to find examples of successful rollups. Remember HP and Data General? How about this one? Loewen Funeral Homes bought more than 1,100 funeral homes and 400 cemeteries in North America over 12 years but found few efficiencies and amassed so much debt that the company went into bankruptcy proceedings in 1999. Many rollups devolved into fraud as owners tried to hide the problems.
Staying the course
Companies sometimes decide they’re focusing on their core business when they’re actually ignoring a threat. I remember talking about Kodak in a presentations. Kodak was well aware of digital photography as early as 1981, when the company conducted a detailed study. But the company was addicted to the 60 percent-plus profit margins on its traditional film, chemicals and paper business, so it viewed digital technology as something that could enhance the existing business not as an all-out assault. (The New York Times reported that, when a Kodak researcher invented a key piece of digital technology, management’s reaction was, “That’s cute ? but don’t tell anyone about it.”) While competitors Agfa and Fuji acted decisively and well, Kodak lost 75 percent of its market value in the past decade and shed more than two-thirds of its workforce.
This concept is emphasized in the IM world. I have recently talked to a bunch of business owners that are so focused on a product or process that clearly has a shelf life. There ignoring the fact that technology will obviously change soon. Or the process is reliant on a fad or at the mercy of companies like Google, twitter, facebook, or many others flipping a switch. Once that happens they’re dead. Not to confuse this with staying true to your company vision. If your company vision is to “make money and just show others to make money no matter what,” then you don’t have a sustainable future.
Moving into adjacent market
We got bit by this bug. Our thought was that one of our companies is so effective at teaching people to build a sustainable and long term assets (their business), that we thought we could do that in the small business world. What a surprise. Not a positive one I might add. Most small business owners don’t go on line and buy $5,000.00 coaching products. They buy books, research themselves, hire someone to do it, have piers and associations to talk with, or they are completely white collar and don’t really care.
While companies can benefit greatly from stretching themselves, as GE did under Jack Welch, they sometimes overestimate the value of what they bring to the new market and underestimate its complexity. They can be very different worlds. Laidlaw thought its expertise in operating school buses would transfer to a different form of transportation: ambulances. What Laidlaw found was that ambulances were actually a medical services business, NOT a mini bus, and subject to regulation and contractual issues that Laidlaw hadn’t faced. Laidlaw took a $1.8 billion write-off in 1998. This is just an example of the contrasts that can be found trying to migrate into another market. Be careful not to jump or abandon your current market before properly researching and testing for the change. You could all of a sudden find yourself not making money in both markets.
It’s an axiom that as businesses mature, they consolidate. But owners sometimes focus on the assets or lists they will get by purchasing competitors and underestimate the problems they’re buying. I can’t tell you how many times I have heard this mistake in the last 6 months. Companies are teaming up together without proper du-diligence and finding out there was a whole lot of smoke and mirrors. I’m from the Boston area and we had a local store called Ames. I was doing company restructurings at the time so this big mistake was burned into my mind. Ames Department Stores actually went into bankruptcy proceedings twice because of problems with acquisitions. Its founders had the idea for discount department stores four years before Sam Walton, and Ames became one of the four biggest chains in the country before liquidating in 2002.
To test whether one of these types of strategies (or any other) is going astray, its necessary to introduce disagreement into the strategy process. That’s because the natural tendency of individuals to settle on a probable plan quickly and then try to build support for it, glossing over the problems or ignoring the proverbial details.
There are numerous, relatively simple, ways of seeking disagreement. People can be encouraged to be informal devil’s advocates. (That’s my Job) Anonymous surveys can be taken to see what people really think. Channels can be created that let objections be sent to owners.
All the informal approaches have limitations, however. A self-appointed devil’s advocate, for example, may hold back for fear of offending the boss.
So, any strategy should be subjected to a formal devil’s advocate review, which uses debate to get all important assumptions and objections on the table, where they can be considered objectively.
The design of a review is key. Otherwise, internal defense mechanisms are too powerful as we can be reminded, “When someone wins an argument, that means someone else lost.” To avoid internal antibodies, the review needs to have clear and limited charter that is to raise questions about a proposed strategy but not to come up with a better one. Letting the review propose an alternative would set it up as being smarter than those who came up with the strategy, which would be much too contentious. In addition, the review needs to be led by someone with credibility who doesn’t have a stake in the strategy, whether that’s a coach, a director or an outsider.
Because the Owner is typically the one who commissions a review, he controls the process and can use it as an adviser. That can be a crucial asset, given that quality advisers are so hard to come by seeking too much advice from owners or directors can signal weakness. Owners also use reviews to build support among the team and the board allowing serious questions to be raised and then addressed in an open manner provides a mechanism for building true consensus.
I was watching the History channel recently. The program was detailing the history of the Persians, reaching all the way back to ancient times to show how well a review process can work. The Persians made decisions twice, once while drunk and once sober. If the decisions matched, they proceeded and they ruled the world for 300 years.
While most owners aren’t drunk as they set strategy, the emotion and social interaction that are involved can put businesses in a delicate state. The sober evaluation provided by a devil’s advocate review can let Owners spot any problems before it’s too late.