Wednesday, April 9, 2014

Tailspin of falling businesses

Oftentimes we analyze the dynamics of companies who are successful and have been constantly growing well since their inception. Interestingly, the article “Seven Ways to Fail Big” by Paul B Carroll and Chunka Mui , present something diametrically opposite, often overlooked, but equally important to analyze-  a comprehensive article with great examples on how seemingly sound companies who are doing everything right until a point of time in business where they commit themselves to take up a strategically wrong decision and end up in the wrong side facing huge losses or becoming bankrupt. I decided to find some recent examples of corporate business failures and align them to the seven fallacies mentioned in the article. Let me reiterate, according to the article, businesses fail due to

1. Synergy Mirage- Where two companies in similar businesses decide to merge prematurely without considering all other parameters needed for a successful merger.
2. Faulty Financial Engineering- Company tries hard to adopt an aggressive financial practice that creates an initial optimistic bubble but later bursts with larger losses.
3. Staying the Course- Company is overconfident about the success of its present business model, does not innovate and ends up dying to better newer substitute products.
4. Pseudo Adjacencies – Not every company excels in what GE has achieved worldwide. The company tries to transfer its core capabilities and products to new customers and newer markets and fails.
5. Wrong technology bets- Company is overoptimistic about a new technology that has not established itself in the market, invests in the technology and later fails due to over investment.
6. Consolidation Rush- In order to achieve operational efficiency through reduction of overhead, Company invests in perceived assets but this unlikely turns into debts.
7. Roll-up- As the word suggests, company combines large number of small businesses into a large one umbrella but is entangled with numerous unforeseen issues, and fails in the long term.

Let me discuss some examples of companies who are not performing as expected. I will draw parallels between the possible reasons why they have failed and the generic reasons discussed above.1

 Zynga- They defined the network for online gaming on social platforms. Farmville by Zynga is one of the most famous games ever in the gaming industry. They were talking billions during the heyday of Farmville. However, they made the wrong technology bet by being overoptimistic about launching games on social channels like Facebook. Gaming industry is a fast and dynamic industry and they had to innovate more and venture into other channels. Their future course depends on their ability to move away from staying course.

 Mitsubishi Motors in US- Though this Japanese automaker is huge success globally, Mitsubishi Motors could never make it big in the US. They could not define a proper customer or price segment where they could operate profitably. They are in losses and will exit the US market. Clearly, this is a case of pseudo adjacencies where Mitsubishi tried to apply a tried and tested strategy, rather than tweaking the strategy to ambient business conditions.

Quiznos Sub- They always differentiated themselves by selling toasty Sandwiches right from their inception in 1981. At point in time, they had around 5000 stores but now are down to 2000 odd shops. Now, they are in debt. They failed because of staying course with their strategy and not innovating and differentiating when competitors launched similar products. Again being overconfident, they hardly decreased the prices of subs in their menu. Their key competitor, ‘Subway’ has a clear dominance and rules the market share now.

JC Penny – They were America’s if not the largest but one of the largest mid-range department stores. They were going great until a point in time where they added a bunch of smaller companies to their umbrella. They failed in their roll-up strategy. They could not maintain a coherent strategy and were not able to manage and optimize operations. Moreover, their target segments became blurred and they closed a chunk of their retail shops.

Blackberry – They ruled the pre iPhone era. Blackberry phones were arguably one of the most popular phones a few years back. Again, they are failing because of their over-reliance on their USP of great QWERTY keyboards. They were slow to innovate and adjust in an ever changing smart phone market.

Mergers failed due to Synergy Mirage – Some examples where companies failed by deciding to merge are:2

Sprint and Nextel both well-known wireless telecommunication companies merged as equals. They could not make joint strategies with their technologies and later separated.
Daimler-Benz bought Chrysler, which never suits Daimler-Benz’s goal of being a luxury car brand. Ultimately, they broke ties.
AOL and Time Warner merged with the intention to create world’s largest media company, which never lasted.
Arby, the second largest fast-service sandwich chain failed by acquiring Wendy’s, the hamburger company in 2008 and sold it in 2011
Bank of America’s acquisition of mortgage lender Countrywide


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