Friday, August 7, 2015

The Seven Sirens of Business Failure


In the article titled Seven Way to Fail Big (Paul B. Carroll and Chunka Mui) state that not every strategy works for every enterprise.  To avoid failing a company must understand the seven sirens accounting for the most business failures.

 

The first siren is Synergy Mirage where a company seeks synergies by merging with firms with complementary strengths.  Seeking synergies without evaluating core compatibility factors such as sales force compatibility, systems compatibility, and most importantly without an understanding as to whether the companies can unite under one common culture.

The second siren is faulty financial engineering.  When a company uses overly aggressive financial practices to drive growth, for example invest in risky ventures that in the long term do not pay off.  For example profits derived through predatory lending in the lending business, packaging of subprime mortgages and reselling those to consumers via the creation of complex flawed or junk products.  In the short term the company may see profit and growth but longer term the risk always turns out to be excessive and leads to huge losses, reputational damage and loss of trust.  Compounding this problem is clever financial reporting where companies register sales in the books to boost quarterly earnings, investor confidence, even going as far as paying off auditors in order to keep the scheme going as more investors join the scam is promulgated.

The third sire is staying the course when it’s obvious that the market is signaling a change.  This is not to be confused with a company keeping to its core values or core ideology.  A company can pivot, change markets or even consumers without losing its core ideology and purpose.  A company needs to take interest and understand the industry it operates in, in today’s world that is called “Big Data Analytics”.  Today executives are presented with reports that signal trends and shifts in the market.  Those that are quickest to respond to these changes in the market can turn these into advantages, turning a change of the market into a new product to address a new segment of the market.  It is important not to simply react to market changes however it is important to understand the difference between season trends and a dramatic shift in the market. 

The fourth sire is pseudo adjacencies, or selling products to existing customers, or existing products to new customers through new channels.  Assuming that the company will be successful at selling a new product to customer that buy propane gas is assuming transferability of that success.  Instead of assuming and overestimating success companies should conduct appropriate independent market research. 

 

The fifth siren is betting on the wrong technology, whether your company is a technology company or not, in today’s world major investments are made in ERP, CRM and other mission critical systems.  For example, betting on the wrong partner to deploy the company’s Point-of-Sale solution could leave the company vulnerability to Point-of-Sale compromise, delays in opening new stores or simply lack of integration between the Point-of-Sales (frontend) and the backend systems (inventory management, supply chain etc.).  Some of those projects are multi-million dollars projects that span years.  Betting on the wrong technology could be costly, leave the company at a competitive disadvantage and give a competitor the upper hand.  System projects should be hedged and always executed with some sort of contingency plan.  For example, if the Point-of-Sale is delayed, there is an alternative system in place in the meantime to keep the company’s basic operation running.

The sixth siren is consolidation rush, when companies find themselves with overcapacity they do not want to lay off people and take a write off (also leads to bad publicity).  Consolidation can lead to the same problems as trying to capture synergy by acquisition, merger.  As with any merger or acquisition companies need to be properly vetted to avoid buying or merging with companies who have problems that you do not know about.

The seventh siren is roll-up, roll-up is the combining of huge numbers of small businesses into one large one to increate purchasing and brand power.  Although this strategy can work, more often what happens is that the expected gains never materialize.  Companies should be very weary of rolling up small businesses that are used to a lot of autonomy.  There are small businesses that may be very successful because they know how to operate a successful business in their space.   Under one single umbrella for example, small businesses will no longer control their own marketing, sales, systems and etc. This could lead to a disconnect between small business consumers and the practices of corporate headquarters who will never step foot into the small businesses.

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