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.

Building a Company's Vision

The Harvard Business Review article titled Building Your Company’s Vision (James C. Collins; Jerry I. Porras) defines vision as having two components (core ideology and an envisioned future).   Core ideology is made up of the company’s core values and core purpose which act as the guiding principles by which a company navigates.  These core values require no external justification.  The authors state that a great company will change its markets or seek out different customers in order to remain true to its core values. 

How does a company or startup go about figuring out its core values?

·         Create a MARS group of five to seven people

·         The five to seven people selected should have the highest level understanding of what the company’s core values are and should have the highest credibility and competence amongst their peers.

·         Create a preliminary draft of no more than 5 core values

·         For each value the MARS group should ask at a minimum the following (3) questions:

1.       Would the company be willing to hold on to this core value even if it became a disadvantage?  If the answer is yes, it is a core value.

2.       If you started an organization tomorrow, what core values would you build into the org.?

3.       Will this value stand the test of time?  Can you envision those values being as valid 100 years from now as they are today?

How does a company identify its core purpose?

·         Use the five whys method to identify purpose.

·         Why is it important that we make this product? (ask this question (5) times)

·         The purpose should last at least 100 years.

·         The purpose should inspire change.

·         Lastly ask what deeper sense of purpose would motivate you to continue to dedicate your precious creative energies to this company’s efforts.

Envisioned future is the second part of the vision.  Envisioned future consists of two parts, a 10 to 30 year audacious goal plus vivid descriptions of what it will be like to achieve the goal.

10-to-30 (BHAG/audacious goal)

·         List goals audacious goals that typically require 10 to 30 years work to complete.

·         List audacious goal that are clear and compelling (Ex: climb mount Everest)

·         The audacious goals should serve as a unifying point of effort and act as a catalyst for team spirit.  It has a clear finish line in order to measure progress and completeness.

·         Vision level BHAGs (audacious goals) apply to the entire org. and require 10 to 30 years of effort to complete.

·         Set the BHAG (audacious goal) far into the future so that it is beyond the current capabilities of the organization. 

·         The BHAG (audacious goal) could have 50% to 70% probability of success.  However everyone must believe that the goal can be reached.

Vivid Descriptions

·         Write a clear description of what it would be like to achieve the BHAG (audacious goal)

·         Ex: transform this company into the #1 supplier of widgets in the world with the lowest defect rate per unit and highest customer satisfaction ratings in the industry.

A Novel Strategy - Saving a dying ISP

In the article titled "Bringing Science to the Art of Strategy" (A.G. Lafley, Roger L. Martin, Jan W. Rivkin, and Nicolaj Siggelkow) state that the key to creating novel possibilities in strategic planning is to recognize that conventional strategic planning is not actually scientific, because there is no generation of a hypothesis and testing of those hypotheses. The authors state that to produce novel strategies teams need to adopt a step by step process in which creative thinking yields possibilities and rigorous analysis tests them.  They offer a framework by which teams can go about "framing" the opportunities and then fleshing out these opportunities using the scientific method while at the same time using organizational management structures to ensure inclusiveness and avoid unnecessary influence.

One of my previous posts (Back Bay Battery Question #2) outlines a perfect example of a company that would have benefitted from framework outlined in this article.

In the early 90's I worked for a mom and pop ISP (Internet Service Provider) called Netrus.net.  Netrus was a pioneer in the (ISP) market in the South Florida market. Netrus was initially created to provide satellite internet services in remote areas where land based internet service could not be delivered.  Netrus provided T1s, frame relay and website design as well but their core competency was providing internet access.  Over time Netrus was able to succeed because they had the advantage of being one of the first few ISP’s in the South Florida market.  For many years, Netrus was profitable and continued to grow.  Unfortunately AT&T, Comcast, Dish, DIRECTV and other large media and cable companies used their existing infrastructure (wiring into homes, neighborhoods, buildings) and were able to deliver faster internet services than what traditional dial-up based internet services providers could compete with.  Netrus did not recognize the threats and did not make any strategic plans to alter its trajectory and was eventually forced out of business (its clients were eventually sold off to another ISP).  I often think of what the company could have done to avoid closing its doors.  I was not privy to senior management meetings but the article hit home for me.  I can see where the framework described in the article could have been used to generate multiple options for Netrus.  The article states that the issue must be converted into at least two options.  In keeping to this Netrus could have framed their choices into the following:

Step 1: (Framing a choice)

Step 2: (Generate possibilities)

·         Status quo (unsustainable)

o   Continue to provide traditional dial-up internet services while massively funded media and cable companies enter the market with newer and faster technologies and force prices downward.

·         Netrus pivots (become a CDN (content delivery network)

Step 3: (Specify conditions)

o   Netrus’s largest customers do not have a content delivery network but are struggling to provide their subscription base with better streaming and content delivery options.

o   Content providers need to be able to deliver localized content quickly to different parts of the world without hoping around the internet (reduce latency)

o   Content provider must be willing to pay a premium for the ability to deliver content through a CDN.

o   Netrus has data centers in every major airport in the South East and therefore has the ability to deliver content locally to the South East where most of its large clients do business.

o   There are very few competitors in the market providing CDN type services.

Step 4: (Identify barriers)

o   Significant investment needed to upgrade Netrus’s infrastructure and bandwidth

o   Unproven ability to sell this offering to existing Netrus clients and new clients.

o   Netrus will need to hire highly skilled networking engineers to manage more complex infrastructure.

Step 5: (Design test)

o   Create a survey to poll existing Netrus clients regarding interest in CDN

o   Create a poll to test price sensitivity of potential CDN customers

o   Create a method to test existing infrastructure to determine existing capacity of Netrus’s network.

Step 6: (Conduct tests)

o   Poll existing Netrus clients regarding interest in CDN

o   Poll existing and new clients regarding price of CDN offering

o   Test existing infrastructure to determine existing capacity

Step 7: (Make a choice)

o   Review key conditions and reach a decision

Using this simple example, Netrus’s senior management could have generated opportunities to take the company in a different direction.  Through the framework it is clear to see that its traditional internet services offering will no longer be able to sustain the company’s growth and profits.  A new line of business needs to be created.  In order to do that a new direction needs to be charted.  A new strategy needs to be adopted.  Using the framework one of those strategies could have been the transformation of Netrus into a Content Delivery Network (ex: Akamai). 

  

VF Corporation and The Coherence Premium

Analysts seem to think that the VF Corporation¹ is looking for a new acquisition, and once again Puma is being mentioned.²   I think that VF may very well be in a position to expand though additional M&A, but I think Puma is the wrong sort of target for them to be looking at.  To date, VFC has focused on lifestyle brands ‘that excite consumers around the world.’  These brands include Timberland (their last acquisition in 2012), Lee, Vans, Wrangler, Nautica, and a number of others.  Puma doesn’t really fit into this portfolio.  VFC has done very well for itself focusing on lifestyle brands that may or may not be tangentially sporting related.  Puma, on the other hand, is first and foremost a sporting equipment brand, and is a direct competitor to Nike, Reebok, and the like.  These sporting apparel companies, though at the most basic level are still apparel companies, operate in a very different market aimed at a different segment of consumers. 

VFC’s ‘coherence premium’ is centered on the marketing of the lifestyle they’ve associated with their brands.  This varies from Vans and Reef’s surfer and skater culture, to Wrangler’s western culture, to Nautica’s watersport culture, but in each case the advertised lifestyle promotes the brand as a worthwhile premium product.  Combining this world class marketing with VFC’s supply chain management successes and design departments neatly encapsulate the VFC coherence that has led to so many successful years.

Now I’m not trying to suggest that VFC and Puma *can’t* work.  Perhaps VFC can and will develop the new core competencies required to compete in the sportswear market.  Certainly this is a much more reasonable M&A target than Sara Lee’s acquisition of Hanes, for example.  But, if VFC does acquire Puma, I think it represents a shift in VFC’s long term strategy away from their currently demonstrated successes.  It’s a big risk, and will require the development of new core competencies to compete in this new, quite crowded and quite competitive market.   

1.        http://www.vfc.com/

2.       http://www.bizjournals.com/triad/blog/morning-edition/2015/04/time-for-this-triad-corporate-giant-to-buy.html