Blog#3 : Innovate or Decimate - Survival of the fittest

“Sometimes your best investments are the ones you don’t make” resonates perfectly with this week’s article “ Seven ways to fail big”. After reading the article some of the famous mergers and acquisitions failures I could think of are :

Kmart – Sears

The establishment of Sears Holding Corporation, a result of merging two struggling retailers Kmart and Sears was supposed to improve their retail market share and the integration of their product lines was supposed to serve as a moat against big box competitors. ESL Investments invested in their merger with the intent of maximizing their economies of scale.

Synergy Mirage: Although both were retail giants, their modus operandi and market segment varied significantly. Sears was known for home appliances and outdoor products whereas Kmart encompassed apparel , grocery etc. ESL assumed that their combined customer base would drastically broaden their retail market share. Following the merger, that wasn’t the case thereby forcing them to work independently  paving a way to a disaster.

Faulty Financial Engineering: Incompetent strategy stripped the company of its assets over time. The Capex value of both companies together before the merger  plunged drastically after the merger. Sears had the lowest rate of capital investment to sales and prioritized share buy backs leading to value destruction.

Stubbornly staying the course: With the merger, the corporation did not try to reinvent its existing store format or dabble in ecommerce to gain increased market in order to compete with Walmart and Target. Lack of innovation and customer focus  was another reason for this downfall.

Pseudo- Adjacencies: Before the merger, Sears tried to diversify by purchasing a lot of Kmart retail outlets. After the merger they planned to achieve cost savings by combining supply chain and administrative overheads without realizing it was not a great move considering their product and market segment were different.

In my opinion, All the above factors decimated Sears holding corporation and it was forced to file for bankruptcy in 2018. Thus, leading to the biggest downfall in the history of retail.

eBay & Skype

Online auction giant eBay acquired VoIP business Skype in 2005 for $2.6 billion assuming that by integrating Skype to their platform would help buyers and sellers better connect with each other and can call using skype. The reason for the failure of this merger turns out to be :

Bets on the wrong technology

eBay’s assumption that skype would facilitate in connecting the buyers, sellers and shippers using VoIP backfired. They had their bets on a wrong technology and didn’t invest their time to do a customer analysis and align it with their organization’s framework. People preferred maintaining anonymity as vendors, or shippers and preferred email conversations than talking on call. With this investment on wrong technology eBay incurred lot of losses and had to eventually sell Skype to private investors at $1.9 billion.

In my opinion eBay should have tried to understand its customer segment and their needs before making a decision on this investment. It was a good initiative in theory but didn’t integrate with their overall company mission thereby leading to this fiasco.

To conclude, companies that don’t innovate or do a strategic market analysis(customer & products) tend to make rash decisions in acquiring companies. In this cut throat market, to survive one must keep reinventing and make judicious merger/acquisition decisions to be successful .

 

References

1.      https://www.babson.edu/academics/executive-education/babson-insight/strategy-and-innovation/sears-and-kmart-a-sad-sad-story/#

2.      https://www.businesswire.com/news/home/20180925005670/en/Downfall-Giant---Suffering-Fundamental-Problems-Sears

3.      https://www.pcworld.com/article/171267/skype_ebay_divorce_what_went_wrong.html

Blog #3 consumer culture

One of the clichés of business school is talking about synergy. It is sometimes talked about like it's a magic trick that any company can use to make more money. I found the Quaker Oats example to be an obvious failure that they should have seen coming. I grew up in southern Vermont in the 1990's where the Snapple brand had become a bit of a cultural phenomenon among the hemp wearing, hill-billy hippies of the state. Snapple's commercials fit the culture, they were seen as more green because they sold their product in glass bottles, and more natural because they did not sell soda. Gatorade by contrast caters to a completely different demographic, mainly athletes. From a production stand point Quaker must have thought they were buying a product that was within their core competency. But from a marketing/cultural stand point the products couldn't be more different. Quaker Oats is well known by older people, Gatorade is loved by athletes, and Snapple was a cultural phenomenon among young, green, liberals. These products are only similar, perhaps, from a production stand point, but that is not how customers see products. Customers see the marketing and the cultural signals, and no amount of marketing would have made athletes drink Snapple, hippies drink Gatorade, and Quaker Oatmeal cool. The synergy in this acquisition probably seemed obvious but a clash of cultures got in the way. 

The Coherence articular had a good example of a "Pseudo-Adjacent" strategy from Anheuser-Busch. They tried to sell new products to existing customers, which may have worked in a bar, but failed in the grocery store. Salty snack and beer do go together in a bar when they are being consumed, but in a grocery store they are just two items on the shopping list and are unrelated. It seems that setting would be key to selling this new product, but they changed the setting. If they had stuck to selling in bars they may have forestalled competition with Frito-Lay and gained customer attention in the snack market over time. Then the decision to compete for grocery shoppers would have made more sense. The second big problem is that producing and shipping snack is a completely different core competency requiring different equipment, and knowledge, and predictably they had problems with shipping. 

Both of these examples seem to be a mistake in understanding the culture of consumers, as well as the setting in which they consume the product. 

Blog #3: Two companies facing the "Seven Ways to Fail Big"

The article on “Seven Ways to Fail Big” makes me think about two experiences: One in which I supported my client during my summer internship as a management consultant and felt I saw the “Synergy Mirage” and the other in which I worked as an IT business analyst and felt I saw “Wrong Technology bets.” I feel that since I have personally experienced two of the fails mentioned in the article, at least these two issues are common reasons companies fail in even small ways (i.e. not in the form of a bankruptcy). 

              Related to my summer internship consulting project, though I did not participate in the due diligence of the transaction I was involved in, as discussions of the future state were taking place, I felt that during them there was a strong sense of optimism that things would work out and discussion of details was contained. The author mentions how M&A is pursued to capture synergies but that the transactions can be detrimental if the two companies that are merging don’t align on culture or other factors. In early discussions, I wondered through the acquisition what economies of scale could be achieved especially since the acquirer was decentralized while the target was centralized in its activities. For the client, it was important to manage the brand’s locally therefore resulting in decentralization. While the reason behind that was likely due to the products offered by the company, it does suggest that maybe the synergies expected were overly ambitious. With synergy targets going out five years from the date of closing, it will be a matter of time before the company can determine whether they succeeded or failed. The article mentioned the idea of questioning whether a strategy was sustainable over the long term. This transaction pointed out to me how difficult it can be to not only understand what the future brings but also how to predict out five or more years.

              Something that stood out to me from being an IT business analyst was the idea that technology alone cannot solve organizational issues, something mentioned in the article. The employer I worked for used SAP which is a very robust platform, however, we had major compliance issues while using it. We also had better technology than a competitor, but they had a larger research funding portfolio which was a more important metric for the organization. The article mentions “Wrong Technology Bets” and I definitely felt first hand what can happen when you have great systems but they don’t align with the needs of the organization or can’t be implemented ideally because of what the people resources within the organization can achieve.

Blog # 3: Why you can be the winner in the market Champion?

Takeaways:

1.    Corporations are facing the strongest competitors all over the world to win or survive in a global market. The way to win is to build up a unique strategic position in the market.

2.    Build up the strategic position need coherence inside the company. The company can create consistency in three steps: First, know the way to play. Second, build up a capability system for the company. Third, generate product & service fit.

3.    The value proposition should fit the trend of customers; otherwise, coherence may block the company's reform.

                     

When we come to an interview, many interviewers will ask a common question, "why you"? It is a theoretically tough question since we need to differentiate ourselves from all the other competitors. Similarly, corporations are asked these questions again and again by each customer. Previously, they can find reasons in geography. But in a globalization era, multinational corporations have to face robust competitors worldwide, so it is significant for the company to build up a unique strategic position in the market. And “The Coherence Premium”[1] can give us inspiration about how to do this.

 

The Coherence Premium tells us how to form a whole in strategy and ability. First, know the way to play. All levels in the company should know what kind of value they will create for customers. Second, build up a capability system for the company. To deliver the value proposition, the company needs to have three to six core capabilities. Third, create a product & service fit. Products and services can leverage the core capability system. However, there is a risk that should avoid this mechanism. Once the order has been built, it will be hard to reform. So the value proposition to customers must fulfill the change of the market; otherwise, if the need for customers changes, companies with a pre-industrial coherence will be damaged by industry revolution.

 

Southwest Airlines is an example of coherence’s power. In the first place, they decided to provide cheap and quick transportation for ordinary people, which was the trend with new customers. Then, they built six core capacities in the picture below (dark grey circles). And finally, they aligned their products and services with the six core capacities. Therefore, they win customers and hardly lose in their 30-year history.

 

 

Porter, “What is strategy”[2]

 

Nevertheless, someone may argue the meaning of coherence. To form a differentiated positioning with competitors, the company must maximize its areas of expertise and make it impossible for competitors to replicate. According to Michael Porter's theory, there are two ways to improve the company's efficiency: one is strategic, and the other is operational. With the spread of company management best practices, there is always the possibility of learning by others. Therefore, it is necessary for the company to form a whole in strategy and ability, and to achieve a specific positioning in the minds of consumers, to prevent it from being surpassed by opponents.

 

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[1] Leinwand, Paul & Cesare Mainardi. The Coherence Premium. Harvard Business Review, June 2010.

[2] Porter, Michael. What is Strategy? Originally published in November 1996.

Xiaomi: Insights on Balance between Coherence and Incoherence

The article “Severn Ways to Fail Big” and the article “The Coherence Premium” together provide me a better understanding of strategic planning. The article “Severn Ways to Fail Big” depicts a clear picture of what to avoid when making decisions to shift the long-term strategy, and the latter one talks about how to identify the capacities from inside and then match them with the outside market. I find some interesting connections between two articles which enable me to think more on how to balance between coherence and incoherence, and a vivid example also comes into my mind: Chinese smart phone producer Xiaomi.

The power of coherence means that a coherence company will focus on what it does best in making every decision across every business; however, when a company finishes its coherence test and finalize what capabilities it has, it may risk strategic incoherence. This means it can be weak in some segmented market or lose some distribution channels or any else capabilities. For example, in the article, Pfizer gave up its OTC drugs and sold out its confectionary products business as they wanted to focus more on personal health care products and thought this is the future trend. Well, the root cause behind the seven ways in where strategist always make mistakes is to have complimentary capabilities. Strategists decide to merge with another company or roll-up to consolidate many small businesses, or apply the “pseudo adjacencies”, all because they want to shift a part of their capabilities, making the incoherence become coherence. Those seven mistakes are hard to avoid, then the question would be how risky could be when a company finalizes their coherence and inherence, and how to balance them according to the future trend.

I find Xiaomi, a Chinese smart phone producer, as an interesting example. It once won the Chinese market as 17.5% of total market share by using several coherent strategies[1], for example:

·      Compete on the price and customized Android system with high performance;

·      lower the cost by using social media (as their CEO is very good at social media campaign) as the main marketing platform instead of massive off-line advertisements and celebrity endorsements;

·      Increase the profitability by providing further paid content service mainly attractive to male customers who are keen on technologies.

It is clearly here that although Xiaomi achieved its initial success through the above sample coherences, it took the risks of having a low presence in offline channels and in female customers who do not care the high performance so much.

As for now, the risks turn into the crisis. Competitors Oppo and Vivo grew at a whopping 124% and 74% year-on-year this past quarter, while shipments of Xiaomi units decreased by almost 40%.[2] Oppo and Vivo invest heavily in offline channels and the famous reality shows and also invite the most popular male celebrities to endorse their products, which can attract the targeted female groups.

Xiaomi fought back by also increasing their offline marketing spending, as we can now easily spot ads in subways, buses and malls. In the meantime, they still maintain their competitive price and features by developing different models. They also expand to other product categories such as TV box and other emerging markets such as Indian, their most profitable market with 26% of market share.

In short, the key takeaways would be to balance the coherence and incoherence by quickly reacting to the changes, starting shift from the easiest inherence and trying to find the middle ground between old and new changes. Like the ““Severn Ways to Fail Big” article said, definitely avoid being distracted and stressed by the new trends or changes, that lure the strategist to make dangerous decisions. From my point of view, I think Xiaomi is still doing well. After all, it is natural to increase marketing spending and move to adjacent markets when a company grows big. It is an on-going process and worth to be monitored further.

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[1] Dunn, J. (2016, August 16). The Apple of China has hit a wall. Retrieved April 12, 2017, from http://www.businessinsider.com/xiaomi-smartphone-sales-china-market-share-2016-8

[2] Horwitz, J. (2016, August 15). Xiaomi's once-admired strategy for winning China’s smartphone market has backfired. Retrieved April 12, 2017, from https://qz.com/758955/xiaomis-once-admired-strategy-for-winning-chinas-smartphone-market-has-backfired/