Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Ye ars

299 Pages·2009·2.63 MB·English

by  Paul B. Carroll, Chunka Mui

Table of Contents

Title Page
Copyright Page
Dedication
Introduction

PART ONE - Failure Patterns

ONE - Illusions of Synergy
TWO - Faulty Financial Engineering
THREE - Deflated Rollups
FOUR - Staying the (Misguided) Course
FIVE - Misjudged Adjacencies
SIX - Fumbling Technology
SEVEN - Consolidation Blues
Coda

PART TWO - Avoiding the Same Mistakes

EIGHT - Why Bad Strategies Happen to Good People
NINE - Why Bad Strategies Happen to Good Companies
TEN - The Devil’s Advocate
ELEVEN - The Safety Net

Epilogue
Acknowledgements
Research Notes
Notes
Recommended Reading
Index

Praise for Billion-Dollar Lessons

“This book identifies the seven strategies that sound safe, but have tripped up
some of the smartest leaders of otherwise successful companies. Learn from
their expensive mistakes.” —L. Gordon Crovitz, former publisher, The Wall
Street Journal

“It is a lot easier to talk about our successes than our failures. Carroll and Mui
have written a book that helps us get serious about learning from our failures, as
painful as it may be. And they give us some good ideas to help avoid future
failures.”

—Michael Moskow, vice chairman and senior fellow for the Global Economy,
The Chicago Council on Global Affairs

“Billion-Dollar Lessons is a must-read for any manager contemplating a game-
changing investment. It will help ensure winners, not losers. It will help create,
rather than destroy value.”—Adam Gutstein, CEO, Diamond Management and
Technology Consultants

“Billion-Dollar Lessons provides a set of tough questions and ideas to help us
avoid making big strategic mistakes. Perhaps the biggest question is whether we
choose to learn from others’ mistakes.” —Daniel Roesch, director, General
Motors Strategic Initiatives

“Mui and Carroll have developed a methodology to keep your business healthy.
Through extensive research on real world companies, the authors have identified
seven strategies that will likely make your business sick. Then they tell you, in a
compelling and accessible way, how to avoid them like the plague.”

—Martin Nisenholtz, senior vice president, digital operations, The New York
Times Company

“This book draws you in with engaging stories of smart experienced leaders
delivering spectacular failures. The insights and learning are essential for every
modern manager and leader who wants to win in the twenty-first century.”

—Toby Eduardo Redshaw, global CIO, Aviva

“Paul Carroll and Chunka Mui show how to avoid the catastrophic strategic
failures that have laid low so many companies over the past few decades. More
important, they point the way for making decisions that will help you confront
the reality of your future business. Reading this book is like having a wise
strategy consultant at your side every step of the way.”

—B. Joseph Pine II and James H. Gilmore, coauthors of The Experience
Economy and Authenticity: What Consumers Really Want

“A fascinating compendium of well researched corporate screw-ups and how to
avoid, learn from, and mitigate against them.”

—Gordon Bell, principal researcher, Microsoft Research

“Replete with thoroughly researched, well known and not so well known,
entertaining but sometimes horrifying stories and anecdotes, Billion-Dollar
Lessons should be mandatory reading for every senior manager and public
company director.”

—Mel
Bergstein,
chairman,
Diamond
Management
and
Technology

Consultants

“Read and learn about the costly mistakes of others; it could save you
tremendous time and money. In fact, Billion-Dollar Lessons might yield the best
return on any time investment you will ever make.”

—Vince Barabba, general manager (retired), corporate strategy and knowledge
development, General Motors Corporation

“As someone who has had many failures and learned some of my most
significant business lessons from them, I gained business insights from the
‘billion dollar lessons’ Paul and Chunka detail in their book.”—Robert Pasin,
CEO, Radio Flyer

“A lot of huge business mistakes have been made over the years, and it sure
makes sense to try not to reproduce the mistakes of others. Why not cash in on
the tuition others have paid to be educated? There is a huge amount we can learn
from these stories.”

—David S. Pottruck, chairman, Red Eagle Ventures

“You’ll want to read this book more than once in order to assimilate both the
insight into human behavior and the wisdom it offers to avoid costly mistakes of
your own.”

—Kim Volk, president and CEO, Delta Dental Plans Association

“Carroll and Mui have trumped conventional wisdom with two new ideas: to
increase our odds of success, we need to study failure, and even the most intense
focus on execution doesn’t deliver if you have a failed strategy. A must-read for
executives who intend to aggressively build their companies.”—Glen Tullman,
CEO, Allscripts

“An engaging guide to improve the quality of both ‘bet the company’ decisions
and everyday ones. Drawing insights from notable flawed decisions, Carroll and
Mui identify practical steps to counter the forces of human nature, which are
powerfully arrayed against rational analysis.”

—M. Carl Johnson, III, senior vice president and chief strategy officer,
Campbell Soup Company

“Chunka and Paul expose the lack of critical analysis and thinking that sits
behind many of the strategic clichés we use to justify big deals. If you are
considering a big strategic move, read this book first.”—Rick Leander, chief
strategy officer, The Clearing House

“Billion-Dollar Lessons rigorously analyzes the biggest failures of the past
decades and delivers not only practical advice on what to avoid, but also invents
the ‘devil’s advocate’ process—which you can implement to stop your own
organization from happily going off a cliff.”—John Sviokla, vice chairman,
Diamond Management and Technology Consultants

“Billion-Dollar Lessons provides an outstanding framework for creating positive
dissent and asking the best questions. All leaders want to do great things;
hopefully this book will help smart leaders to cast a critical eye on some of our
great ideas and avoid hubris.”

—Jennifer F. Scanlon, vice president and CIO, USG Corporation

“If you believe that those who do not study history are doomed to repeat it,
Billion-Dollar Lessons will help you learn from the strategic mistakes made by
well-respected business leaders in the past. Time and time again, world-class
companies execute flawed strategies. Remember the definition of insanity:
Doing the same thing again and again but expecting different results.”—Eric
Sigurdson, leader, CIO Practice, Russell Reynolds Associates

“Without question, many M&A deals are driven by haste, ignorance, and hubris,
others by real insight and intelligence. Billion-Dollar Lessons gives wise council
to those who can create or destroy hundreds of millions of dollars of net worth
with the stroke of a pen.”
—Michael Boyle, senior vice president, CIO AF Technology, Allstate Financial

“A thoughtful account of how egos have obscured good business judgment. The
business world could better use history and facts as a guidepost.”

—John Chu, senior vice president, Hartford Financial Services Group, Inc.

“Growing and managing successful companies is an exercise that is grounded in
pattern recognition. Billion-Dollar Lessons is an amazing collection of case
studies—patterns—demonstrating the many ways in which executives and their
companies have derailed.”

—Doug Collom, partner, Wilson, Sonsini, Goodrich & Rosati

“Having been involved in many transactions during my career, I found the
analysis and conclusions to be very accurate, and a must-read for any person
continuing to do transactions.” —Morgan Davis, CEO (retired), White
Mountain Insurance Company

“An important contribution to understanding the causes of major corporate
strategic failures of the last few decades, complete with a pragmatic approach to
avoid these strategic mistakes.”

—Bernie Hengesbaugh, chairman and CEO (retired), CNA Financial
Corporation

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England First published in 2008 by Portfolio, a member of Penguin Group (USA) Inc.

Copyright © Paul B. Carroll and Chunka Mui, 2008

All rights reserved

Cartoon by Henry Martin. © The New Yorker Collection 1979 Henry Martin from cartoonbank.com.

All rights reserved.

eISBN : 978-1-59184219-4

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From Paul:

To my wife, Kim; my daughters, Shannon and Clare; and my parents, Charlie

and Yvonne

From Chunka:

To Beth, Kai, and Zoë, with love

Introduction

Can Fatal Strategic Flaws Only Be Recognized in Hindsight?

International Business Machines Corporation lore says that, in the early 1960s,
CEO Tom Watson Jr. summoned to headquarters an executive who was
responsible for a venture that lost $10 million. Watson, whose fierce temper was
legendary, asked the man if he knew why he’d been called in. The man said he
assumed he was being fired. Watson responded: “Fired? Hell, I spent $10
million educating you. I just want to be sure you learned the right lessons.”

Corporate America has spent hundreds of billions of dollars producing

educational failures in recent decades. But executives shudder at the very word
“failure,” so people rarely try to learn any lessons from them—unless that lesson
is how to make sure someone else catches the blame. As we’ve seen with the
subprime mortgage crisis in 2007 and 2008, which mimics earlier financial
crises, businesses keep making similar mistakes, over and over again.

We propose to help executives and investors learn the lessons to be had from

failure. Organizations involved in life-and-death situations—such as hospitals,
airlines, and the military—routinely do after-action analyses that help them keep
from repeating catastrophic errors. We think it’s time managers did likewise.
And executives need to learn not just from their own experiences, but from the
lessons financed by others, as well. Why spend $500 million, and a decade of
your life, repeating someone else’s mistake when you could learn to avoid it by
spending a few hours with a $26 book (less on Amazon)?

Business books routinely look at successes and suggest how readers can

emulate them. But no one looks at failures and lays out methods for how not to
emulate them. Imagine a sports team that decides it will only play offense and
not play defense. It’s time executives focused some of their attention on defense.

To glean the lessons from failure, we undertook an extensive research effort to

examine the most significant business failures of the past quarter century. We
defined failure as writing off major investments, shuttering unprofitable lines of
business, or filing for bankruptcy. Working with leading information vendors,
we built a comprehensive database of more than 2,500 such failures suffered by
publicly traded companies in the United States. We did a literature search to look
for failures that didn’t show up in the vendors’ databases—for instance,

companies that sold themselves before having to account for a major problem.
Then, using various screens, we narrowed the list to the 750 most meaningful.
Aided by a team of researchers, we spent more than a year poring over the data.

The extent of the failures was stunning. Since 1981, 423 U.S. companies with

assets of more than $500 million filed for bankruptcy. Their combined assets at
the time of their bankruptcy filings totaled more than $1.5 trillion. Yes, that’s
trillion, with a t. Their combined annual revenue was almost $830 billion. Some
of these companies went into bankruptcy multiple times; in other words, they
couldn’t even learn from their own mistakes.

Over those twenty-five years, 258 publicly traded U.S. companies combined

for more than $380 billion in write-offs. Sixty-seven companies had combined
losses from discontinued operations that totaled almost $30 billion.

What caused all those flameouts? The current emphasis in business literature

suggests that everything boils down to execution. Generals say a battle plan
never survives the first contact with the enemy, and business executives have
much the same attitude. They reason that they can only do so much planning.
After that, they have to plunge ahead, hoping to execute better than the other guy
and maybe catch a bit of luck. Yet, despite all the books written about how to
improve performance by making individuals and companies more effective, we
found that failures often don’t stem from lack of execution. Nor are they due to
timing or luck. What we found, instead, is that many of the really big failures
stemmed from bad strategies. Once launched, the strategies were doomed to fail,
and these failures probably could not have been prevented by even spotless
execution—unless the implementers were licensed to kill the strategy itself.

The situation is rather like the Charge of the Light Brigade. Faulty intelligence

and vague orders contributed to the disastrous decision of the British to charge
overwhelming Russian artillery in the Crimean War. Once the charge was set in
motion, disaster was inevitable—“Into the valley of Death / Rode the six
hundred,” as Alfred, Lord Tennyson put it.

With strategy often to blame, the next question is: Are doomed strategies

avoidable? Or are the fatal flaws only recognizable in hindsight?

To answer this, we sifted through the database to eliminate cases where failure

stemmed from poor execution or from environmental factors beyond
management control. For instance, we didn’t ding airlines for the plunge in
traffic following the terrorist attacks on 9/11. Still, we found hundreds of cases
where a strategy led directly to a major failure. We then did a root-cause analysis

into those cases. We reviewed financial filings, business and popular press
reports, and assessments from industry analysts to understand the failures. We
used numerous techniques to avoid giving ourselves the benefits of hindsight—
looking at what was written at the time, seeing whether everyone in an industry
was making the same mistake or whether our failure case stood out, and so forth.

What we have found is that as many as 46 percent of the failures could have

been avoided if companies had been more aware of the potential pitfalls. A
significant percentage of the other failures, the ones that we didn’t classify as
avoidable, could have been mitigated if companies had seen warning signs and
had proceeded more cautiously.

Looking at the avoidable failures, we identified repeating patterns, where

failures across multiple industries were variations on a theme. We then drilled
into the repeating patterns, or failure modes, to draw the lessons about the
common problems and ways that those problems might be averted.

What we found is that failures tended to be associated with one of seven types

of strategy. Failures could certainly happen for other reasons, but if a company
followed one of these seven strategies it was far more likely to flop. Those seven
strategies are:

• Synergy. This “whole is greater than the sum of the parts” approach often

led companies to overestimate the benefits from a merger. Synergy fades
in and out of vogue, even though studies have found that companies have
only about a one-in-three chance of reaching their goals for revenue
gains driven by synergy. We found dozens of major examples—from the
granddaddy of them all, AOL Time Warner, on down—that let us
identify the warning signs that a given synergy strategy is based on
smoke and mirrors.

• Financial engineering. We don’t mean fraud. We’re talking about

legitimate, albeit aggressive, ways of using accounting or financing
mechanisms. The aggressive approaches did sometimes lead to fraud
because they were addictive. Once companies started, they couldn’t stop.
They had to keep increasing the aggressiveness until they crossed the line
into illegality. But even companies that thought they were merely being
aggressive sometimes found they were constructing a fairy tale—such as
the major lender that generated a huge amount of business by offering
thirty-year loans on assets with a useful life of only ten to fifteen years.

• Rollups. Much to our surprise, we didn’t just find tons of examples of