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

299 Pages·2009·2.63 MB·English
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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 PORTFOLIO Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi - 110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, 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 Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book. The scanning, uploading, and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law. Please purchase only authorized electronic editions and do not participate in or encourage electronic piracy of copyrightable materials. Your support of the author’s rights is appreciated. http://us.penguingroup.com 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

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