Learning from the expensive failures of others

Citation

Calandro, J. (2009), "Learning from the expensive failures of others", Strategy & Leadership, Vol. 37 No. 5. https://doi.org/10.1108/sl.2009.26137eae.001

Learning from the expensive failures of others

Article Type: The strategist’s bookshelf From: Strategy & Leadership, Volume 37, Issue 5

Billion Dollar Lessons – What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years

Paul Carroll and Chunka MuiPortfolio, New York, 2008

Good judgment is usually the result of experience. And experience is frequently the result of bad judgment (Robert A. Lovett).[1]

The recently published book Billion Dollar Lessons – What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years by Paul Carroll and Chunka Mui is especially relevant in our risky economic times. Based on intensive research on 750 significant strategic failures,[2] and published in the midst of the 2008 global credit crisis, the book identifies major causes of strategic misadventures in general, and problematic M&A deals in particular, and presents an approach designed to mitigate the risk of future failures.

Some of the failures identified are fairly well known, such as mergers attempted to create synergy. Nevertheless, the authors’ systematic analysis of each failure, and the case studies presented to explain them, provide valuable corporate strategic insight. Additionally, one of the failures identified is less well known but is particularly interesting: “misjudged adjacencies.”[3] Essentially, a misjudged adjacency arises when initiatives attempting to leverage a firm’s core competency fails. Given this definition, one cannot help but think of the insurer American International Group (AIG): once the most successful insurance company in the world the firm was caused to fail, seemingly as a result of grossly underestimating the risk of credit protection that it sold. While the final chapter of the AIG debacle has yet to be written, it seems relatively clear that the firm’s decision to sell credit-based insurance was a clear misjudged adjacency.[4]

Carroll and Mui cite a Bain study indicating that 75 percent of strategic adjacency moves fail.[5] They then present a detailed case study of Oglebay Norton Company to illustrate the particulars of a misjudged adjacency strategy in detail. Oglebay was a regional steel and shipping firm with a 154-year history that initiated adjacency-based strategic moves seemingly to diversify away from core areas, which ultimately led to a bankruptcy filing in 2004 and then to the firm’s being acquired in 2007.[6] Other adjacency-based cases explored in the chapter include regional airline FLYi Incorporated, Xerox, Avon Products, Inc., plumbing supplier American Standard Companies, mainframe leasing company Comdisco, Inc., school bus operator Laidlaw, Inc., and Florida Power & Light. Finally, to assess the risk of future misjudged adjacencies, the authors identified the following “red flags” for executives to consider:

• •

  The prime motivation for an adjacency initiative is to move away from a core competency rather than to leverage or build on one, which is what seems to have occurred at Oglebay.

• •

  The firm does not have the skills necessary to capitalize on an adjacency opportunity, which clearly seems to have occurred at AIG.

• •

  Overestimating the benefits, such as customer demand, of an adjacency-based opportunity.

In the first part of the book, each chapter thoroughly explores a strategic failure cause that the authors’ research identified. The second section of the book presents a solution for avoiding future strategic failures, a “Devil’s Advocate Review.” Named after a former practice of the Catholic Church that argued against sainthood for candidates, a strategic Devil’s Advocate Review is essentially designed to argue “the ‘no’ side of a strategic initiative.”[7]

As authors Carroll and Mui correctly observe, arguing the “no” side of an initiative is something that the greatest managers in history, such as Alfred Sloan of General Motors and Thomas Watson of IBM, frequently required before they made a decision. However, arguing aggressively against an initiative can generate career risk if it is not conducted in a structured and careful way. To address this concern, the authors recommend Devil’s Advocate Review best practices that include granting license to the person performing the review.[8]

Another way to avoid the career risks of an internal Devil’s Advocate Review is to conduct an independent review utilizing select outside experts. This alternative generates risks too, of course, so the authors presented the following guiding principles to mitigate those risks:

• •

  Establish a clear and focused devil’s advocate review charter.

• •

  Carefully construct and organize the devil’s advocate team.

• •

  Focus on the strategic initiative that is the subject of the review, not on the process that produced it.

• •

  Deliver questions, not answers.

• •

  Close the loop on all questions raised during the review so a decision can be made.[9]

Billion Dollar Lessons provides a wealth of insights gleaned from the strategic misadventures of corporate leaders. Corporate strategists would be wise to learn from their painful mistakes. To explore further lessons, Strategy & Leadership spoke with the authors of this timely book.

Strategy & Leadership: What are the Billion Dollar Lessons that strategists can put to use immediately in the current distressed global economy?

Paul Carroll and Chunka Mui: Warren Buffett says his guiding principle is to “be fearful when others are greedy and greedy when others are fearful.” There’s certainly plenty of fear in the economy right now, and thus plenty of opportunities to get greedy. Greed, however, does not necessarily translate into wealth. We think the teachings from Billion Dollar Lessons are critical for companies to apply as they try to capitalize on today’s market turmoil; in other words, making sure greed does not send them down the wrong path, as appears to have happened with Bank of America’s seemingly hasty acquisition of Merrill Lynch.

S & L: You indicated that a common feature of strategic failures is an underestimation of “the complexity that comes with scale.”[10] How does this work in practice?

Carroll and Mui: While it is perfectly reasonable to argue for some economies of scale, or some level of overhead costs dropping as a percentage of the total business increases, companies often do not account for the fact that when they double in size they aren’t just doing precisely the same thing twice as many times. For example, companies may be dealing in different markets, with different customers, different sales channels, and so on. The extra complexity that comes with scale is what tripped-up US Air’s consolidation strategy after it purchased Piedmont.

S & L: Your book explains how complexity is also an issue in cases of misjudged adjacencies. Could you comment on the role that complexity and adjacency risk played in the current economic crisis?

Carroll and Mui: Our research showed that companies often mismanage the challenges of new businesses, especially businesses that they wrongly deem to be adjacent to their existing ones. This explains, in part, the current crisis. For example, Merrill Lynch, Citigroup, AIG, and others pushed into new businesses built on complex derivatives that they clearly did not understand, leading to their downfall and widespread collateral damage. But this was not the whole story. Numerous other firms like Countrywide and Lehman Brothers should have identified the risks of such behavior, but instead repeated the same mistakes that brought down companies like Green Tree Financial and Conseco in the 1990s (as we describe in chapter two of our book). They were not overwhelmed by complexity; rather, they were destroyed by ill-conceived strategies.

S & L: How do the lessons of your research complement current strategy work?

Carroll and Mui: Our hope is that awareness of common strategic mistakes can help managers avoid them. At the same time, one of the most important lessons from our book is that the strategy process is very fallible, and that being aware of the potential problems is not necessarily much insurance against repeating them. We think companies have to institute safeguards against internal process failures that make even the best organizations susceptible to bad strategies. In addition to whatever internal safeguards are used, we believe that whenever an organization embarks on a high-stakes strategy, it needs to subject that strategy to a thorough independent devil’s advocate review.

Notes

1. 1.

   As quoted by Paul Carroll and Chunka Mui, Billion Dollar Lessons – What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years (NY: Portfolio, 2008), p. 272.

2. 2.

   Ibid, p. 2.

3. 3.

   Ibid, Chapter 5.

4. 4.

   AIG was predominantly a property and casualty insurance company that also had significant life insurance components. For an interesting study of firm predating its current problems see Heidi Nelson and Kenneth Froot, American International Group, Inc., HBS case services #9-200-026, December 6, 1999.

5. 5.

   Carroll and Mui (2008), cited above, p. 117.

6. 6.

   Ibid, pp. 118-123.

7. 7.

   Ibid, p. 232.

8. 8.

   Ibid, p. 234.

9. 9.

   Ibid, p. 261.

10. 10.

    Ibid, p. 191.

Joseph Calandro JrEnterprise Risk Manager of a global financial services firm and a Finance Department faculty member of the University of Connecticut (joseph.calandro@business.uconn.edu).