Plenty of lessons can be learned from the glut of businesses that have fallen under the swift sword of a merciless recession. Yet according to authors Paul B. Carroll and Chunka Mui, executives continue to make the same mistakes that defeated their predecessors. In Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years, Carroll and Mui draw on research into more than 750 business failures to reveal the misguided tactics that mire companies. Again and again, companies follow the same wrongheaded strategies-and the costs are astronomical. Between 1981 and 2006, 423 major companies with combined assets totaling $1.5 trillion filed for bankruptcy. Hundreds more took huge write-offs, were acquired in fire sales, or just called it quits. Carroll, a former 17-year veteran of the Wall Street Journal and author of Big Blues, discusses how businesses can learn from others' mistakes.
Knowledge@Emory: In Billion-Dollar Lessons, you focus on failures, when most business books focus on successes. Why take this tact?
Carroll: I covered IBM in 1986 for the Wall Street Journal, and saw that company and others have experiences where things seem to be going along swimmingly. But just a few years later some worried that IBM might even be headed for bankruptcy. In 1993, Mexico was the darling of the developing world, but then its economy ran into problems. We tried to find indications in business books of mistakes that contributed to these problems, but we realized that everyone wanted to write about success. There are thousands of books about successful companies, but virtually none about the lessons to be learned from those that crash and burn.
Knowledge@Emory: What would you identify as the main cause of failure among businesses today?
Carroll: There are a number of mistakes being made, but the number one cause of failure is misguided strategy-not sloppy execution, poor leadership, or bad luck. In Billion-Dollar Lessons, we break the strategic errors into seven categories, including pursuing non-existent synergies; moving into an adjacent market that really isn't adjacent; misguided consolidations; faulty financial engineering; rollups, or buying up businesses to create a monopoly; staying the course instead of adapting; and chasing the wrong technology.
Knowledge@Emory: What is the most repeated mistake you found in your research, and still evident today?
Carroll: The one mistake I see repeatedly today is staying the course. For example, General Motors was convinced it was fine as recently as early this year; their top executive said GM was ready to lead for another 100 years. But, the company has products that aren't exciting to people, and financial issues because of the huge cost of pension systems. Yet executives managed to convince themselves that everything was great. They stayed the course despite the fact that the business model used by American automakers hadn't worked for years.
Another example is newspapers. It was obvious for a good ten years that newspapers were a declining business. But in 2006, the McClatchy Company decided to buy the Knight-Ridder newspaper chain for $4.5 billion, making it the second-largest newspaper publisher in the United States. McClatchy had purchased a newspaper chain nearly twice its size, whose ad sales had declined in some of its largest and oldest markets while costs rose for labor, paper, and interest on debt. There is no way to make money in a declining market, and the mistake was not facing up soon enough that the business model was going away. The guys who sold are a heck of a lot happier than the guys who bought.
Knowledge@Emory: It seems like a great time, in today's business environment, to consolidate. Logically, isn't it the way of world that the strong survive and the weak get eaten?
Carroll: There is a real tendency today to consolidate. Stock prices have been whacked, so it's tempting to buy those companies whose stock prices are down. Also, as industry matures and production becomes more efficient, combining offers the prospect of having the best of both companies: the best people, the best manufacturing facilities, the best processes. There are some good deals out there, but we can learn from past experiences that you still need to be careful, because when companies buy assets, they may also be buying problems.
That's what happened when Daimler bought Chrysler in 1998 for $38 billion. Daimler hoped to increase its purchasing power by closing some plants and by using the combined manufacturing plants more efficiently. Nevertheless, Daimler made critical mistakes by ignoring a slew of problems at Chrysler. The U.S. automaker was saddled with a union contract that included health and pension benefits that added, by some estimates, almost $2,000 more to the cost of each car than Toyota paid for those benefits. And historically, Chrysler had been losing market share. Also, a lack of synergy cost Daimler dearly. Mercedes' elite engineers didn't want to share their technology with the commoners at Chrysler and see the Mercedes brand cheapened. Daimler not only didn't get the benefits it envisioned, but also inherited all of the problems at Chrysler.
Knowledge@Emory: You mention chasing faulty technology as one of seven primary failed strategies. Can you give us an example of a company that has fallen victim to this?
Carroll: Rupert Murdoch paid $580 million cash for MySpace, which is now being overtaken by Facebook. The world of technology moves so quickly that it's hard to figure out where new technology is going. It wasn't clear that everybody was going to defect to Facebook, as both solutions are viable, but polls show that visitors of various ages find Facebook easier to use. Meanwhile, users continue to complain that it's incredibly hard to find someone on MySpace, that since users are free to design their own pages, every page is very different, and that the technology is off-putting to anyone over the age of 25. Mr. Murdoch jumped at an opportunity to be on the cutting edge of a very popular social networking site, but ended up chasing the wrong technology. The result is that he is losing a ton of money.
Knowledge@Emory: What's the devil's advocate process and how can that help us bring business problems to the surface before it's too late?
Carroll: Executives look at mergers and acquisition deals that go bad, yet they expect their deal to end in different results. Leadership needs to get an objective opinion. They shouldn't ask an investment banker for advice because he will want you to do a deal, since it will make him money whether it's a success or failure. The chief executive should bring in outsiders to put the organization through an exercise that gets all the assumptions on the table and considers all of the stakeholders. Everybody has to be involved and you have to consider everything that can go wrong. Then executives can more objectively evaluate the idea. Typically when an executive asks about an idea or proposal, there is already a lot of momentum to move ahead. But if you lay it out and consider all aspects, you get a better vision. Many times, the questions turn out to be so daunting that people fall back and regroup, and try to figure out a different way to proceed. So, the devil's advocate process is not used to kill good ideas, but to thoroughly evaluate a proposal before jumping in.
Knowledge@Emory: What was the biggest surprise you found in your research of 750 business failures?
Carroll: There are no new mistakes, just the same ones being made over and over. The most persistent is the number of failed rollups, and the lack of almost any successful rollups. But we did find a lot of fraud. Say someone goes in and buys up competing funeral homes. Executives say they will integrate processes, but they are driven by revenue. So, the focus becomes buying more business, not integrating. What ends up happening is business leaders underestimate the complexity and challenge of integrating new companies. Fraud comes in when they need currency to buy more companies, because they need a strong stock price or strong debt rating. People have a tendency to say 'well, we know we have a problem here, but we'll fudge the numbers this quarter and make it up next quarter.' But they can't make it up, because the fact is that the problem is a sign of fundamental issues with the business and they still haven't addressed that.
Knowledge@Emory: What's the first thing a manager can do to help their company avoid failure?
Carroll: Set up an informal devil's advocate process by using anonymous surveys. Executives need to agree ahead of time that they will let dissenting voices be heard. In the heat of the moment they may push a bad idea through, so they should get everyone to sign on ahead of the process. Secondly, find a history that fits. Strategies would be better served with a richer use of history, both the internal history of the company and lessons to be learned from others. Use history to illuminate the context in which a decision is being made. Ask, 'How did we get here?' before plunging into, 'What are we going to do?' Also, use history to learn from previous success and failures. Learning from success is easy, but don't be afraid to use failures as lessons in worst practices. Third, force the organization to collectively stare into the abyss and have a clear view of the worst-case scenario. Managers must then do all it can to assess the probability of such calamity, decide if the risk can be tolerated, and make needed adjustments. Have an escalation mechanism to enable vital information to reach decision-makers. These are processes that can help managers bring potentially disastrous problems to the surface before they can bring a company down.