Expensive mistakes

Since 1981, 423 U.S. companies with assets of more than $500 million filed for bankruptcy, with total assets exceeding $1.5 trillion. What lessons can we learn from such colossal business failures? According to Paul Carroll and Chunka Mui, authors of "Billion-Dollar Lessons," plenty.

The current emphasis in business literature suggests that everything boils down to execution, but the authors offer an alternative theory: failure stems from bad strategy. Based on their analysis, the cardinal sins of bad strategy include:

  • Synergy – the mere mention of which should cause investors to flee – lauds economies of scale and mutually beneficial business generations, but they almost never materialise; yet, investment-banking fees always do.

  • Financial engineering – such as when clever and well-paid people create a host of complex debt instruments that are then sold to other clever and well-paid people who were similarly misemployed – usually ends with catastrophic results.

  • Rollups, in which someone realises that a particular industry is still dominated by mom-and-pop operations and acquires dozens, if not hundreds, of them, will eventually discover that it is running an unwieldy behemoth.

  • Staying the course occurs too often, with businesses clinging to old strategies or technologies even when they are obviously doomed.

  • Many companies figure they can extend themselves into "adjacent" markets, often by making an acquisition; however, they usually do not understand the new market they have entered.

  • Executives sometimes bet on the wrong technology, resulting in their company going bust.

  • Consolidation is a natural process in a maturing industry, but that does not mean that just because a company can consolidate, it should.

    Moreover, the authors urge executives to pose tough questions when they embark on dangerous courses of action, such as: "Can the strategy withstand sunshine;" Can the strategy withstand storms;" "When does it stop?"

    Source: Daniel Akst, Expensive Mistakes, Wall Street Journal, September 24, 2008; based upon: Paul B. Carroll and Chunka Mui, Billion-Dollar Lessons, Portfolio, September 2008.

    For text: http://online.wsj.com/article/SB122221497204869357.html

    For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

    FMF Policy Bulletin/ 30 September 2008
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