NCPA - National Center for Policy Analysis


September 25, 2008

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 materialize; 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 realizes 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.

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