7 ways to fail big: Lessons from losers
An analysis of the biggest business failures of the past quarter century, conducted by two consultants, reveals that nearly half of them could have been avoided.
In most cases, the culprit was flawed strategy, not inept execution, which usually gets the blame. Had their leaders looked at history, they may have saved hundreds of billions of dollars.
The seven pitfalls:
1. “We’ll have synergy.” The idea that you can grow by joining another firm with complementary strengths is usually a mirage. Disability insurers Unum and Provident in the group and individual markets, respectively, thought they’d be able to sell each other’s products. Turns out they served different customers through different models, with no incentive to cross-sell, which they should have been able to figure out beforehand.
2. Flawed reasoning. If subprime mortgage lenders had paid attention to Green Tree Financial, they might have sensed danger. In the 1990s, Green Tree used aggressive accounting to offer 30-year mortgages on mobile homes, which depreciate rapidly. Conseco, an insurer that bought Green Tree for its rapid growth, paid $6.5 billion and wound up taking a loss of almost $3 billion. It went broke in 2002.
3. Throwing good money after bad. Redoubling investment in your current strategy is itself a strategy of sorts. Eastman Kodak turned away from the alarm triggered by digital photography, which the company had identified as a threat as early as 1981. Kodak couldn’t detach itself from film—the lore or the fat margins. It paid dearly.
Even before the recent market selloff, Kodak lost 75% of its stock value over a decade.
4. “We can do that.” Adjacent-market strategies had worked for Jack Welch at General Electric. Now declining steel mill Oglebay Norton wanted to diversify. Limestone looked good because the company was already hauling it for use in steel production, so Oglebay started buying quarries, but didn’t understand the business. For one thing, shipping methods differed. Oglebay went bankrupt in 2004.
5. The wrong technology. Motorola’s satellite phone division, Iridium, started out as a legitimate response to a market need. However, over time cell phones outstripped the technology. Often blamed on bad execution or marketing, this failure really happened because Motorola was stymied on its own technology and blind to the fact that no one was going to lay out $3,000 in up-front costs, plus monthly charges, for a phone as big as a brick.
6. Hanging on. As industries mature, they consolidate. Although there’s some glory in being the buyer, it’s wiser to sell. Discount retailer Ames tried to compete with Wal-Mart by buying other rusty retailers without considering that none of them would help it compete in what mattered: back-office systems and supply chain. Ames bought G.C. Murphy, Zayre and Hills department stores before dying in 2002.
7. Roll-ups. The idea here is to take lots of small firms and roll them into a giant that will increase buying power and visibility while lowering capital costs. Instead, roll-ups seem susceptible to fraud: MCI WorldCom, Philip Services, Westar Energy and Tyco are some examples. Buyers also seem to overpay and can’t sustain their fast acquisition rates. Long story short: Let’s not roll.
— Adapted from “Seven Ways to Fail Big: Lessons from the most inexcusable business failures of the past 25 years,” Paul B. Carroll and Chunka Mui, Harvard Business Review.
