From The Mistake Bank: Sue Pera on the downside of expansion

From The Mistake Bank:

This is the first of a series of interviews with businesspeople about mistakes they've made in their careers. If you'd like to be part of this series, email me at john (at) caddellinsightgroup (dot) com.


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Sue Pera is the owner of the Cornerstone Coffeehouse in Camp Hill, PA. Visit them on the web at http://thecornerstonecoffeehouse.com. (Disclosure: I usually hang out here on Friday mornings, when the cleaners come to do my office. It's a great place; if you happen to find yourself in Camp Hill, you must stop by.)

Tags:
Mistake Bank, mistakes, narrative, customer relationships, expansion, growth, entrepreneurism

Buyer's hubris harms revenue growth from acquisitions

Accenture recently released a report entitled “Leveraging Sales & Marketing to Maximize the Value of Mergers and Acquisitions.” This report quantifies what many people have felt about M&A—as far as growing revenue long-term, it’s not a successful strategy. Among Accenture’s findings was that while 56% of companies studied grew faster than their industry groups in the two years before they made a large acquisition, only 33% duplicated that feat in the two years following the year the deal closed.

The report lays out reasons this is so: disruption to customers, loss of key customer-facing staff, unexploited opportunities to market to new customers. (They also provide suggested remedies—they are consultants, after all.)

After living through three significant acquisitions (being bought twice, buying once), I believe there is a deeper reason that drives what Accenture observed—buyer’s hubris.

In spite of rhetoric like “merger of equals,” “best of breed,” and so on, in my experience buyers develop a mindset that they are superior to the company they purchased—smarter, with better products, processes, etc. (Otherwise, perhaps the shoe would be on the other foot!) This is especially true when the merger consolidates the businesses of two once-competing companies.

I recall pleading with one acquirer to retain the name of our company’s flagship product—it had brand value and keeping it would signal to the large customer base that the product itself wouldn’t be retired. At first, the integrated marketing group (led by the buyer’s VP of marketing) thought this was a crazy idea. But, after much discussion, the group reluctantly agreed. That acquiring company no longer exists, but the product—with that old name—lives on and supports many of those same customers.

Buyer’s hubris extends to the acquired company’s customers. Rather than being carefully cultivated, they are frequently taken for granted. (What they need is to be resold on the new company. This is rarely done, in my observation.)
Similarly, the people who support those customers are seen as suspect. Those people may have competed—in some cases, successfully—against the buyer’s sales team. (Perhaps sour grapes is a reason the customers are not treated as carefully as need be.) At any rate, it’s difficult to trust former competitors. As a result, they are not welcomed; their opinions are not solicited.

When consolidating a market, real humility on the buyer’s part is required. There’s a lot of human nature obstructing that, and perhaps it’s unrealistic to think hubris can be overcome. Until that day, however, we’ll continue to read studies documenting poor growth results from mergers.

(Thanks to New York Times Dealbook for the pointer to this research.)

Related posts:
Ultra-competitive mindset costs dealmakers

Tags:
acquisitions, integration, psychology, growth

Does your business suffer from the "usual suspect" syndrome?

I've seen it at several places. It usually strikes fast-growing startup companies and becomes particularly painful as they grow past 200 employees. A small group of people emerges with either (1) authority or (2) key subject matter expertise. As the company grows, the group is stretched thinner and thinner, such that they appear to be invited to every meeting and involved in every decision of consequence. Without their input, nothing happens.

The usual suspects then are so busy that they don't have time to delegate or train people so that they can share the workload. Meanwhile, the company continues to grow, decisions stagnate, excellent people leave for lack of opportunities or simply out of frustration. Finally, there's an agonizing resolution, frequently as a result of a forced management change or sale/merger.

The suspects are exhausted, empty, and no longer needed.

Have you ever seen this happen?

Tags:
management, growth

Mistake Bank featured in the Ning blog

Ning is the platform that hosts The Mistake Bank and more than 300,000 other social networks (!). In the Ning blog, they feature a few networks each day that use Ning. And last night, they posted a nice writeup of The Mistake Bank. Did you ever notice this: when others discuss an idea you have, they often explain it more clearly than you can! Please check it out.

And if you're interested in starting a social network, for a class reunion (like my wife did) or any other purpose, I'd highly recommend Ning. It's highly functional and exceptionally easy to set up, maintain and customize. (Note: I have no connection with Ning other than as a user of their software.)

Ning was founded by Gina Bianchini and Marc Andreesen. Andreesen previously had founded Netscape and Opsware, two highly successful startups. I think he knows something about growing successful companies.

Related Post:
"The Breakthrough Company": wise advice for the emerging entity

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Mistake Bank, social networking, technology, entrepreneurism, growth

"The Breakthrough Company"--wise advice for the emerging entity

I was prepared to dislike "The Breakthrough Company." The dust jacket is a garish silver. The author photograph reminded me of Svengali, and the first line of his bio read, "At the age of twenty-six, Keith R. McFarland was named associate dean of one of the nation's leading business schools." And continued, "He and his family live just downhill from the ski lifts at Snowbird, Utah."

This was a cover that screamed at you: THIS IS IMPORTANT, VITAL, DON'T MISS IT. (I mean, how could you not listen to someone who lives just downhill from the ski lifts at Snowbird?)

But you can't judge a book by its cover, nor its author bio, and "The Breakthrough Company" is a serious, substantial and useful effort. McFarland and his colleagues at McFarland Strategy Partners set out to give the "Good to Great" treatment to a different segment of companies--those that graduated from entrepreneurial status (around $10 million in revenue) to substantial size ($250 million to upwards of $1 billion).

They surveyed 1500 companies and from those picked the nine best performers, then reverse-engineered these companies to settle on six characteristics that stood out. And while I've posted before on the limitations of this type of "best practice" approach, it's to McFarland's credit that he also plays down the value of copying the template: "This is not intended to be a recipe book."

Also, the companies he is aiming at helping are still in their formative stages. A company with 250 people can still be shaped. One with 5,000 is much harder to reorient.

And with that, the characteristics McFarland highlights--e.g., "crowning the company," or putting the company's needs and priorities above the founder's--are important, and rare in companies big and small.

My favorite chapter is titled, "Enlisting Insultants," in which McFarland discusses how vital it is for growing companies to have people who can give voice to the minority opinion--either critiquing the conventional wisdom or championing an unpopular initiative. This view echoes those of Gary Hamel in "The Future of Management" as well as Traci Fenton's efforts to promote organizational democracy.

As might be apparent, McFarland can also turn a phrase. The book is well-written, with lots of great stories from the companies' leaders. And from its prominent position in my local Barnes & Noble's business section, it's probably selling a few copies.

In sum, there's a lot to learn from on an important subject. And don't let the cover bug you--the dust jacket is easily removed.

Related:
On Gary Hamel's "The Future of Management"
Shop Talk Podcast #3 - Traci Fenton on democratic workplaces

democracy, leadership, management, entrepreneurism, growth, reading list

Companies stall because they don't listen to customers

The Stall Points Initiative is an effort by the Corporate Executive Board, a business research group, to pinpoint why companies suddenly stop growing, then stagnate or decline for years thereafter. If you think that's a rare trend, think again: according to CEB, 87% of the companies they studied (all at one time members of the Fortune 100 or similarly sized non-US companies) had stalled once or more.

Matthew Olson, Seth Verry and Derek van Bever of the CEB describe their work in the March issue of the Harvard Business Review ("When Growth Stalls" - free link). The authors contend that most of the reasons for stalls are within the company's control (factors such as regulatory actions, macroeconomic issues, political shifts are responsible for only 13% of the stalls).

CEOs are advised to watch for "red flags" to see if their companies are headed for a stall. Here's the list:

• Core assumptions about the marketplace and company capabilities to exploit it are undocumented
• Market definition boundaries are out of date
• Definition of core market is out of date
• Infrequent testing of customers' valuation of product attributes
• Ineffective translation of customer insights into products
• Core customers no longer are willing to pay a premium for the product

Five out of the six reasons directly point to an inability to listen carefully to the market and compose a realistic picture of the strengths and weaknesses of the company's products.

So why do stalls happen? Companies point inward and lose contact with customers. Their internal focus leads them to overestimate their strengths and show overconfidence in their offerings.

Companies need to constantly question their value propositions to customers (this strategy approach can help) and guard against falling in love with their products. A little humility, a lot of listening, and never being satisfied.

strategy, growth, Harvard Business Review

A salesperson's lesson on growth

A number of years ago, I was in an internal training class with some of my colleagues. One guy in particular was a salesperson I had always thought of as being a bit shallow. Anyway, during a break in the class, I got into a discussion with him about the effect of Home Depot and moving commercial development out of city centers, putting Mom and Pop hardware stores out of business. And in the discussion he was, to my surprise, against a lot of that development. I was saying, you know, wasn't it a good thing that due to these superstores things could be cheaper and that people could buy more things? And I remember him saying in response: why do things need to be cheap, why do we need more things?

It really shocked me, because my assessment of him was way wrong. I had definitely not pegged him to be such a thoughtful person. I've remembered those words for more than 10 years and as I reflect on it now, his response and his thinking had a lot of the Buddhist in them.

Voice-to-Screen messaging - powered by SpinVox

retail, growth, pricing, spoken post

Young fashion designers show uncommon wisdom in business matters

There are lots of reasons to be impressed by the designers at Proenza Schouler, profiled in today's Wall Street Journal (link - $$). I'm most impressed by their business savvy--specifically how they have been able to grow their business from a self-funded startup yet retain control, a difficult task in the fashion industry.

The group, consisting of designers Jack McCollough and Lazaro Hernandez and CEO Shirley Cook (ages 29, 29, and 27, respectively), has cut a series of deals that stand out for their vision and good sense. I'd also say that the group has been willing to grow more slowly than others in order to maintain control. (In other words, they haven't gotten greedy.) Here are some examples of what they've done to date:

1. Created their first collection with money borrowed from their parents. That collection won a student competition at Parsons School of Design and was bought by Barney's.
2. Created a brand using their mothers' maiden names so that they couldn't lose control of their own names. (Think Joseph Abboud wishes he'd done that?)
   
3. Got venture capital to produce a second collection.
4. Won a contract from Target for a limited-edition collection. Used the Target money to buy out their VC.
5. Most recently, accepted $3.7MM of investment from the Valentino Group for a 45% stake in the company. The Valentino investment gives the group access to more advanced production facilities and Valentino's distribution channels in addition to capital.

These would seem like smart moves for executives twice the age of the Proenza Schouler team. That they could make such wise decisions so early in their careers is truly remarkable.

(Photo: a dress from the Proenza Schouler Resort 2007 collection.)

fashion management investment alliances growth entrepreneurism Wall Street Journal