How the wrong strategy can destroy a business

If your business is running into difficulties bring in help
as soon as possible. That was the message in my last blog. In this article I
look at some of the strategic failures that drive businesses under. Whilst I’m
not using names or other details from which individual businesses can be
identified, everything I describe here has actually happened; so it’s real.

Consider a manufacturing business selling B2B. Built up over
20 years to reach a substantial turnover, good profits, low gearing and a great
market position, its founders sold the business to the management, with venture
capital support. At this stage, only two things really changed, the “presence”
of the founders was absent and the gearing increased. Initially everything went
well; but the new owners then decided to go for an acquisition. So they bolted
on another very similar business doing much the same, except it was smaller,
not as well run and in a different part of the UK. Funding the acquisition
required further borrowing, interest payments soared, management was stretched
geographically, overheads of the combined business weren’t stripped out quickly
enough and the market took a downturn. BANG.

In my view, The MBO was OK. The problem was the acquisition,
particularly for a new untested management team. The VCs pushed the acquisition
and the management was flattered; but the strategic justification for the
acquisition was never really clear. Were they buying market share? If they
were, they should have stripped out all duplicated costs and as much overhead
as possible to make the combined business as lean as the original business; but
they didn’t. Or were they buying into a new market segment? In this case they
would have managed the new business at arm’s length to allow it to flourish in
a segment they knew less well. However, the new business was in the same
segment as the original business. The problem was that, with no clear
acquisition strategy, they actually bought market share but behaved as if they
were buying into a new market segment. So what we learn from this is that you
don’t acquire a business because you can or because it’s available; it must be
part of a very clear and properly developed acquisition strategy.

Now consider another manufacturing and service business
selling B2C. It was another VC backed MBO. It was a significant player in its
market, operationally efficient, very profitable and growing substantially year
on year. So its business model was robust and working well. Or was it? A market
analysis showed that, although it was growing, its growth was underperforming
that of the market. So, despite its growth, it was losing market share. This
should have been a warning sign that all was not well; and that perhaps the
business model wasn’t as good as the management perceived it to be. But the
warnings were not heeded and then the market turned down. The business
continued to lose market share; but now it was losing share of a falling market;
and its sales went into a steep decline until it had insufficient critical mass
to survive. BANG. The message is clear. Ensure you continually review your
performance in the market, listen to what the market is telling you and act on the
warning signs when they appear.

How about an old established family business founded in the
early years of the 20th Century. It had three relatively diverse
operating divisions with both B2B and B2C activities. Ownership was in the
hands of 13 shareholders spread over two main families. No individual shareholder
had control and each of the two main family groupings had 50% each. Of the 13
shareholders, only 4 had worked in the business, within the ten years before
its demise and the role of CEO had passed from one elderly shareholder, from
one of the families, to another elderly shareholder, from the other family. The
remaining 9 shareholders had no managerial or operational involvement at all
but wanted to be consulted about even low level decisions. Add to all this, the
fact that there had been a long established rift between the two families and
it’s not hard to imagine that the business was suffering from complete inertia.
This may all sound farfetched; but it’s true. The business had become paralysed
and, although a rescue attempt was made, it was too little too late. BANG. This
shows the importance of getting the ownership and management of family
businesses properly structured, with professional management drafted in where
appropriate and with individual shareholders clear about their responsibilities
and the consequences of their actions.

My final example is a manufacturing business selling B2B
that was family owned and which had been reasonably successful over many years. It was concerned that its market was changing and that its products, which were components for the assembly of the finished products, undertaken by its customers, was in decline.

This assessment was probably correct and its long term sustainability
would require some form of diversification. The least risky direction of travel
would probably have been to move progressively towards the final assembly of
the product. The demarcation between its market position, as a components
supplier, and that of its customers as assemblers was already disappearing –
hence its initial problem – so formalising that position and marketing the
finished product under its own brand was a fairly logical step.

However, it withdrew from the supply of components before it
had fully established its new customer network and thereby scored a serious own
goal as its sales fell significantly. But it compounded the problem by
developing several ranges of complimentary products, of which it had limited
experience, and opening new sales channels into new market sectors, of which it
also had very little experience and for which it was not appropriately
resourced. Focus was taken away from the core business; and the new products
and market segments made heavy losses.

The result was that sales continued to decline, even with
the new products and market segments, and the business, as a whole, started to
accumulate losses. Perhaps the saddest thing of all was that, despite the
deteriorating financial performance, the balance sheet was originally strong
enough to withstand some of the early losses and, if the business had come to
terms with the failure of its strategy and changed course, it could probably
have been saved. But it was in denial; and wouldn’t budge. BANG.

The first message here is that any change of strategy needs
to be properly researched, properly planned, properly resourced and properly implemented. In addition, the level of risk needs to be assessed and understood, before embarking on any major strategic change. This business had a hugely ambitious change programme, for which it had neither the skills nor resources and it had little or no understanding of the risks it was running. The second message is, if a new strategy is clearly not working, come to terms with it, remember that the first loss is always the best loss, swallow your pride and change course.

All business failures are different and all I’ve done here
is to give a few examples of businesses that have failed for strategic factors;
but they actually represent some very common themes and highlight some
important principles. Acquisition and diversification strategies involve huge
risks, albeit they can also provide some major benefits; but they need to be
very robust and cannot be handled in a cavalier manner. The market is full of
messages for each and every player; listen to it. Family businesses can fail as
a result of family factors rather than commercial ones.

Next week I’ll be looking at how operational factors can undermine
businesses. But my final message here is to repeat that, “If things are starting
to go wrong bring in help urgently; and even if things are going well, an
external strategic review may well identify potential problems at an early
stage, enabling you to take action before the position becomes serious. Yes
it’s a plug for work for people like me; but people like me can bring an
external perspective, broader based experience and objectivity to managements
that, by definition, tend to be focused on the day to day.

If you want to contact me direct, call me on 07770 816468
(+44 7770 816468 from outside the UK) or email anthony.pratt@imc-consultancy.com

 

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