Stand By for the Same Old Strategy Mistakes

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Certain acquaintances advising large companies report signs of revival among their clientele. Apparently having concluded that the worst is over, corporate types are lifting their heads above the parapet and beginning to feel that old itch to go out there and acquire somebody, or maybe launch a new product line or two. Like all right-thinking people I’m gladdened by this news. But a reading of the history of strategy also leaves me cautious, afflicted with an oh-no-here-we-probably-go-again suspicion that some of the same old mistakes will likely recur. Watch out for one or more of the following coming soon to a company near you:

Sticking with too many businesses, or plunging into still more. As Bruce Henderson, a founding lord of strategy said late in his life, “Nearly all companies I have known have a number of businesses they should not be in.” Private-equity operators are merely the latest, if particularly fervent believers in this gospel. After buying a multi-line company they’ll ruthlessly shed businesses to get down to the ones with a clear competitive advantage. Many a strategy consultant has discovered that Pareto got there before him or her, in that 20% of a client’s operations accounts for 80% of its profits.

While I’m not thrilled with the prospect of the household’s treasured Saab 9-3 convertible being rendered an orphan (or a Spyker, however much it might aspire to same), I applaud General Motors for pruning divisions and marks. Here’s hoping that Ed Whitacre, more a relentless acquirer in his prior life, and his team will keep looking for uncompetitive units to shed. It’s a necessary step if GM is to have the semblance of future.

Consultants who’ve worked with the likes of Johnson & Johnson bear witness to the fact that companies gather the energy/courage to really get going on promising businesses only after they’ve started putting the bad ones out of their misery. A future blog will explain why the Strategic Eye has settled on the Ford Focus as its car of the year. (Not that we’re getting rid of the orphan. They literally don’t make ‘em in Monte Carlo yellow any more.)

Throttling back on the cost-cutting. We all assume that behind all those “value” offerings from McDonald’s, Starbucks, and P&G are some sharp-eyed and –penciled managers who are keeping track of their costs and managing them downward in conjunction with prices. The message to them: Don’t stop thinking about tomorrow, and don’t stop the push for economies.

It is, classically and traditionally, just so much more fun to raise prices. To have and exercise macho “pricing power.”  My reading of the economic evidence suggests that fewer and fewer companies will have that prerogative. As the inevitability of experience-curve effects dictate, and your competitors in China and India will remind you, unremitting cost-cutting needs to become a habit. This usually entails a shift in consciousness. Think of it as a push not just for greater efficiency, but also for simplicity and elegance. Recall the two-word mantra of German engineers, “Fewer parts;” it applies to lots more than machinery. (Perhaps some kind reader might even translate it into the original German for us.)

Pushing too hard for growth too soon. If you’re a publicly held company it might seem that you have no choice but to go for growth if you want to keep the stock price up. It ain’t necessarily so. Lloyds Bank Plc turned out spectacular shareholder returns in the period from 1982 to 1992, its returns mounting faster than its revenues. As its then chief executive Brian Pitman said, “We’re not interested in chasing growth or size for their own sake, but in creating value for shareholders.” Michael Porter makes rather the same point, though coming at it from less of a value-management angle, in his 1996 article, “What Is Strategy?” Coming out of a recession you may be better off investing in the business, strengthening your competitive position, shoring up your profitability, even if the results don’t show up on the top line for a while.

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