Recreating a Business

Business failure & survival Successful & unsuccessful change

Internal development Alliances Acquisitions

I. Background: Business Failure & Survival

Thousands of dot.coms Recent Business Kmart, Jacobsons, Wards, Failures Owens-Corning, G-I Holdings (GAF Corp) Finova, Federal Mogul Warnaco Midway Airlines & SwissAir Polaroid, Bethlehem Steel Global Crossing Enron WorldCom Adelphia Arthur Andersen 3 Dexter Corp (chemicals), 1767-2000 (break-up)

Worldcom, Inc.* Adelphia Communcations NTL, Inc. Global Crossing Ltd. Kmart Corp. Enron Corp.** Federal-Mogul Corp. Reliance Group Holdings, Inc. Pacific Gas and Electric Co. FINOVA Group, Inc., (The)

Date Assets ($ bln) 7/21/2002 104 6/25/2002 24 5/8/2002 17 1/28/2002 26 1/22/2002 17 12/2/2001 63 10/1/2001 10 6/12/2001 13 4/6/2001 21 3/7/2001 14 10 14 13 10 15 12 15 20 34 36 9

21 Largest Bankruptcies, 1980-2002

First City Bancorp.of Texas 10/31/1992 HomeFed Corp. 10/22/1992 Southeast Banking Corporation 9/20/1991 First Capital Holdings 5/30/1991 First Executive Corp. 5/13/1991 Imperial Corp. of America 2/28/1990 Gibraltar Financial Corp. 2/8/1990 MCorp 3/31/1989 Financial Corp. of America 9/9/1988 Texaco, Inc. 4/12/1987 Baldwin-United 9/26/1983

Current Turmoil
Vivendi AOL Time Warner Lucent Nortel Mobilcom United Airlines
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Business Failure
40,000-80,000 companies file for bankruptcy (Chapters 7, 11, & 12) in the U.S. each year
Sources: bankruptcydata.com; abiworld.org

Thousands more are acquired

Some because they are successful, But many because they are failing

U.S. Business Bankruptcies (Ch. 7, 11, & 12), 1980-2002 Source: www.abiworld.org
90,000 80,000 70,000 60,000 Annual 50,000 40,000 30,000 20,000 10,000 0 Q1 Q1 & Q2 Q1, Q2, Q3

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Many Businesses Fail

Most industry leaders disappear over time
+85% top 100 U.S. firms in 1900 have disappeared +85% top 100 from the 1955 Fortune 500 are gone from the top 100; +80% are out of business +50% of the 1979 Fortune 500 are gone

Why do so many firms exit, by failure or acquisition? Why do a few firms manage to survive over long periods?
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Research on Business Exit

Failure Acquisition
Young firms Mid to older

Small firms Technical change Social change Inert firms (ignore change) Maladaptive firms (respond poorly to change) Ineffective internal change Ineffective alliances Ineffective acquisitions Ineffective global expansion

Any size

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 Kirkstall Forge (UK), ~1151 Sorbonne, 1257 Oxford, 1200s Stora (Swd. paper), 1288 Paris Opera Ballet, 1661 Hudsons Bay Corp, 1670 Caswell-Massey Holdings (soap), 1752 C. Brewer (Hawaii agribusiness), 1826 N.C. Railroad, 1849

Some Survive
Siemens, 1847 Mobil Oil, 1866 Toshiba, 1875 Washington Post, 1877 Shell Oil, 1890 General Electric, 1892 Tulsa Banking/Liberty National, 1895 Potomoc Electric, 1896 Griffith Consumers, 1898 Many brewers & newspapers
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Research on Business Survival

There are some industry tendencies, but the key issues are firm-level (managerial) not external Firms that survive over long periods have learned how to change effectively Survivors use multiple modes of change
Internal development & discrete exchange Alliances Acquisitions

But The changes also raise the risk of rapid failure 12

II. Successful Change

Modes of change
Internal development Discrete exchange/purchase contracts Alliances Acquisitions (Global learning)

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Recreating The Company: Four Contexts for Change

Laurence Capron, Will Mitchell, Joanne Oxley In Financial Times Mastering Strategy: The Complete MBA Companion In Strategy, pp. 384-390, Pearson Education Limited, London, 2000

Mode Context Advantages Risks Processes Incentives Internal Discrete exchange Alliances Acquisitions
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Internal Change
Context Relevant resources exist within the firm Advantages Speed Coordination Protection Risks Irreversible commitments Path dependence Low-powered incentives Processes Cross-functional coordination Incentives Change-focused individual & group rewards

Examples HP used minicomputer experience for ink-jet printers Schwab developed eSchwab from investment skills
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Internal Development Overview

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Discrete Exchange
Context Advantages Risks Limited availability Active market for specific resources Low cost & low confusion via targeted resource acquisition Limited coordination of external exchange Limited protection of ongoing exchanges Processes Incentives External search Search rewards Internal integration Integration rewards

Examples Many firms license in brand names & technology Many firms hire individuals with new skills
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Alliances
Context Advantages Shared costs Quick access to complex resources Hands on interorganizational coordination Partially retractable commitments Bilateral protection Risks Coordination confusion Internal conflict Processes Partner search systems Inter-firm coordination Internal commitment Loss protection Incentives Aligned partners' incentives Aligned internal incentives

Moderate market failure for discrete resource acquisition

Proprietary loss

Corning: lab jv w/ Ciba-Geigy & silicone jv w/ Dow Hitachi: Medical markets expansion via Philips jv 18 Microsoft & Cisco: 100s of alliances

Alliances Overview

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Acquisitions
Context Advantages Extent of resource acquisition Depth of integration Protection Risks High cost Processes Pre-acquisition search systems Incentives Aligned internal incentives of Post-acquisition new employees reconfiguration and existing systems employees

High market failure for resource acquisition

Slow integration Low-powered incentives

J&J: Dozens of medical sector acquisitions Cisco & ABB: Dozens of acquisitions AOL: Time Warner acquisition to obtain content 3Com: Acquired Palm Pilot w/ US Robotics
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Acquisitions Overview

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Global Learning
Involves all modes
With their advantages And their risks (squared)

Examples
Advantages: Carrier, Asahi Glass, Guardian Glass, P&G, CitiGroup, Ryder Logistics, Wal-Mart? Problems: Vickers, Daihatsu, Mitsubishi, Daewoo, Bata, Barings, Kmart, Gateway, Enron, Allied Irish Banks, ABB, Vivendi
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Risks of Change
Change attempts are two-edged
Great if you succeed Costly if you fail (e.g., Xerox, Cendant, Kmart, DaimlerChrysler, Dow-Corning, Warnaco, SwissAir, Midway, Enron, AOL-TW?)

Each change mode risks failure if done badly. But: Inertia is a sure road to corporate death (e.g., American Motors, steel cos.)

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 Change is necessary
For people For firms For societies

Change

Change is risky
For people For firms For societies

So learn how to change well

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Next
C. Jackson

General Electric: Corporate dynamics Preparation

Syllabus questions Identify key financial trends in Welch era Do 3-year financial projections to 2005 What major strategic issues do Charlie Jackson (& Jeffrey Immelt) face?

J. Immelt

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