How to Save a Company from Financial Failure

Written By Ben Gilad

All the financial maneuvering in the world will not save a company whose strategy does not fit reality. Implementation is not the problem, adaptation is. Protecting revenues from currency fluctuations is an irrelevant remedy when the disease is the disappearance of revenues themselves. While P&G lost $157 million in a financial debacle in 1994 (derivative trading), P&G’s stock lost more than half of its value in the stock market during the first three month of 2000, leaving the shareholders $35 billion poorer. The decline of P&G’s market value was the result of years of slipping in its various consumer product markets. Kimberly-Clark was giving P&G a run for its money in diapers with the Huggies brand. Crest was being beaten badly by Colgate-Palmolive’s Total. Private labels and local brands in household cleaning products and processed foods have risen in market share over the years as global brands weakened. Unilever and L’Ore’al were gaining over P&G in cosmetics and hair care. Its pharmaceutical division was a nonplayer in the industry of giants. Its early technological lead, which was evident in the 1960s and 1970s, evaporated in all but a few categories.

In short, P&G’s strategy, which had hardly changed since the 1960s, did not fit P&G’s market leadership aspirations given the much tougher competitive environment, and investors—seeing that the management of P&G was not responding—devalued the company accordingly. In comparison, the financial debacle mentioned above can be justly seen as immaterial. Ironically, during the 1990s P&G spent much more time and corporate thought on managing its financial exposure than on managing its growing industry dissonance.

Adjusting strategy to changing conditions, especially those that require sacrificing current profits for long-term profits is the most difficult of tasks, especially in very large companies. It requires executives to balance the protection of their existing assets with the need to stay ahead in the game. This is especially clear in late stages of market change, when incumbents fight tooth and nail to preserve their customers. However, if one can feel sympathy toward the dilemmas of management in reacting to change late in the game, what should not be acceptable to both management and shareholders is companies that do not have an effective system in place to identify dissonance risk signs early enough to try and make a difference.

Shifts in industries and markets that give rise to industry dissonance are not always clear, especially early on. Often the signals are ambiguous, hard to distinguish from mere “white noise.” White noises are the daily changes and developments in every business’s markets. Industries are dynamic. Markets are dynamic. Who knows when an innocent datum showing a rise in data transmission is a trend that will explode to exceed voice transmission and annihilate Lucent, or when the appearance of bell-bottom jeans signals the end to “normal” jeans among teenagers and the resulting near-demise of Levi Strauss?

While for operational, public relations, or even financial risks, the percentage is mostly a single digit, it jumps to double digits when the issues involve customers’ needs, competitors’ moves, alternative technologies, and new players. These changes create truly strategic risks in the sense that they do not interfere with the implementation of the existing strategy—they may negate the company’s strategic concept itself.

Industry dissonance risk is not programmable. One cannot use mathematical modeling, computer programs, or known probabilities to calculate divergence of assumptions from reality. In assessing the risk of a stock, analysts use past distributions of returns. In assessing the future direction of the industry, past outcomes are often irrelevant. Therefore, assessment of the risk of external events is by its nature subjective.

Industry dissonance poses a complex picture that is hard to decipher. It emanates from the external world, where multitudes of external forces including competitive, technological, macroeconomic, global-political, and demand and supply determinants operate for or against the company’s strategy. Information-wise, however, it requires less collection of data—less of the mass of structured data (the so called “data mining”)—but more insight into what is relevant and what is not in the world around the company. Companies have systems in place to collect mass data. Software companies sell solutions they call “business intelligence” that are actually not about business and not about intelligence but about structuring mass quantitative data into databases. Busy executives may find solace in reading the reports generated by this data mining software, but the hard tasks of identifying and acting on strategic change are still very much labor intensive. Inundated with internal issues—memos and meetings, fire fighting in a zillion operational problems per day—executives find it hard to spare the time needed to reflect systematically on the big picture and arrive at an insight about where their assumptions might be straying. Sometimes, they are not even aware of what assumptions they work on. Without a conscious attempt to reveal hidden assumptions developed over years of experience working in an industry, management may have no chance of exposing obsolete models.

Because of its amorphous nature, the subjectivity in assessing it, and the complexity of looking at the big picture across products or business units, the risk of industry dissonance tends to fall between the cracks. This is the most neglected risk in business. Billions of wasted dollars reflect how deep this oversight can run. Sears, Montgomery Ward, Levi Strauss, Swissair, American Express, General Motors, Chrysler, Digital, Polaroid, Lucent, Nortel, AT&T, Ericsson, People Express, TWA—shall I continue? Sometimes the failure is what Robert Simons called “franchise risk,” where the entire enterprise disappears. Sometimes a failure involving industry dissonance results “merely” in losses of hundreds of millions and the layoff of thousands. For example, before its current chairman and CEO, Carlos Gutierrez, was appointed to his position, the Kellogg’s Company lost market share and sales in the hundred of millions when it failed under Arnold Langbo, its previous CEO, to address the crucial trend of a steadily declining ready-to-eat breakfast market with alternative options to cereals. By acquiring Keebler, Gutierrez was the first to dare to acknowledge that Kellogg’s future can no longer be in cereals alone—and to do something about it. For Kellogg, this was nothing short of a revolution.

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