Ever wondered why newspapers always had this ridiculously large, uncontrollable size? Perhaps when you were trying to read one in your garden on a sunny yet windy afternoon, forcing you to peel the pages of your face every annoying three seconds? Or while reading one on the train, smashing your elbow in a nodding neighbour’s face when turning the page? I did. Not smashing my elbow in anyone’s face, but wondering why these pages had to be so bloody large.
I simply assumed that it was much cheaper to print on large pages than small ones. Turns out I was wrong.
To my surprise, I found out that printing on large pages is actually more expensive than on smaller ones…?! Why did they do it then; are these Times, Guardian and Daily Telegraph people closet sadists, finding secret joy in giving us a daily struggle with inky pages? Here’s what happened:
In 1712 British newspapers came to be taxed on the number of pages published. Editors then decided to print the news on enormous pages, and fewer of them, creating the broadsheet format. The original tax disappeared in 1855 but, despite being considerably more expensive, the format persisted.
As you may remember (if you’re from London), a couple of years ago, after the free newspaper “Metro” entered the industry, the Independent was the first to abandon the broadsheet and “go tabloid”. Their sales figures surged. Soon The Times followed, and later also the Guardian, all to their benefit. But why did it take so long – centuries!? Had no-one ever conceived the idea of printing newspapers on smaller (and cheaper!) pages?
Sure they had. Many times over the years someone would bring it up; “shouldn’t we print on smaller pages?” But they would always dismiss the idea: “no-one is doing it” and, mostly, “the customer would not want it”… Yes we did!
I call this “collective inertia”. Every existing player in the industry was afraid to break the mould and take the plunge. I have also learned, studying many firms in many different lines of business, that most industries have such a slightly strange, idiosyncratic convention that everybody adheres to but nobody really remembers why we’re doing it that way.
But hardly anyone dares to challenge it. And that is where the business opportunity lies. If you’re the first one to spot the silly convention (just to name a few candidates: buy-back guarantees in book publishing, detailing in the pharmaceutical industry, insane working hours in investment banking) and do it differently, it might just make you a heck of a lot of money.
And it would save many of us customers from a daily elbow in the face.
Wednesday, January 30, 2008
Sunday, January 27, 2008
It is ok to get lucky – even for a top manager
Let me tell you a story. A story of a company called Hornby. If you’re British, you’ll know them. You might even be feeling slightly nostalgic merely thinking about them. Hornby makes little model trains, and has been doing so for a very, very long time.
Ten years ago the company was nearly bankrupt. In an attempt to save costs they decided to outsource production to China. However, much to their surprise, they discovered the Chinese not only produced much cheaper, they also delivered superb quality. Therefore, middle managers could not resist spending all the money that they were saving through the outsourcing on adding additional quality in their product designs and, most of all, a lot of extra detail: a working light on every table in the restaurant carriage, windscreen wipers on the locomotive, a bit of dirt (painted) on the bottom of the carriages, etc. Their products became perfect scale models.
Then, as much to their surprise as to their joy, they noticed sales increasing substantially. When it persisted, they started talking to their vendors to figure out what on earth was happening?! They discovered that it was no longer fathers buying model trains for their children, but buying them for themselves (and in the process spending quite a bit more money on themselves than on their children…). Inadvertently Hornby had moved out of the toy market into the hobby market, producing for collectors rather than children.
Not long thereafter, Hornby was outperforming the FTSE dramatically, seeing its share price rise from 35 to 250 in just a few years.
But what can we learn from a story like Hornby's? Isn’t their smart change in strategy simply due to sheer, unintended luck!? Well, partly, but that’s perhaps the first lesson. I find that many successful companies with great innovative strategies (e.g. Southwest Airlines, Zara, CNN) experienced some significant element of serendipity at their inception. But we (and often they) post-rationalise things as if it was all planned as such from the get-go.
But why? There is no shame in getting lucky. A great manager (such as Hornby’s Frank Martin) does not necessarily come up with the strategy, but is superb at recognising the opportunity when it comes knocking on the company's door, while subsequently carefully adding all the other necessary strategic elements (marketing, investor relations, distribution, etc.) to take advantage of the opportunity. Just recognise the importance of luck - rather than deny it - and make sure you gratefully take advantage of it.
Ten years ago the company was nearly bankrupt. In an attempt to save costs they decided to outsource production to China. However, much to their surprise, they discovered the Chinese not only produced much cheaper, they also delivered superb quality. Therefore, middle managers could not resist spending all the money that they were saving through the outsourcing on adding additional quality in their product designs and, most of all, a lot of extra detail: a working light on every table in the restaurant carriage, windscreen wipers on the locomotive, a bit of dirt (painted) on the bottom of the carriages, etc. Their products became perfect scale models.
Then, as much to their surprise as to their joy, they noticed sales increasing substantially. When it persisted, they started talking to their vendors to figure out what on earth was happening?! They discovered that it was no longer fathers buying model trains for their children, but buying them for themselves (and in the process spending quite a bit more money on themselves than on their children…). Inadvertently Hornby had moved out of the toy market into the hobby market, producing for collectors rather than children.
Not long thereafter, Hornby was outperforming the FTSE dramatically, seeing its share price rise from 35 to 250 in just a few years.
But what can we learn from a story like Hornby's? Isn’t their smart change in strategy simply due to sheer, unintended luck!? Well, partly, but that’s perhaps the first lesson. I find that many successful companies with great innovative strategies (e.g. Southwest Airlines, Zara, CNN) experienced some significant element of serendipity at their inception. But we (and often they) post-rationalise things as if it was all planned as such from the get-go.
But why? There is no shame in getting lucky. A great manager (such as Hornby’s Frank Martin) does not necessarily come up with the strategy, but is superb at recognising the opportunity when it comes knocking on the company's door, while subsequently carefully adding all the other necessary strategic elements (marketing, investor relations, distribution, etc.) to take advantage of the opportunity. Just recognise the importance of luck - rather than deny it - and make sure you gratefully take advantage of it.
Wednesday, January 23, 2008
Management consultants – pin-striped pigeons
Now, having said all that, they [management consultants] are a bit like rats. Or, to put it more kindly, pigeons (also referred to by London mayor Ken Livingstone as “rats with wings”). They spread diseases – allow me to explain.
I have been working on a large research project which analyses the spread of harmful management practices (a dodgy type of control system, faulty financial instrument, counterproductive management technique, etc.). One could conjecture that harmful management practices never see the light of day (wrong) or that if they accidentally do, they will always quickly die out and disappear (wrong again). Perhaps I will bore you with the findings of this project some other time but for now let me dwell on how these harmful practices actually spread across firms.
Yep, that’s where the pin-striped pigeons come in – ok, some of them rats. Harmful management practices spread much like a virus. Actually, the patterns of how they spread among firms can be modelled successfully using techniques from social anthropology on the diffusion of harmful cultural practices (such as footbinding in China, female circumcision, etc.), which not coincidentally have been adopted from epidemiology.
A virus survives – like the flu – by spreading to a new host, preferably before the old one dies. Often, there are some creatures (e.g. rats) that facilitate the spread amongst the creatures of another species (e.g. humans). That’s much of what management consultants do, even knowingly: picking up practices in one industry or country and recommending and applying them in others. Just like viruses or bacteria, some of these practices are not very helpful to say the least (although harmful effects may only manifest themselves in the long run), others may have been useful in the original setting (e.g. industry) but completely inappropriate in the new one.
Unintentionally – again, just like the poor pigeons in Trafalgar Square – management consultants promote the spread and persistence of the harmful practice. According to Mayor Livingstone, they’re best banned and starved to death.
I have been working on a large research project which analyses the spread of harmful management practices (a dodgy type of control system, faulty financial instrument, counterproductive management technique, etc.). One could conjecture that harmful management practices never see the light of day (wrong) or that if they accidentally do, they will always quickly die out and disappear (wrong again). Perhaps I will bore you with the findings of this project some other time but for now let me dwell on how these harmful practices actually spread across firms.
Yep, that’s where the pin-striped pigeons come in – ok, some of them rats. Harmful management practices spread much like a virus. Actually, the patterns of how they spread among firms can be modelled successfully using techniques from social anthropology on the diffusion of harmful cultural practices (such as footbinding in China, female circumcision, etc.), which not coincidentally have been adopted from epidemiology.
A virus survives – like the flu – by spreading to a new host, preferably before the old one dies. Often, there are some creatures (e.g. rats) that facilitate the spread amongst the creatures of another species (e.g. humans). That’s much of what management consultants do, even knowingly: picking up practices in one industry or country and recommending and applying them in others. Just like viruses or bacteria, some of these practices are not very helpful to say the least (although harmful effects may only manifest themselves in the long run), others may have been useful in the original setting (e.g. industry) but completely inappropriate in the new one.
Unintentionally – again, just like the poor pigeons in Trafalgar Square – management consultants promote the spread and persistence of the harmful practice. According to Mayor Livingstone, they’re best banned and starved to death.
Tuesday, January 22, 2008
RECORD COMPANIES SURRENDER TO CONSUMERS ON DOWNLOAD DRM
A quiet victory of music consumers has occurred now that Sony BMG Music Entertainment has become the final major recording company to drop digital rights management protection on its digital downloads.
Major recording companies starting placing protection software on downloadable files in 2005 and 2006 to protect the music files from being passed on to other listeners. The digital rights management software, however, often blocked consumers who had purchased downloads from moving files to portable music players or even to new computers and from making compilations discs of their favorite music.
The software incensed many consumers because it forced consumers to purchase multiple copies or forced them to illicitly bypass the software if they wished to use music they had purchased on more than on platform. Many felt it was unfair that one did not “own” the download in the same way as a CD, a book, or a DVD and voiced their frustration in blogs, music forums, and to the record companies.
Opposition grew so strong among consumers that consumer rights and competition authorities in both the U.S. and Europe soon began to investigate and question the practice.
In 2007 EMI and Universal Music Group dropped the DRM measures and Warner Music Group and Sony BMG Music Entertainment have now followed suit in 2008.
Although the recording companies would still have preferred that consumers only be able to "rent" music and never own it--giving them the possibility to limit the number of times a download could be played before an additonal payment would be required, they ultimately gave in to consumer oppostition and are recognizing that consumers view music purchased in whatever form as substitutable.
Major recording companies starting placing protection software on downloadable files in 2005 and 2006 to protect the music files from being passed on to other listeners. The digital rights management software, however, often blocked consumers who had purchased downloads from moving files to portable music players or even to new computers and from making compilations discs of their favorite music.
The software incensed many consumers because it forced consumers to purchase multiple copies or forced them to illicitly bypass the software if they wished to use music they had purchased on more than on platform. Many felt it was unfair that one did not “own” the download in the same way as a CD, a book, or a DVD and voiced their frustration in blogs, music forums, and to the record companies.
Opposition grew so strong among consumers that consumer rights and competition authorities in both the U.S. and Europe soon began to investigate and question the practice.
In 2007 EMI and Universal Music Group dropped the DRM measures and Warner Music Group and Sony BMG Music Entertainment have now followed suit in 2008.
Although the recording companies would still have preferred that consumers only be able to "rent" music and never own it--giving them the possibility to limit the number of times a download could be played before an additonal payment would be required, they ultimately gave in to consumer oppostition and are recognizing that consumers view music purchased in whatever form as substitutable.
Sunday, January 20, 2008
Management consultants – happy slapping
Is it just me or is it getting increasingly fashionable to dislike management consultants (but hire them anyway)? Now, I wouldn’t say it is an entirely new fashion but the loathing of the pin-striped mercenaries seems to be reaching new and unprecedented heights of late.
A short while ago, I was talking to three members in the top team of a British company (which will remain blissfully anonymous but which you will know) who showed me the three main conclusions of their team’s recent ‘strategy retreat’ and, believe it or not, one of the three was “no more consultants!”
Now, what have these poor people done to deserve such a bad reputation anyway, ‘eh?! Well…
It is an unprotected profession and every idiot can call and list himself as a management consultant (and many do – I guess the remainder become professors). Yet, the reputable firms also seem to provoke a fair share of grunting, ground-spitting, and a wide array of hand gestures. Is it pure envy? Surely there must be some of that; being seen walking hand-in-hand with the CEO on way to an expensive restaurant for a powerpoint presentation between the fifth and sixth course while overtly charging a couple thousand quid might do that to you.
Yet, there must be something more. Perhaps it is the fact the accountability of the consultant is knowingly nil; it is not that we withhold payment till the effects of the recommended strategy have become apparent in ten years time (even if that were measurable).
Perhaps it is because everything they recommend has such a high value of deja-vu – “didn’t I say that at our last away-day?”
Or perhaps it is because management consultants en masse recommended corporate diversification in the 1970s, a refocus on core activities in the 1990s, told “old economy” firms to keep their “new economy” activities as strictly separate entities during the dotcom bubble but lately advise them to carefully integrate clicks and bricks, urged IT firms to get into consulting while currently stealthily de-merging them, etc.?
Who knows, but let’s not pretend we knew better. Surely you have both bad and good consultants. Just as you have bad and good clients. Some (if not many…) executives seem to use consultants expecting them to say what they wanted to hear anyway.
Consultants are undoubtedly more useful if you are genuinely open to hear what they have to say about your strategy. For example, ample academic research has suggested that bringing in an outsider’s view can seriously improve the quality of decision-making (be it often at the price of slowing it down). Yet, hiring a consultant is of course no reason to stop thinking for yourself. As Richard Dawkins said, “it is good to be open-minded, but not so open that your brain falls out”.
A short while ago, I was talking to three members in the top team of a British company (which will remain blissfully anonymous but which you will know) who showed me the three main conclusions of their team’s recent ‘strategy retreat’ and, believe it or not, one of the three was “no more consultants!”
Now, what have these poor people done to deserve such a bad reputation anyway, ‘eh?! Well…
It is an unprotected profession and every idiot can call and list himself as a management consultant (and many do – I guess the remainder become professors). Yet, the reputable firms also seem to provoke a fair share of grunting, ground-spitting, and a wide array of hand gestures. Is it pure envy? Surely there must be some of that; being seen walking hand-in-hand with the CEO on way to an expensive restaurant for a powerpoint presentation between the fifth and sixth course while overtly charging a couple thousand quid might do that to you.
Yet, there must be something more. Perhaps it is the fact the accountability of the consultant is knowingly nil; it is not that we withhold payment till the effects of the recommended strategy have become apparent in ten years time (even if that were measurable).
Perhaps it is because everything they recommend has such a high value of deja-vu – “didn’t I say that at our last away-day?”
Or perhaps it is because management consultants en masse recommended corporate diversification in the 1970s, a refocus on core activities in the 1990s, told “old economy” firms to keep their “new economy” activities as strictly separate entities during the dotcom bubble but lately advise them to carefully integrate clicks and bricks, urged IT firms to get into consulting while currently stealthily de-merging them, etc.?
Who knows, but let’s not pretend we knew better. Surely you have both bad and good consultants. Just as you have bad and good clients. Some (if not many…) executives seem to use consultants expecting them to say what they wanted to hear anyway.
Consultants are undoubtedly more useful if you are genuinely open to hear what they have to say about your strategy. For example, ample academic research has suggested that bringing in an outsider’s view can seriously improve the quality of decision-making (be it often at the price of slowing it down). Yet, hiring a consultant is of course no reason to stop thinking for yourself. As Richard Dawkins said, “it is good to be open-minded, but not so open that your brain falls out”.
Wednesday, January 16, 2008
“Over the hill and far away, top managers are here to stay”
Well, at least Dutch top managers are.
When do top managers generally decide that it is time to move on and “seek other challenges”? Well, one prominent reason is of course that they are about to get the boot (because their firm’s performance is in dire straits). Yet, that appears to not be the only case. Academic research on American executives – among others by Professor Wagner from Michigan State University – has shown that top managers are not only leaving when the performance of their companies is rock bottom (undoubtedly with a good poke by their board if not a kick in the backside) but also when firm performance is relatively high. Wagner speculated that this happens because then they’re hot stuff on the job market and able to find themselves a nice new green pasture.
Now, although this will hardly be anyone (else)’s idea of “fun”, it so happened I had a database available on a couple of hundred Dutch top managers and was curious whether the same might be true for these guys (yes, all of them guys…). And you know what, after a good chunk of statistical analysis it appeared that Dutch top managers also leave when their firm’s performance is at a high. Yet, they’re not walking at all when it’s low…?! Apparently, Dutch top managers don’t get the sack even if their firms are underperforming.
When do top managers generally decide that it is time to move on and “seek other challenges”? Well, one prominent reason is of course that they are about to get the boot (because their firm’s performance is in dire straits). Yet, that appears to not be the only case. Academic research on American executives – among others by Professor Wagner from Michigan State University – has shown that top managers are not only leaving when the performance of their companies is rock bottom (undoubtedly with a good poke by their board if not a kick in the backside) but also when firm performance is relatively high. Wagner speculated that this happens because then they’re hot stuff on the job market and able to find themselves a nice new green pasture.
Now, although this will hardly be anyone (else)’s idea of “fun”, it so happened I had a database available on a couple of hundred Dutch top managers and was curious whether the same might be true for these guys (yes, all of them guys…). And you know what, after a good chunk of statistical analysis it appeared that Dutch top managers also leave when their firm’s performance is at a high. Yet, they’re not walking at all when it’s low…?! Apparently, Dutch top managers don’t get the sack even if their firms are underperforming.
Interestingly though, these top managers not only left when their firm’s performance was relatively high, but when it was also just starting to (rapidly) decrease. I guess it is all about picking your moment; what better time to get out than when you’re just “over the hill”, and your house of cards is about to come tumbling down!
Sunday, January 13, 2008
“Today’s fast-changing business environment”? – same as it ever was
“Today’s business environment is characterised by increasingly high levels of uncertainty and change” – ever read a business article that starts with a sentence like that? My guess is you have. It seems like every other management article I read starts with such a sentence. And it annoys me. Deeply.
“In today’s fast changing business world…”, “many industries are increasingly characterised by rapid change…”, “high velocity environments”, “increasing hypercompetition”, and so forth and so forth, bla bla, bla bla.
I know, it is slightly pathetic that something like this annoys me but it does. I guess it annoys me because people simply accept it as a given; as the truth. But is the current business environment really so much more turbulent than 15 years ago when the world computerised, or when the Berlin Wall came down, or when electricity was invented? Somehow, I doubt it. But still, people always say that “the world of business is becoming increasingly volatile” (without showing me any evidence).
Fortunately, my fellow strategy professor Gerry McNamara, from Michigan State University, and two of his colleagues were equally annoyed but (in contrast to myself) did something about it. They analysed the financial performance of about 5700 companies over a period of more then two decades, looking at measures such as performance stability, market stability, abnormal business returns, industry dynamism, munificence, etc. And they found the following: Nothing. Absolutely zilch.
Analysing 114,191 observations, starting from the late 1970s, they found that some industries may be turbulent, but no more turbulent than before. Or, as they say, “our results suggest that managers today face markets no more dynamic and opportunities to gain and sustain competitive advantage no more challenging than in the past”.
So please stop telling me that “the world of business is increasingly changing fast”. It is not. It is the same as it ever was.
“In today’s fast changing business world…”, “many industries are increasingly characterised by rapid change…”, “high velocity environments”, “increasing hypercompetition”, and so forth and so forth, bla bla, bla bla.
I know, it is slightly pathetic that something like this annoys me but it does. I guess it annoys me because people simply accept it as a given; as the truth. But is the current business environment really so much more turbulent than 15 years ago when the world computerised, or when the Berlin Wall came down, or when electricity was invented? Somehow, I doubt it. But still, people always say that “the world of business is becoming increasingly volatile” (without showing me any evidence).
Fortunately, my fellow strategy professor Gerry McNamara, from Michigan State University, and two of his colleagues were equally annoyed but (in contrast to myself) did something about it. They analysed the financial performance of about 5700 companies over a period of more then two decades, looking at measures such as performance stability, market stability, abnormal business returns, industry dynamism, munificence, etc. And they found the following: Nothing. Absolutely zilch.
Analysing 114,191 observations, starting from the late 1970s, they found that some industries may be turbulent, but no more turbulent than before. Or, as they say, “our results suggest that managers today face markets no more dynamic and opportunities to gain and sustain competitive advantage no more challenging than in the past”.
So please stop telling me that “the world of business is increasingly changing fast”. It is not. It is the same as it ever was.
Monday, January 7, 2008
Deal-eager executives – tribal instincts
Why is it that top managers often seem to become so gung-ho on acquisitions? Take Ahold’s “fallen-from-grace” ex-CEO (now corporate convict) Cees van der Hoeven. Ahold actually started out with quite a careful approach to doing take-over deals, but over the years acquired itself completely out of control, like a Faliraki girl with a credit card in a Gucci store.
My guess is there are two causes of deal-eager executives. It is the type of person who becomes CEO and it is the type of person we make them. Let me discuss the first one with you.
An interesting line of research in social anthropology analysed what type of person is more likely to rise through the ranks to become the headman of a tribe. Often, this would be the most fierce, ambitious and aggressive warrior, who would be willing to take on all his opponents in the quest for leadership.
Yet, interestingly, although characteristics such as fierceness and ambition would be helpful in becoming tribe leader, these characteristics were not necessarily positive for the future of the settlement, since these type of leaders were prone to take the tribe to war. This would ultimately take its toll on the size, strength and survival chances of the tribe. Thus, the same characteristics that would make people more likely to become the headman, were likely to get the tribe in to trouble.
CEOs might not be all that different. Those people who are ambitious, risk-seeking and aggressive enough to be able to rise to the ultimate spot of CEO, just might be the same people who, once they’re there, take their firm on a conquest.
Acquisitions offer the thrill of the chase. You select a target, mobilise resources and lead the attack. Sometimes there are others eyeing your prey but skilful manoeuvring and a fierce battle will make you come out victorious again. And another victory means pictures in the newspapers, popping champagne, and a larger tribe to rule and command.
My guess is there are two causes of deal-eager executives. It is the type of person who becomes CEO and it is the type of person we make them. Let me discuss the first one with you.
An interesting line of research in social anthropology analysed what type of person is more likely to rise through the ranks to become the headman of a tribe. Often, this would be the most fierce, ambitious and aggressive warrior, who would be willing to take on all his opponents in the quest for leadership.
Yet, interestingly, although characteristics such as fierceness and ambition would be helpful in becoming tribe leader, these characteristics were not necessarily positive for the future of the settlement, since these type of leaders were prone to take the tribe to war. This would ultimately take its toll on the size, strength and survival chances of the tribe. Thus, the same characteristics that would make people more likely to become the headman, were likely to get the tribe in to trouble.
CEOs might not be all that different. Those people who are ambitious, risk-seeking and aggressive enough to be able to rise to the ultimate spot of CEO, just might be the same people who, once they’re there, take their firm on a conquest.
Acquisitions offer the thrill of the chase. You select a target, mobilise resources and lead the attack. Sometimes there are others eyeing your prey but skilful manoeuvring and a fierce battle will make you come out victorious again. And another victory means pictures in the newspapers, popping champagne, and a larger tribe to rule and command.
Thursday, January 3, 2008
Most acquisitions fail – really!
Here come the stats on M&A again – you may have seen them before, but since I am sure you (still) don’t believe them, here they are once more:
70-80% of acquisitions fail, in terms of creating stock market value. Three overview studies in the prestigious Strategic Management Journal showed that on average share prices of acquiring companies fall between .34% - 1% in the ten days following the announcement of an acquisition. And this is a result consistent over a period of 75 years of stock market data!
“But that’s only 10 days”, you might say, “these acquisitions might still create value in the long run, right?” Nope; wrong. Research in the Journal of Finance concluded that acquiring firms experience a wealth loss of 10% over the five years after the merger completion.
“Perhaps the stock market initially is too pessimistic?” Actually, quite the opposite: A study on a 131 big deals (over $500million) indicated that in 59% of the cases, market-adjusted return went down on announcement. Hence, the stock market was positive about 41% of the deals. Not an awful lot, but it could have been worse. Or could it…
After 12 months, 71% of all those deals had negative consequences! That is, of the 41% of cases where market value went up on announcement because the stock market was optimistic about their potential to create value, only 55% still had positive returns the year after! Thus, even the stock market initially had been way too optimistic. Even more deals ended up destroying value than they first had expected.
Yet, every time I show these statistics to a group of executives they frown and proclaim, “we know this, but it is not true for our company”. Often followed by, “we analysed all our deals and 2/3 of them was a success” (not sure why it is always 2/3, but it always is). Yeah right.
But what really is the “analysis” that most of them performed? They have asked people in the relevant BU’s whether they thought the deal was a success. Now, if these people already overtly say “no”, I am pretty sure the acquisition was a disaster.
Of all the deals conducted, this leaves 2/3 of “non-disasters”, which is not the same as a success. Perhaps another 1/3 did not cause major problems as the integration went alright, but that does not mean that the (usually very expensive) deal actually created value – at least beyond the take-over premium that was paid. You might have been better off not having done it at all, despite having avoided a disaster.
So, believe me, 2/3 of acquisitions fail – yes, really.
70-80% of acquisitions fail, in terms of creating stock market value. Three overview studies in the prestigious Strategic Management Journal showed that on average share prices of acquiring companies fall between .34% - 1% in the ten days following the announcement of an acquisition. And this is a result consistent over a period of 75 years of stock market data!
“But that’s only 10 days”, you might say, “these acquisitions might still create value in the long run, right?” Nope; wrong. Research in the Journal of Finance concluded that acquiring firms experience a wealth loss of 10% over the five years after the merger completion.
“Perhaps the stock market initially is too pessimistic?” Actually, quite the opposite: A study on a 131 big deals (over $500million) indicated that in 59% of the cases, market-adjusted return went down on announcement. Hence, the stock market was positive about 41% of the deals. Not an awful lot, but it could have been worse. Or could it…
After 12 months, 71% of all those deals had negative consequences! That is, of the 41% of cases where market value went up on announcement because the stock market was optimistic about their potential to create value, only 55% still had positive returns the year after! Thus, even the stock market initially had been way too optimistic. Even more deals ended up destroying value than they first had expected.
Yet, every time I show these statistics to a group of executives they frown and proclaim, “we know this, but it is not true for our company”. Often followed by, “we analysed all our deals and 2/3 of them was a success” (not sure why it is always 2/3, but it always is). Yeah right.
But what really is the “analysis” that most of them performed? They have asked people in the relevant BU’s whether they thought the deal was a success. Now, if these people already overtly say “no”, I am pretty sure the acquisition was a disaster.
Of all the deals conducted, this leaves 2/3 of “non-disasters”, which is not the same as a success. Perhaps another 1/3 did not cause major problems as the integration went alright, but that does not mean that the (usually very expensive) deal actually created value – at least beyond the take-over premium that was paid. You might have been better off not having done it at all, despite having avoided a disaster.
So, believe me, 2/3 of acquisitions fail – yes, really.
Wednesday, January 2, 2008
ONLINE AND MOBILE REVENUE POTENTIAL DRIVE COMPENSATION DISPUTES
The issues in the Hollywood writer’s strike, which began Nov. 5, are symptomatic of a broader challenges that online and mobile media pose for all content creators. The fundamental issues for all media involve how to obtain revenue for content distributed by digital media and how to share revenue from those downloads.
In the Hollywood case, the central issues revolve around new media residuals for advertising supported video downloads of content prepared for TV and motion pictures, made for Internet content, and other streaming video. Screen writers, who did not foresee the success of VCR and DVD sales of motion pictures and television programs in past negotiations, are determined to receive greater compensation for the growing business in digital downloads.
The Alliance of Motion Picture & Television Producers argues that business potential of new media is uncertain and does not wish stipulate a monetary value for it. The Writer's Guild of America has asked for a $250 residual for one year of unlimited streaming of an hour-long show and 3-cents-per-download—the rate writer’s receive for DVD sales.
The rhetoric of the dispute has involved standard finger pointing with the producers’ group accusing writers of “quixotic pursuit of radical demands” and the writers accusing the producers of “corporate greed.”
Whatever the truth of those claims and the outcome of the work stoppage, there will be more disagreements in the coming years among those who actually produce content and those who employ creators or ultimately own the content because the issues are far broader and deeper than the screen writers challenging program and film producers. The underlying issue of what compensation creators deserve is growing in all media industries and digital downloads increasingly play important roles in their businesses.
In the past 20 years, at the behest of large commercial media firms, Congress past more copyright legislation than in all the years of the previous century combined. It extended the length of copyright, gave copyright protection to performers, games, and broadcasts, provided more protection and stronger penalties for digital than analogue content, and criminalized copyright violations.
The rhetoric of the media industry throughout the debates was consistent: If creators of content aren’t protected and compensated, no one will create articles, books, music, scripts, etc. However, the effect of the copyright legislation did not effectively strengthen the position of authors, composer, performers, or artists, but reinforced the power of copyright owners--essentially film, television, and recording companies, newspaper, magazine, and book publishers. Today, creators of content are now beginning to use the rhetoric that media firms used in copyright debates in their attempts to gain more compensation because of the growing revenue streams in digital media.
Although the full financial future of digital media is uncertain—as in any emerging industry, media firms are investing billions based on an upbeat assessment of its business opportunities. Twentieth Century Fox just announced a deal to rent its movies through digital downloads from the iTunes Store, which sold more than 200 million video downloads in 2007. Viacom signed a $500 million online advertising and content distribution deal with Microsoft covering the websites they both operate such as MTV, Comedy Central, MSN, and Xbox Live. You Tube was purchased by Google for $1.65 million and subsequently acquired the ad-serving firm DoubleClick for $3.1 billion in order to improve its ability to earn ad revenue on You Tube and other sites.
Although there is business risk involved in these ventures, digital media are clearly growing and are expected to produce handsome rewards. Downloads of movies and TV produced only $250 million in 2007, but are forecasted to reach nearly $2 billion in just 2 years. Digital downloads of music have already surpassed that mark and U.S. newspapers had online advertising revenue of $2.6 billion in 2006. There is money to be made in digital media and the amount is rising rapidly.
The growing value of digital downloads is one of the reasons why Viacom sued You Tube in 2007 for $1 billion in damages when 160,000 clips of its programs that were found on the online site. When media companies sue each other, you know that real money is at stake.
Arguments made by Hollywood producers that they are uncertain if there is money to be made in downloads are hollow given their own investments. It appears they are trying to reduce their business risk and to increase their profits by keeping writers’ compensation low and stropping them from gaining a stake in the growth of downloads.
The issues of compensation that led screenwriters to strike are confronting writers and photographers for newspapers, magazines, and books, independent video producers posting material on social media sites, and citizen journalists whose articles, photos, and videos are being use by commercial media and their digital sites--sometimes replacing paid content of professionals.
Now that online services are beginning to generate significant revenue streams for print media, journalists’ and writers’ desires to gaining more compensation for those uses of their work are rising. Although some papers and magazines agreed to provide nominal payments or salary increases for secondary uses of print content online, most have not yet come to terms over the growing revenue stream and how its benefits should be shared.
One can expect issues of compensation for digital materials to gain greater significance as negotiating points for the Newspaper Guild and the National Writer’s Union in the years to come. Both have lent their support to the Writer’s Guild of America and their members are increasingly aware of the effects of the new revenue streams on the companies that employ them.
In the Hollywood case, the central issues revolve around new media residuals for advertising supported video downloads of content prepared for TV and motion pictures, made for Internet content, and other streaming video. Screen writers, who did not foresee the success of VCR and DVD sales of motion pictures and television programs in past negotiations, are determined to receive greater compensation for the growing business in digital downloads.
The Alliance of Motion Picture & Television Producers argues that business potential of new media is uncertain and does not wish stipulate a monetary value for it. The Writer's Guild of America has asked for a $250 residual for one year of unlimited streaming of an hour-long show and 3-cents-per-download—the rate writer’s receive for DVD sales.
The rhetoric of the dispute has involved standard finger pointing with the producers’ group accusing writers of “quixotic pursuit of radical demands” and the writers accusing the producers of “corporate greed.”
Whatever the truth of those claims and the outcome of the work stoppage, there will be more disagreements in the coming years among those who actually produce content and those who employ creators or ultimately own the content because the issues are far broader and deeper than the screen writers challenging program and film producers. The underlying issue of what compensation creators deserve is growing in all media industries and digital downloads increasingly play important roles in their businesses.
In the past 20 years, at the behest of large commercial media firms, Congress past more copyright legislation than in all the years of the previous century combined. It extended the length of copyright, gave copyright protection to performers, games, and broadcasts, provided more protection and stronger penalties for digital than analogue content, and criminalized copyright violations.
The rhetoric of the media industry throughout the debates was consistent: If creators of content aren’t protected and compensated, no one will create articles, books, music, scripts, etc. However, the effect of the copyright legislation did not effectively strengthen the position of authors, composer, performers, or artists, but reinforced the power of copyright owners--essentially film, television, and recording companies, newspaper, magazine, and book publishers. Today, creators of content are now beginning to use the rhetoric that media firms used in copyright debates in their attempts to gain more compensation because of the growing revenue streams in digital media.
Although the full financial future of digital media is uncertain—as in any emerging industry, media firms are investing billions based on an upbeat assessment of its business opportunities. Twentieth Century Fox just announced a deal to rent its movies through digital downloads from the iTunes Store, which sold more than 200 million video downloads in 2007. Viacom signed a $500 million online advertising and content distribution deal with Microsoft covering the websites they both operate such as MTV, Comedy Central, MSN, and Xbox Live. You Tube was purchased by Google for $1.65 million and subsequently acquired the ad-serving firm DoubleClick for $3.1 billion in order to improve its ability to earn ad revenue on You Tube and other sites.
Although there is business risk involved in these ventures, digital media are clearly growing and are expected to produce handsome rewards. Downloads of movies and TV produced only $250 million in 2007, but are forecasted to reach nearly $2 billion in just 2 years. Digital downloads of music have already surpassed that mark and U.S. newspapers had online advertising revenue of $2.6 billion in 2006. There is money to be made in digital media and the amount is rising rapidly.
The growing value of digital downloads is one of the reasons why Viacom sued You Tube in 2007 for $1 billion in damages when 160,000 clips of its programs that were found on the online site. When media companies sue each other, you know that real money is at stake.
Arguments made by Hollywood producers that they are uncertain if there is money to be made in downloads are hollow given their own investments. It appears they are trying to reduce their business risk and to increase their profits by keeping writers’ compensation low and stropping them from gaining a stake in the growth of downloads.
The issues of compensation that led screenwriters to strike are confronting writers and photographers for newspapers, magazines, and books, independent video producers posting material on social media sites, and citizen journalists whose articles, photos, and videos are being use by commercial media and their digital sites--sometimes replacing paid content of professionals.
Now that online services are beginning to generate significant revenue streams for print media, journalists’ and writers’ desires to gaining more compensation for those uses of their work are rising. Although some papers and magazines agreed to provide nominal payments or salary increases for secondary uses of print content online, most have not yet come to terms over the growing revenue stream and how its benefits should be shared.
One can expect issues of compensation for digital materials to gain greater significance as negotiating points for the Newspaper Guild and the National Writer’s Union in the years to come. Both have lent their support to the Writer’s Guild of America and their members are increasingly aware of the effects of the new revenue streams on the companies that employ them.
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