AT&T, Kodak, IBM and GM pay the price for aggressive acquisition strategies
Corporate success inevitably leads to failure. Think AT&T, Kodak, IBM, Xerox, General Motors, Lucent, Coca-Cola " all once dominant, all since humbled. And that's for starters.
Every corporation needs to grow to remain vital, no doubt about it. Many companies convince themselves they need acquisitions to speed growth ' a dubious proposition.
What they get eventually is arteriosclerosis. Seth Glickenhaus, 87, a partner in New York investment firm Glickenhaus, calls the process 'institutionalisation.''
As a company grows, so does its manual of rules. Enterprising employees are stymied. Companies that control markets become arrogant and complacent. It's now impossible for the chief executive to be a hands-on manager. Mergers just make the situation worse.
AT&T bought a computer company. It flopped. AT&T bought a wireless business. It's still a loser. C Michael Armstrong, the current chief executive, has bought into cable television: more red ink. Meantime, AT&T's core, long distance, has become a commodity business. For years, Eastman Kodak distracted itself with acquisitions in chemicals and drugs. Then it divested to focus on photography, especially the digital variety ' the right policy finally, but faulty execution so far.
Xerox's name became generic for copying. Recently, it almost ran out of cash. After virtually saturating the world with Coke, Coca-Cola has seen sales over the past five years rise a total of just 14%.
As companies grow, they invariably repeat what they did that made them successful, failing to innovate, says John Whitney, a professor of management at Columbia Business School.
He gives examples: General Motors tinkered with old car models while Ford Motor developed the Explorer sport-utility vehicle. Lucent Technologies lagged in the development of fibre optics and then kept cutting prices to sell its less advanced equipment. International Business Machines launched its personal computer business in Florida, away from the home office in Armonk, New York, which was smart. When the unit succeeded, IBM moved it to headquarters, where it failed.
IBM also misjudged the effect PCs would have on its mainframe business. Since 1987, its total sales have grown 60%, while rival Hewlett-Packard, from a much smaller base, has leapt six times. Remember, IBM once was a company so powerful that it kept competitors alive to avoid monopoly charges ' setting its prices high enough so that others could undersell it and still survive.
The litany of big-time losers goes on. Procter & Gamble, once the bully of the supermarkets, reported that its sales dropped 2.8% in the March quarter after declining 3.8% in the December quarter. Desperate for sales growth, Procter & Gamble in May agreed to buy Bristol-Myers Squibb's Clairol hair colouring business for $4.95bn in cash. That day and the next, its stock dropped 5.2%.
Motorola used to be the leader in cellular phone manufacture; in the first quarter, it lost $533m as overall sales fell 12%. Sears, Roebuck & Co was once the biggest retailer in the US, and Kmart was king of America's discounters. Would you buy their stocks now? It's noteworthy that both companies made acquisitions and then undid them.
Whitney says that General Electric, at which he once was a consultant, may be the only company to avoid the size bugaboo.
The company spreads responsibility among managers, he says, and when one unit gets big, it tries to break it into smaller, more manageable pieces.
Glickenhaus is a bit more generous. He says Exxon Mobil and two drugmakers, Merck and Pfizer, have succeeded despite their size. 'There are always a few Michael Jordans,'' he says.
Spinoffs of businesses that can innovate and grow on their own seem one answer to the size problem. But many of today's spinoffs are intended to distract investors from a company's poor performance. Intelligent spinoffs are rare, mostly because CEOs simply fail to recognise that size is a detriment.
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