Deal making is glamorous; due diligence is not. That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value. The momentum of a transaction is hard to resist once senior management has the target in its sights. Companies contract "deal fever," and due diligence all too often becomes an exercise in verifying the target's financial statements rather than conducting a fair analysis of the deal's strategic logic and the acquirer's ability to realize value from it. In a recent Bain & Co. survey of 250 international executives with M&A responsibilities, only 30% of them were satisfied with the rigor of their due diligence. And fully a third admitted they hadn't walked away from deals they had nagging doubts about. In this article, the authors, all Bain consultants, emphasize the importance of comprehensive due diligence practices and suggest ways companies can improve their capabilities in this area. They provide rich, real-world examples of companies that have had varying levels of success with their due diligence processes, including Safeway, Odeon, American Seafoods, and Kellogg's. Effective due diligence requires answering four basic questions: What are we really buying? What is the target's stand-alone value? Where are the synergies--and the skeletons? And what's our walk-away price? Each of these questions will prompt an even deeper level of querying that puts the broader, strategic rationale for acquisitions under a microscope.
During the dot-com boom, many people saw the potential for new communication technologies to enable radically new business models, but they were far too optimistic about the speed with which the revolution would occur. Now, as the bitter disillusionment of the dot-com bust begins to fade, we have a chance to think again--this time more rationally--about how best to take advantage of the remarkable changes these new technologies are gradually making possible. One such change is the ability to create markets inside companies, allowing decision making to be decentralized and introducing some of the efficiency, flexibility, and motivating influence of free markets. In this article, the author examines this nascent form of business organization, exploring the benefits as well as the potential risks. BP, for example, met its goal of reducing the company's greenhouse gas emissions nine years ahead of schedule, not by setting and enforcing targets for each division but by allowing business unit heads to buy and sell emissions permits among themselves using an electronic trading system. And Hewlett-Packard recently experimented with a system that allowed employees to buy and sell predictions about likely printer sales, using a kind of futures contract. The markets ended up predicting the actual printer sales with much more accuracy than official HP forecasts. At a fundamental level, these changes are enabled by the fact that electronic technologies allow information to be widely shared at little cost. This simple fact has a profound implication for organizing businesses. When more people have more information, they can use it to make their own well-informed decisions, appropriate to local circumstances, instead of following orders from above. As a result, even very large companies can benefit from the collective wisdom of their employees.
In the late 1990s, Fleet Bank was facing high and rising employee turnover, particularly in its retail operations. Overall turnover had reached 25% annually, and among some groups, such as tellers and customer service reps, turnover was as high as 40%. Using a new methodology developed by Mercer Human Resource Consulting, Fleet set out to determine why so many employees were leaving and what could be done to retain them. Fleet's analysis showed that people were leaving not so much for better pay but for broader experience, which they thought would enhance their marketability. Additionally, the analysis revealed a link between the turnover problem and the company's busy history of mergers and acquisitions. Fleet's mergers and acquisitions frequently meant that it had to consolidate operations. That consolidation resulted in layoffs, which provoked higher levels of voluntary turnover, perhaps because remaining employees began worrying about their job security. Although the obvious solution to the turnover problem might have been to compensate the remaining employees--say, with higher pay--the more effective and less costly solution, Fleet discovered, was to focus on employees' career opportunities within the company. Those who moved up the hierarchy, or who even made lateral moves, stayed longer. Its solutions required only modest investments that, in the end, saved the company millions of dollars.
Ask senior managers to pare costs by 10%, and they know just what to do. Ask them to boost growth by 10%, and they're stymied, assuming that growth is not really something they can influence. But managers can control their company's growth if they have better information about where their revenues are coming from. Rather than sort sales by geographic market, business unit, or product line, they should break them out in a way that reveals which part of their strategy is responsible for what part of their revenue. This article presents a tool--the sources of revenue statement (SRS)--that does just that. Through straightforward calculations using data taken from a company's balance sheet, along with estimations of customer churn and industry growth rates, the SRS enables managers to classify their revenue according to five sources of growth: continuing sales to established customers (base retention); sales won from the competition (share gain); sales that fell into their laps because the market was expanding (market position); sales from moves into adjacent markets; and sales from entirely new lines of business. Once sorted in this way, revenue can be viewed as the outgrowth of manageable circumstances. Comparing the sources of revenue across divisions can uncover profound insights, which can suggest smart ways to change strategy or set stretch goals.
"It's worse than I thought....She's completely lost her mind," says Harry Beecham, the CEO of blue chip management consultancy Pierce and Co. The perplexed executive was in a hotel suite with his wife in Amsterdam, the latest stop on his regular trek to dozens of Pierce offices worldwide. In his hand was a sheaf of paper--the same message sent over and over again by his star employee and protegee Katharina Waldburg. The end of the world is coming, she warned. "Someone is going to die." Harry wouldn't have expected this sort of behavior from Katharina. After graduating with distinction from Oxford, she made a name for herself by single-handedly building Pierce's organizational behavior practice. At 27, she's poised to become the youngest partner ever elected at the firm. But Harry can't ignore the faxes in his hand. Or the stream of consciousness e-mails Katharina's been sending to one of the directors in Pierce's Berlin office--mostly gibberish but potentially disastrous to Katharina's reputation if they ever got out. Harry also can't dismiss reports from Roland Fuoroli, manager of the Berlin office, of a vicious verbal exchange Katharina had with him, or of an "over the top" lunch date Katharina had with one of Pierce's clients in which she was explaining the alphabet's role in the creation of the universe. Harry is planning to talk to Katharina when he gets to Berlin. What should he say? And will it be too late? Four commentators offer their advice in this fictional case study. They are Kay Redfield Jamison, a professor of psychiatry and a co-author of Manic-Depressive Illness; David E. Meen, a former director at McKinsey & Co.; Norman Pearlstine, the editor-in-chief at Time Inc.; and Richard Primus, an assistant law professor at the University of Michigan.
"It's worse than I thought....She's completely lost her mind," says Harry Beecham, the CEO of blue chip management consultancy Pierce and Co. The perplexed executive was in a hotel suite with his wife in Amsterdam, the latest stop on his regular trek to dozens of Pierce offices worldwide. In his hand was a sheaf of paper--the same message sent over and over again by his star employee and protegee Katharina Waldburg. The end of the world is coming, she warned. "Someone is going to die." Harry wouldn't have expected this sort of behavior from Katharina. After graduating with distinction from Oxford, she made a name for herself by single-handedly building Pierce's organizational behavior practice. At 27, she's poised to become the youngest partner ever elected at the firm. But Harry can't ignore the faxes in his hand. Or the stream of consciousness e-mails Katharina's been sending to one of the directors in Pierce's Berlin office--mostly gibberish but potentially disastrous to Katharina's reputation if they ever got out. Harry also can't dismiss reports from Roland Fuoroli, manager of the Berlin office, of a vicious verbal exchange Katharina had with him, or of an "over the top" lunch date Katharina had with one of Pierce's clients in which she was explaining the alphabet's role in the creation of the universe. Harry is planning to talk to Katharina when he gets to Berlin. What should he say? And will it be too late? In R0404A and R0404Z, four commentators offer their advice on this fictional case study. They are Kay Redfield Jamison, a professor of psychiatry and a co-author of Manic-Depressive Illness; David E. Meen, a former director at McKinsey & Co.; Norman Pearlstine, the editor-in-chief at Time Inc.; and Richard Primus, an assistant law professor at the University of Michigan.
The case describes the successful growth and internationalization strategy of Belgian Creyf's interim business (temporary labour services) after initial internationalization debacles, which nearly bankrupted the original family company. It describes the "not me too" strategy of this player in an industry increasingly dominated by a few large European and even world players. It subsequently raises the strategic and organisational issues the group is facing in dealing with this increasingly large and international portfolio of businesses in a market that is showing signs of the worst economic downturns in many years.
In mid-2003, CEO Chris McCormick felt L.L. Bean was in a good position to begin to grow again. For nearly 90 years, the company sold clothing and gear for outdoor enthusiasts through its catalogs and a single retail store in Freeport, Maine. In the three decades prior to 1996, sales growth averaged nearly 20% per year. In 1995, sales hit $1 billion, but stagnated for the next six years--growing at less than 2% annually. The company responded with a structural reorganization and investment in its Internet sales channel. In 2002 and early 2003, McCormick led an effort to reduce overhead and improve its internal systems, including the elimination of 1,000 jobs--which reduced year-round headcount by nearly 15%. After these initiatives, the company remained profitable and enjoyed a strong balance sheet, but sales growth remained near zero. Most significantly, between 2000 and 2002, L.L. Bean opened three retail stores in shopping malls outside Maine. McCormick viewed these three stores as the first of a chain of stores that would form a new selling channel and enable L.L. Bean to grow. Early results from the three new stores were below expectations; L.L. Bean spent significant time examining its retail store activities in an attempt to learn where it could improve. As the company began to apply those lessons in the stores, performance picked up, fueling McCormick's optimism that L.L. Bean could grow with retail stores.
In the seemingly never-ending revelations of corporate scandals that have been exposed since the fall of Enron, the media, politicians, and the general public have taken to characterizing such leaders as "bad people," even to the point of considering them evil. The rest of our leaders have become suspect, as corporate executives are tied for dead last with used car salesmen in terms of public trust. These overly simplistic notions of "good leaders" and "bad leaders" only serve to cloud our understanding of the nature of leadership in the business world and how good leaders can lose their way. Teaching Purpose: To outline how and why leaders lose their way.
Jack Smith had a stellar career at Chrysler managing major design teams and manufacturing plants before deciding to join industry leader and benchmark Toyota. It is his first day on the job; what will his orientation entail? Cursory walkthroughs and introductions before assignment to a job commensurate with his experience and accomplishments or something else to help him acclimate to Toyota's unique management approach?
Jack Smith had a stellar career at Chrysler managing major design teams and manufacturing plants before deciding to join industry leader and benchmark Toyota. It is his first day on the job; what will his orientation entail? Cursory walkthroughs and introductions before assignment to a job commensurate with his experience and accomplishments or something else to acclimate him to Toyota's unique management approach?
Jack Smith had a stellar career at Chrysler managing major design teams and manufacturing plants before deciding to join industry leader and benchmark Toyota. It is his first day on the job; what will his orientation entail? Cursory walkthroughs and introductions before assignment to a job commensurate with his experience and accomplishments or something else to acclimate him to Toyota's unique management approach?
Analysis of an interview with Red Auerbach, HBR No. 87201. Alan M. Webber, who conducted the interview, probed for the lessons that Auerbach has learned from a long and productive career coaching and managing the Boston Celtics, a professional basketball team in the National Basketball Association (NBA). The HBR article is used as a surrogate for a customer interview, providing the "raw data" for an analysis technique known as the trademarked Language Processing (LP) methodology, developed by professor Shoji Shiba of Tsukuba University and the member companies of the Cambridge, Massachusetts-based Center for Quality of Management. Includes color exhibits.
This case looks at the turnaround at the Massachusetts Port Authority after the 9/11 terrorist attacks. It begins with the situation during the immediate aftermath of 9/11 and then describes how the new CEO restructures the public agency to operate much more like a business organization.