No Bull

No Bull

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As of this writing, the Dow Jones industrial average is plunging into bear market territory for the first time in more than a decade. While individual investors rely on Mr. Greenspan to save them, corporations need to tighten the reigns and sharpen their focus if they are to avoid the drastic measures taken in recent weeks by the likes of Daimler Chrysler, Procter & Gamble, Disney and Charles Schwab.

Remember Econ 101: Success occurs when the company provides the customer with a desired product or service at a reasonable price that will return an acceptable profit. The textbooks tell us that businesses fail when there is no demand for the product or service. If only it were that simple! As we all know, real life is more complicated than the classroom.

As professionals working exclusively with underperforming or distressed companies, we see several recurring mistakes made by management teams. Of these errors, two of the most prevalent include uncontrolled growth and passive management styles. Both of these mistakes, either independently or in combination, can sound the death knell for an organization.

Uncontrolled Growth

Uncontrolled growth, whether by acquisition of other businesses or expansion of existing businesses, almost always leads to a lack of focus by the management team on the core business of the company. In this era of failed roll-ups, one might ask how management teams the world over could have strayed so far from the fundamentals of their core businesses that were once so profitable.

In many of these situations, the company's management and its board of directors were seeking growth for growth's sake. This has often been done with little thought given to the underlying business rationale for growth or to the probability of achieving the desired results. Even when there is a good business case supporting this growth strategy, we seldom see a well-developed strategic and tactical plan for the operational and cultural integration of the new business(es) into the existing company. As a result, expansion often looks a lot better on paper than in practice. This outcome can be—and often has been—devastating, leaving a company with the worst of all worlds; namely, too much debt, severe operational problems and very limited flexibility.

If such an expansion strategy is, in fact, going to be profitable, management must have a step-by-step methodology to deal with the following types of issues:

  • distraction of management and disruption to the ongoing business;
  • risks of entering markets or businesses in which management has limited or no experience;
  • integration of the operations and personnel of the acquired business, including the differences in corporate culture;
  • management of geographically remote locations or several new locations;
  • incorporation of different technology (including computer) systems;
  • unexpected delays and costs caused by the integration process;
  • unknown liabilities or problems associated with the acquired company or assets; and
  • potential loss of key employees and/or management personnel.

This was a problem faced by a large NYSE company that had acquired in excess of 20 small companies in an 18-month period. Management was so intent on an acquisition strategy that no one was focusing on the integration problems that are typical of a roll-up. The subsidiary companies were all using different computer systems that were unable to communicate with each other. As a result, they had severe data integrity issues. There was no centralized cash-management system, and the treasurer had absolutely no idea of his cash availability. The company had several underutilized distribution centers within a two-mile radius of each other.

Existing management, many of whom were founders of the businesses that had been acquired, stayed in place. This only added to the dilemma as turf battles and fiefdoms developed, with no attempts made by anyone to maximize the companies' joint operations. To exemplify the extent of the problem, the sales forces all remained independent and, in many cases, were competing with each other for the same piece of business.

Despite all of these problems, management was able to keep the house of cards together for several years, a testament to the fundamental strength and profitability of at least one of the core businesses. The stock was flying high, indicating a value of over a billion dollars. Unfortunately, sooner or later the cash-positive business that is supporting all the cash-negative businesses will run out of money.

The company eventually defaulted on both its senior and subordinated debt and was forced into a bankruptcy. A new management team is now in the process of "unrolling" the roll-up and trying to determine which of the acquired businesses has the right to ongoing operation.

Just as often, the lack of focus on core operations comes from internal expansion into new businesses or product lines that are unknown areas for the company's management. This was a major issue for an international sports licensor and manufacturer of apparel and footwear. Through a series of marketing and merchandising missteps, the brand name had begun to erode domestically; however, the name maintained strong international brand equity. Management had also purchased a footwear manufacturing company and was struggling with a domestic textile manufacturing business. Both ventures were draining energy and cash from the core business. The company was facing a severe liquidity crisis, was under tremendous pressure from its lenders and was out of options.

The answer for this company was to identify the core business, shed non-essential operations and bring the cost infrastructure back into line. A short-term cash plan was immediately developed, and a waiver was negotiated with the lenders. With these steps, the company bought itself enough time to allow management room to maneuver and develop a new strategy.

Management quickly liquidated ancillary or underperforming assets and focused on the core businesses that were profitable—specifically, the company's European operations, which were cash-positive and included an important, extensive licensee network. The company also had very lucrative international endorsement contracts that allowed it to expand its licensing operation into Asia and the Middle East. These assets became the center of a new business plan. Once this plan was developed, the manufacturing plants were closed and sold, the debt was reduced and restructured, and the company was successfully transitioned from an old-line manufacturer to a profitable marketer and licensor. In this case, as in many, the company discovered that it was actually more profitable to shrink than to grow!

When an industry is undergoing a great deal of change, taking a "wait-and-see" strategy is not effective.

The Complacent Management Team

Another problem that we regularly encounter is a complacent management team. This is a team that works very hard and has been successful in the past, but that is so resistant to change that they are unable or unwilling to adjust to the necessary market or technological forces that affect their operations. The environment shifts around them, and they respond by working harder and harder at the same thing. They don't realize that they need to do things differently to be successful.

Such was one of the many problems faced by an old-line manufacturer of footwear. Although this company was facing the classic symptoms of a distressed company, including cash constraints and a lack of focus, the main problem was that management had come to rely too heavily on a single product, a product that had been on the market for close to 100 years.

Once a dominant name in footwear, this company lost its market position to powerhouses Nike and Reebok. In 1997, it was the fifth largest athletic shoemaker in the United States; by 1998, that position had dropped to a distant seventh. As other firms were producing more technologically advanced shoes demanded by the marketplace, this company did not stay competitive. The management team had not adjusted to—in fact, had ignored—the desires and demands of their customers in technology and/or fashion.

When they finally produced some credible new product offerings, it was too little, too late. Retailers gave the products a lukewarm reception, indicating their continued lack of confidence in the brand.

Eventually, the company ran out of time with its lenders. It filed for bankruptcy protection and will likely be sold.

When an industry is undergoing a great deal of change, taking a "wait-and-see" strategy is not effective. Management must be alert and take the initiative in order to keep up with, not to mention ahead of, the competition.


Our work with literally hundreds of struggling or failing companies has shown us that success demands an avoidance of these common pitfalls. Virtually all companies are vulnerable to a crisis; it is only a matter of time. How well the company survives depends on how quickly and effectively the management team and board of directors are able to react. A focus on the basics—i.e., the factors responsible for an organization's existing success—with a willingness to methodically expand based on market trends may not make the company a market leader, but it will keep it firmly in the black.


1 Bettina M. Whyte and Lisa J. Donahue are principals with Jay Alix & Associates Inc., a leading turnaround and crisis management firm, dedicated to improving the outcome for troubled or underperforming companies. Return to article

Journal Date: 
Friday, June 1, 2001