No Short Cuts

Tom Peters

There are no shortcuts to success. This is especially true for
the business world’s favorite shortcut: mergers. That’s the story
behind Coniston Partners’ May 26 announcement that it now owns 13
percent of Allegis’ (parent of United Airlines) stock and plans
to make a run at buying the rest of that firm. Its unequivocal
objective, to sell off units of the corporation (probably Hertz
and Westin Hotel), demonstrates once again that the “break-up
value” of a conglomerated firm usually is much higher than the
value of the ill-conceived whole.

But merging rather than working at the basics is just one of five
popular, but futile, business quick-fix strategies, says renowned
Harvard Business School Professor Michael Porter, in a trenchant
May 23 commentary in The Economist.

Porter’s list squares precisely with my own observations:

1. Restructuring as strategy. Cutting staff, closing plants,
selling off misfitting business units and deintegration in
general surely have been necessary for old-line firms. Moreover,
they frequently have led to improved bottom-line results in the
short term. However, these frenetic actions amount to just a
first step — atoning for past sins, such as general
slovenliness.

“But restructuring is not a strategy,” claims Porter. … [T]oo few
companies have made the transition from restructuring to building.”
That is, after all the pruning, companies must focus on new, basic
skills necessary to compete today, such as making a total commitment
to achieve world-class quality and heretofore unheard-of flexibility.
Without such long-term capability building, “it is only a matter of
time before [recently restructured firms] will be restructuring
again.”

2. Buying competitors instead of beating them. It goes without saying
that the easiest way to gain market share in the short term is to buy
the competition! The problem, once more, is that this ignores the
basic capabilities that lead to a sustainable competitive
advantage. History suggests that when the attention of management is
diverted to problems associated with buying and selling businesses and
then post-merger integration, the firm becomes clumsy and increasingly
vulnerable to the numerous, more focused competitors that attack by
chipping away profitable niches. Porter notes that the longterm
winners, such as Toyota, Procter & Gamble and British retailer Marks &
Spencer, “have beaten their competitors through [focused] innovation
and dynamism. Buying competitors is a drug which makes managers feel
good in the short term, but ultimately saps the energy and creativity
of an organization.”

3. Alliances. Despite the current rage, “alliances are never
(my emphasis] the solution to a company’s strategic
dilemmas,” Porter flatly asserts. (Allegis’ principal defense
against would-be suitors such as Coniston Partners and its
pilots’ union has been a questionable alliance with Boeing, which
gives the aircraft builder a potential major ownership stake in
Allegis.)

Such alliances will fail if they are used as a substitute for working
at correcting skill shortcomings. Any and all deficiencies that these
alliances are intended to remedy, such as impatience at turning a
profit in a major foreign market, will, if anything, become more
pronounced when the odd couples attempt to achieve the (on paper)
synergies. The only alliances that become successful tend to be those
that combine well-cared- for strategic skills of superb firms, such
as the long-term arrangement between computer maker Amdahl and
Fujitsu.

4. Imitation instead of innovation. Copycat strategies are no way to
achieve long-term advantage, says Porter. Most firms, he adds, “lack
the conviction to set themselves apart.” He cites such industries as
banking, in which everyone seems to enter the same types of product
lines. Companies such as McDonald’s, Citicorp, Federal Express and The
Limited fundamentally have altered the basis of competition in their
industries. Only such bold alteration (supported by continuous
improvement) will lead to sustainable advantage.

5. Diversification for growth’s sake. Porter’s recent empirical work
on the fate of acquisitions is damning indeed, and consistent with
numerous (albeit mainly ignored) previous studies. In an analysis of
diversification and divestitures at 33 big American firms from 1950 to
1980, he found that 53 percent of all acquisitions had subsequently
been unloaded. Looking at specific categories of acquisition he
observed that 55 percent of those in related new fields had
later been bounced; and a whopping 74 percent of acquisitions in
unrelated new fields had been shut down or divested. Yet Porter
sadly concludes, “The allure of diversification is as strong as ever
… [most companies] are making the same strategic mistakes that have
been prevalent for decades: making acquisitions in … fields where
they cannot add any value …” In fact, despite the overwhelming
evidence that diversification for growth’s sake is a losing strategy,
the trend is spreading beyond U.S. borders. Porter points to such
recent European moves as Daimler-Benz’s indigestion after swallowing
AEG Telefunken, calling it a typical case where the “synergies are
hard to discern.”

As competition around the world boils over as never before, firms
caught with bloated staffs and dissipating strengths — from Silicon
Valley to the Ruhr Valley in Germany — are looking quick fixes. There
are none.