business failures -- uofmich

8/2/2019 Business Failures -- UofMich

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Recreating a Business

Business failure & survival

Successful & unsuccessful change

Internal development

Alliances

Acquisitions


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I. Background: Business Failure

& Survival
http://www2.shell.com/home/ExitPage?URL=http://www.shell.comhttp://www2.shell.com/home/ExitPage?URL=http://www.shell.com


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Thousands of dot.coms

Kmart, Jacobsons, Wards,

Owens-Corning, G-I Holdings (GAF Corp)

Finova, Federal Mogul

Warnaco

Midway Airlines & SwissAir Polaroid, Bethlehem Steel

Global Crossing

Enron WorldCom

Adelphia

Arthur Andersen

Dexter Corp (chemicals), 1767-2000 (break-up)

Recent Business

Failures
http://www.adelphia.com/index.cfmhttp://images.google.com/imgres?imgurl=www.deca.org/nab/Kmart.gif&imgrefurl=http://www.deca.org/nab/kmart.htm&h=150&w=187&prev=/images%3Fq%3Dkmart%26svnum%3D10%26hl%3Den


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21 Largest

Bankruptcies,1980-2002

Date Assets ($ bln)

Worldcom, Inc.* 7/21/2002 104

Adelphia Communcations 6/25/2002 24

NTL, Inc. 5/8/2002 17

Global Crossing Ltd. 1/28/2002 26

Kmart Corp. 1/22/2002 17Enron Corp.** 12/2/2001 63

Federal-Mogul Corp. 10/1/2001 10

Reliance Group Holdings, Inc. 6/12/2001 13

Pacific Gas and Electric Co. 4/6/2001 21

FINOVA Group, Inc., (The) 3/7/2001 14

First City Bancorp.of Texas 10/31/1992 10

HomeFed Corp. 10/22/1992 14

Southeast Banking Corporation 9/20/1991 13

First Capital Holdings 5/30/1991 10

First Executive Corp. 5/13/1991 15Imperial Corp. of America 2/28/1990 12

Gibraltar Financial Corp. 2/8/1990 15

MCorp 3/31/1989 20

Financial Corp. of America 9/9/1988 34

Texaco, Inc. 4/12/1987 36

Baldwin-United 9/26/1983 9


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Current Turmoil

Vivendi

AOLTime Warner

Lucent

Nortel

Mobilcom United Airlines


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Business Failure

40,000-80,000 companies file for bankruptcy

(Chapters 7, 11, & 12) in the U.S. each year Sources: bankruptcydata.com; abiworld.org

Thousands more are acquired

Some because they are successful,But many because they are failing
http://www.abiworld.org/http://images.google.com/imgres?imgurl=www.isinolaw.com/images/static/bankruptcy.jpg&imgrefurl=http://www.isinolaw.com/jsp/bankruptcy/BKRUPT_Main.jsp%3FLangID%3D0&h=385&w=527&prev=/images%3Fq%3Dbankruptcy%26svnum%3D10%26hl%3Denhttp://www.abiworld.org/


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U.S. Business Bankruptcies (Ch. 7, 11, & 12),

1980-2002 Source: www.abiworld.org

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

AnnualQ1

Q1 & Q2

Q1, Q2, Q3


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Many Businesses Fail Most industry leaders disappear over time

+85% top 100 U.S. firms in 1900 have disappeared

+85% top 100 from the 1955 Fortune 500 are gone

from the top 100; +80% are out of business

+50% of the 1979 Fortune 500 are gone

Why do so many firms exit, by failure or

acquisition?

Why do a few firms manage to survive over longperiods?


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Research on Business ExitFailure Acquisition

Young firms Mid to older

Small firms Any size

Technical change

Social change Inert firms (ignore change)

Maladaptive firms (respond

poorly to change)

Ineffective internal change

Ineffective alliances

Ineffective acquisitions

Ineffective global expansion
http://images.google.com/imgres?imgurl=www.aaroads.com/gallery/ks/jw/exit-sign-for-k-254.jpg&imgrefurl=http://www.aaroads.com/gallery/ks/&h=403&w=570&prev=/images%3Fq%3Dexit%2Bsign%26svnum%3D10%26hl%3Den


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http://images.google.com/imgres?imgurl=www.hrd-aero.com/Survival-Equipment-Large.jpg&imgrefurl=http://www.hrd-aero.com/Survival-Equipment.htm&h=830&w=689&prev=/images%3Fq%3Dsurvival%26start%3D20%26svnum%3D10%26hl%3Den%26sa%3DN


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Research on Business Survival

There are some industry tendencies, but the keyissues are firm-level (managerial) not external

Firms that survive over long periods havelearned how to change effectively

Survivors use multiple modes of change

Internal development & discrete exchange

Alliances

Acquisitions

But The changes also raise the risk of rapid

failure
http://images.google.com/imgres?imgurl=www.hrd-aero.com/Survival-Equipment-Large.jpg&imgrefurl=http://www.hrd-aero.com/Survival-Equipment.htm&h=830&w=689&prev=/images%3Fq%3Dsurvival%26start%3D20%26svnum%3D10%26hl%3Den%26sa%3DN


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II. Successful Change

Modes of change

Internal development

Discrete exchange/purchase contracts

Alliances

Acquisitions

(Global learning)


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Recreating The Company: Four Contexts for

ChangeLaurence Capron, Will Mitchell, Joanne Oxley

In Financial Times Mastering Strategy: The Complete MBA

Companion In Strategy, pp. 384-390, Pearson Education Limited,

London, 2000

Mode Context Advantages Risks Processes Incentives

Internal

Discrete

exchange

Alliances

Acquisitions


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Internal Change

Context Advantages Risks Processes Incentives

SpeedIrreversible

commitments

Coordination Path dependence

ProtectionLow-powered

incentives

Relevantresources

exist within

the firm

Cross-functional

coordination

Change-focused

individual &

group rewards

ExamplesHP used minicomputer experience for ink-jet printers

Schwab developed eSchwab from investment skills


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Internal Development Overview


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Discrete Exchange


Limited availability External search Search rewards

Limited

coordination ofexternal exchange

Internal

integration

Integration

rewards

Limited protection

of ongoing

exchanges

Active

market forspecific

resources

Low cost & low

confusion viatargeted resource

acquisition

Examples

Many firms license in brand names & technology

Many firms hireindividuals with new skills


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Alliances


Shared costsCoordinationconfusion

Partner searchsystems

Alignedpartners'

incentives

Quick access to

complex

resources

Internal conflictInter-firm

coordination

Aligned

internal

incentives

Hands on inter-

organizational

coordination

Proprietary lossInternal

commitment

Partially

retractable

commitments

Loss protection

Bilateral

protection

Moderate

market

failure for

discrete

resource

acquisition

Corning: lab jv w/ Ciba-Geigy & silicone jv w/ Dow

Hitachi: Medical markets expansion via Philips jv

Microsoft & Cisco: 100s of alliances


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Alliances Overview


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Acquisitions


Extent of

resource

acquisition

High costPre-acquisition

search systems

Depth ofintegration

Slowintegration

Post-acquisitionreconfiguration

systems

ProtectionLow-powered

incentives

High market

failure forresource

acquisition

Aligned internal

incentives of

new employeesand existing

employees

J&J: Dozens of medical sector acquisitions

Cisco & ABB: Dozens of acquisitions

AOL: Time Warner acquisition to obtain content

3Com: Acquired Palm Pilot w/ US Robotics


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Acquisitions Overview


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Global Learning

Involves all modes

With their advantages

And their risks (squared)

Examples

Advantages: Carrier, Asahi Glass, Guardian Glass,

P&G, CitiGroup, Ryder Logistics, Wal-Mart?Problems: Vickers, Daihatsu, Mitsubishi, Daewoo,

Bata, Barings, Kmart, Gateway, Enron, Allied IrishBanks, ABB, Vivendi


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Risks of Change

Change attempts are two-edgedGreat if you succeed

Costly if you fail (e.g., Xerox, Cendant, Kmart,

DaimlerChrysler, Dow-Corning, Warnaco, SwissAir,Midway, Enron, AOL-TW?)

Each change mode risks failure if done badly.

But: Inertia is a sure road to corporate death(e.g., American Motors, steel cos.)


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Change Change is necessary

For people

For firms

For societies

Change is risky

For people

For firms

For societies

So learn how to change well


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Next

General Electric: Corporate dynamics

Preparation

Syllabus questions

Identify key financial trends in Welch era

Do 3-year financial projections to 2005

What major strategic issues do Charlie

Jackson (& Jeffrey Immelt) face?

C. Jackson

J. Immelt

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