Sunday, March 31, 2019

The Acquisition Trap

Shortly after coming to Stanford I realized my mistake. I should have hired an actor to go to work in my place. 

My first day on the job, he would arrive and fill out the paperwork, meet the dean, and step into the classroom. He would be popular, of course; perhaps I would hire a comedian. I could teach him the material in private, and he could cartwheel into the classroom like Jackie Chan – or maybe sachet in like George Clooney. Meanwhile, I would hide in the library basement and write research articles. But, alas, I did not devise the scheme until it was too late. I had already reported for work, so my colleagues and students all know that I am no Brad Pitt – and ever since I have split my time between teaching and research.

The good news is that by doing things myself, I learned how. I’m still unlikely to be called by Angelina Jolie any time soon, but I’m a better teacher for having done this myself. That is how things go; call it the “learn or buy” decision. Need food? Go to the store. Need to finish a math assignment? Get to work. You could pay someone to do your math assignment, but then you’d not only be a liar, you would never learn your math. Paying for things is a way to avoid learning. Some people change the oil; some people pay Jiffylube.

Common sense, you say. But I work with companies all the time who don’t get this basic truth. Leadership wants their company to learn something, so they acquire another company that already knows how. But this purchase does not make their company learn; it just means they own another company that knows how to do things that they don’t. For their company to learn, they would have to do it themselves, and through that difficult process they might have learned. But paying someone else does not help you to know. In fact, since you can rely on the acquired unit, you can avoid having to learn.

For example, the American company eBay (the inventor of internet auction websites) decided to enter China a few years ago. They could have gone in themselves, and learned, and it would have been risky and difficult. So instead, they acquired China’s then-leader in that space, Eachnet. Earlier, Eachnet had learned (by doing) a lot about how internet auctions work in China – whether and for what you can charge fees, how to deal with the trust problem using escrow services, the costs and benefits of physical trading locations, how to do business with people who don’t have a credit card, and the list goes on. eBay’s leadership in Silicon Valley did not know any of this about China. After the acquisition, eBay’s leadership still did not know any of this. They just owned a company that knew. They fell into the acquisition trap.

You may think that “good execution” can get you out of the acquisition trap. You’re wrong. After the acquisition, you have a choice. You may choose to absorb the acquired company into your company, or you may choose to let it stand alone. If you absorb, business consultants will likely be involved; they call it “post-acquisition integration.” You can pay these consultants to tell you about “synergy.” But the research suggests these promises are often not fulfilled. (The results are mixed. It appears that acquisition increases the variance in performance. That means acquisition makes some firms much better off but others much worse off – and it is hard to know in advance which will be which.) In practice, “integration” is where the two companies are put together, some people lose their jobs, and many others end up in new jobs (that might not be right for them but they are glad to have the job at all). Typically the purchasing company dominates in this process, which means that the knowledge of the acquired company usually gets watered down or vanishes entirely.

Your other choice is to leave the acquired firm alone. One of my favorite CEOs, Matt Harris, once had to leave alone an acquired software development group in Israel because, to paraphrase that group’s leader, they “would kill for each other, but they did not care” about the acquiring company. Harris’ company needed their work, so he let them be and designed the development process to take advantage of the situation. This worked out fine because Harris was not interested in having the company learn from the acquisition. But if your goal is to learn, you won't get there by leaving the acquisition alone.

What about the successful acquisitions you've heard about? You may be thinking of an example or two now. Caution! We can always cherry-pick success stories afterwards. There are also many failed acquisitions, and that is why we need to learn from research that does not sample on success. (Sampling on success, we should play slot machines, too.) That said, we can all name companies that have a good track records on acquisition. Maybe you’re thinking of Google, or 3M, or Cisco, or Blackstone, or name your favorite successful acquirer. Perhaps some firms know how to acquire better than others?

True enough, some companies seem able to acquire better than others, but think about why. Google absorbs innovative technology companies all the time; that is where many of their “innovations” come from. Facebook spread through acquisition so that it now has four distinct entities in the social network space. Private equity companies routinely make money through acquisition and restructuring. But these various examples do not imply that acquisition for learning works. In fact, we know that the less the acquirer needs to learn, the better the acquisitions typically go. Good acquirers already know what they are doing; they may be getting many things from the company they buy, but they are probably not treating that company as their teacher.

There is no substitute for learning by doing. Perhaps you don’t really want to know how to change the oil, but if you do, get to work. And if you’re acquiring a company to learn what it knows, you are stepping into a trap.


For a sobering academic literature review, see this paper by King and his colleagues.

Thursday, February 28, 2019

Why Strategic Planning is Not

Business school professors miss the Soviet Union. The nemesis of old used to provide us with a stream of wonderful examples that we could contrast to the market.

Take nails, for instance. Socialist economist Alec Nove wrote of this example: In an effort to increase the production of nails, the Soviet planning authorities created production incentives based on numbers of nails produced. In response, the Soviets enjoyed the following year a plentiful supply of many many very small nails. To correct the problem, the authorities cleverly switched to incentives based on weight, and the producers responded by manufacturing very large nails. The travesty was parodied in this cartoon from the satiric magazine Krokodil. Ah yes, better to use the market.

But the real lesson of the Soviet experiment has been lost on us, and the corporations of the world should take note: Planning doesn't work.

Corporations must and do plan, of course. Their leaders call these plans "strategic" to give them gravitas. But typically strategic plans are just budgets and goals. Budgets and goals are important, but they are not "strategy" if by strategy we mean the logic that drives action.

The problem is that we don't have all the information we need when we make the plan. If we did, we might be able to make planning strategic, and then leadership would just be planning + execution. But we live in a world of great uncertainty, and so stuff comes up that soon renders our plans obsolete. You do this enough times, and you laugh at planning approaches like the one pictured here.


The better option to "strategic planning," in my view, is strategic thinking

Let me illustrate. I recall during the late 1990s when Dan Warmenhoven, then the CEO of NetApp, challenged his leadership team to move the company beyond its customer base - which at the time was mostly high-tech companies needing NetApp file servers. Warmenhoven had a compelling logic - that information technology (IT) was spreading to all sectors of the world economy and NetApp needed to be selling into the IT buyers within large companies of all sectors.

Today we know that this vision would turn out to be spot on, but at the time the strategy was controversial. After all, the company was doing just fine selling into high-tech. But Warmenhoven changed the company's direction nonetheless, setting a brave course that was clear in its logic, even if it was debatable. There was no lengthy "plan" to do this. Warmenhoven established a way of thinking about the company's strategy, and they commenced action (tracked at weekly business updates). So commenced a process of learning and updating, giving shape and substance to Warmenhoven's initial strategic logic. Such is the power of strategic thinking.

The lesson: Of course we must plan, but don't let the budget-and-goal cycle substitute for strategy. Build your strategy into your planning process, so your people share a common logic that guides their actions.


For more on strategic thinking, see my notes on change and growth.

Thursday, January 31, 2019

How to Change for Good

Sometimes I get the pleasure of teaching Stanford undergraduates. How very bright they are. And the best part: Give me an hour to lecture the undergraduates, and I can send them away completely changed. The problem is, then they go to the next professor, and she changes them right back again!

The lesson: Easy changes are easy to undo, so easy change is temporary. And the easiest changes are the snap decisions, made in a moment, since they can be unmade just as fast.

Sound familiar? If you are an experienced executive, you no doubt have tried to change your approach to leadership. Perhaps you've tried often. Did the changes stick? If so, good for you. But very often our attempts to change ourselves are foiled by the forces of inertia: routines at work; calendars so full of meetings they leave no time for thinking; colleagues who look skeptically when you behave unexpectedly - especially if you've been to a leadership training. The forces of inertia are strong.

Yet every summer, for six weeks, I see a couple hundred talented executives change their lives forever.

Wait. Bear with me.

Yes, I'm plugging the Stanford Executive Program (SEP), which I direct. But I'm talking about how to change as a leader - how to change for good - and you can use the ideas here even without coming to SEP.

To see what makes change stick, it helps to see the difference between one-time change and trajectory change. One-time change happens in a moment, like when I lecture the undergraduates. Such change often happens in a big announcement: "turning over a new leaf"; "from now on..." But well intended though they may be, loudly proclaimed changes made in a moment can be reversed just as loudly in the next moment. Like young love, no need to worry. Just wait a day.

Image may contain: one or more people, sunglasses, ocean, sky, outdoor, nature and waterTrajectory change, on the other hand, is hardly noticeable at first but over time leads to a big difference. Those who navigate the sea, like Paul Barnett, shown here, know the problem. Leave something metal next to your magnetic compass, and the trip from San Diego to Hawaii could end up in Panama. The slight initial change in trajectory would hardly be noticeable at first, but held long enough the new trajectory leads us to a very different place.

Image may contain: sky, ocean, outdoor, nature and waterSo how do you change your leadership trajectory? (First, get past the trajectory metaphor; countless self-help books tell you to change trajectory, but you are not a boat.) To apply this idea to leadership, replace "trajectory" with "understanding." The way you understand the facts gives direction to your leadership. When you change understanding, you change the direction of your leadership.

For instance: Is the controversial new employee a deviant or an innovator? Your answer depends on how you understand your people and their role in creating new ideas. Is the recent failed project evidence of incompetence or of learning? Your answer depends on how you understand your organization's approach to experimentation. Is the new competitor a reason to withdraw or a call to action? Your answer depends on how you understand your strategy and the opportunities in your environment.

When you come to understand in a new way, you change your trajectory as a leader. And better yet, you now have the forces of inertia working in your favor. As your new understanding becomes a habit, it also becomes the status-quo - very hard to undo. Guided by a new understanding, and given time, you and your organization will be in a very different place.

Want to change your leadership trajectory? Come change your understanding at the Stanford Executive Program