Wednesday, September 2, 2009

Strategic Planning Analogy #274: Painting a New Name on the Ambulance

I used to live in a city where the citizens were upset with the ambulance service. The ambulance drivers were accused of being incompetent and dangerous, causing far too many accidents.

In response to citizen protests, the city suspended the license of this ambulance company and replaced them with a different ambulance company.

Unfortunately, this new ambulance company did not have any other operations in the immediate vicinity. Therefore, they needed to hire ambulance drivers in order to serve this city. As it turns out, pretty much the only people in the area who were qualified to drive an ambulance were the former drivers for the ambulance company which just lost its license. Consequently, most of the drivers for the new ambulance company were those same “incompetent and dangerous” drivers that worked for the old company.

So, other than a new name painted on the outside of the ambulance, we were pretty much back to where we started. So much for progress.

In the story, the city tried to improve the performance of the ambulances. To do so, it changed ambulance companies. Unfortunately, what didn’t change were the people driving the ambulances. Since the poor drivers were the cause of the problem, the change in ambulance companies did not solve the problem. The only thing that changed was the name painted on the ambulance.

Many businesses fall into the same trap as this city. They develop strategies intended to change things for the better. However, because the underlying people and processes stay essentially the same, the situation does not get any better. It’s business-as-usual under a different label. These company strategies are about as useless as the idea that painting a new name on the ambulance is going to make those drivers any safer.

The principle here is that significant changes in performance require significant changes in how things are performed. I know this sounds obvious, but actions like what happened with those ambulances seem to occur all the time. We put a new label on something and expect miracles. Concentrate more on labor (what they do) than labels (what they’re called).

This problem seems most acute under two situations: acquisitions and revitalization initiatives.

1) Acquisitions
When you are acquiring a company, you typically have to pay a significant premium price (over current market value) in order to get the deal done. This leads to an important question: What is your company going to do with those assets that is going to make them so much more valuable in order to justify that premium price?

Let’s face it. The current owners probably know a lot more about the company than you do. They are typically already working very hard to extract as much value out of it as they can. And, except for maybe a few people at the top, you are going to keep the same basic people that worked there prior to the acquisition. So why do you, as an outsider, think that the same basic organization is going to perform so much better just because you painted your name on the building?

Sure, people talk about all the “synergies” of putting the acquired company together with their own. My experience is that one never gets as many synergies as hoped for. Either the cultures don’t mesh or fewer things can be eliminated than planned. As mentioned in an earlier blog, using common shared services across multiple divisions quite often causes more net costs than savings. Unless you are planning on running the company significantly differently than before (and I truly mean SIGNIFICANTLY different), you won’t get much of a significant improvement.

Take the recent acquisition of Marvel by Disney. Disney paid a ton of money to get the company (a 29% premium over current value). Will Disney run the company significantly differently than the prior owners? Well, Marvel already was exploiting the value of its characters in movies, merchandise and theme parks (the very things Disney would do). In fact, one could argue that those prior contractual arrangements could make it more difficult for Disney to exploit them under the Disney umbrella.

And is Disney going to get rid of all the Marvel people? Of course not! Disney wants their creativity.

So, other than perhaps executing the prior strategy a little bit better, has Disney done much more than just “paint their name on the ambulance”? Even if they make Marvel 29% better, all they will have done is break even on the deal.

Let’s assume for second that Marvel was horrible at exploiting their assets, leaving huge potential for Disney. Typically, when a company is not doing well in exploiting their assets, astute investors assume that potential acquiring companies will also recognize this potential. These investors assume that eventually one of these firms will acquire the company to better exploit those assets.

As a result, the investors will often bid up the current price of a company ripe for acquisition to include a “potential acquisition premium.” Hence, when the acquirer pays a premium over the current value, they may be paying a premium on top of a premium already embedded in the stock price.

Make sure that when you put an acquisition into your strategy, you specifically outline in that strategy enough changes to that company in order to create enough value to justify the price. Otherwise, all you are doing is painting your name on their ambulance. For more on this topic, see this prior blog.

2) Revitalization Initiatives
In addition to acquisitions, strategies also often deal with revitalizing problem areas in a company’s current portfolio. These revitalization programs are often given fancy names, like “Vision 2020” (If you don’t believe me, just Google “Vision 2020” and see how many firms use that label for their strategic initiative).

The goal is to revitalize performance. However, these initiatives often try to create this revitalization using the same basic people whose poor performance created the need for revitalization in the first place. As we saw in the ambulance story, often times the people are one of the main causes of the original problem. Unless the people (or the culture surrounding the people) are radically changed, why should one expect revitalization?

This reminds me of an interesting story. Years ago, I worked for a firm that was having a sales slump due to a recession. The president of the company asked every employee to send him suggestions on new ideas to improve sales. One person replied, “Do you really think I was holding back on good ideas to increase sales until you asked for them? I’m already doing everything I can to increase sales.”

The point is that most employees are not worthless bums. They are generally good people already trying to help the company do well. Putting a new label on what they do is not going to suddenly make them significantly better. They are already putting in the effort. Unless you significantly change the quality of the people or the nature of the work process, you will get only minimal, short-lived improvement. All you have done is paint a new slogan on an old ambulance.

Significant gains require significant change. If one has the same people doing essentially the same work, one should not expect much of an improvement. Just changing the label doesn’t change the results.

A pig is still a pig, not matter what you call it.

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