Strategic Planning Analogy #408: Poisoning the Well

THE STORY
There are lots of stories written and movies made about feuding families in rural areas. A common tactic used to attack the enemy in these stories family was “poisoning the well.” What would happen was that one family would sneak onto the other family’s property. They would then do something to the well water or reservoir of their enemy with the intent of either drying up the source of the water or making it unfit to drink. This was called poisoning the well.

This was a particularly nasty tactic, because if a farmer or rancher doesn’t have access to good water, their livelihoods are ruined. Not only is there nothing for the family to drink, but nothing to feed the cattle or water the crops. The family who was attacked in this way had few options. Often they just had to give up and move somewhere else.

What makes this tactic even scarier today is the fact that it is not that difficult for a terrorist to “poison the well” of major cities. Using modern chemistry, it wouldn’t take much for a terrorist to cause the major sources of water for huge cities to become unfit to drink. Suddenly, that old tactic takes on new significance.

THE ANALOGY
A similar situation occurs in the business world. However, instead of the well or reservoir being filled with water, it is filled with cash. Just as water is needed to keep the cattle healthy and the crops growing, cash is needed to keep the company healthy and growing. Cutting off the flow of water can ruin a farm or ranch. Similarly, cutting off the cash flow to a business can ruin it.

And just as the families in these movies and books had enemies, so do businesses. And if a company makes a strategic error, they can create a situation in which competitive forces “poison the well” of cash for a business. This can be so ruinous to a firm that the company can no longer exist.

Therefore, a key component of strategy needs to be protecting the well of cash so that it does not get poisoned.

THE PRINCIPLE
Today’s principle has to do with where the emphasis should be placed when looking at the strategic aspects of a potential acquisition. I believe that, in general, too much focus is placed on potential synergies from the acquisition (ways to boost cash) and not enough time is spent looking for the potential of the acquisition to poison the well of cash (ways to destroy cash).

As we will soon see, acquisitions can trigger competitive events which may cause a poisoning of the well. Since the purchase price in an acquisition is typically linked to the value of future cash flows, any poisoning of the well seriously diminishes the value of that acquisition (because there will be far less cash after the poisoning). It can cause you to grossly overpay for the acquisition if you do not take this into account during due diligence.

Ways in Which Acquisitions Can Poison the Well
There are many ways in which an acquisition can poison the well. For example, let’s assume you want to acquire one of your suppliers. That supplier may also be supplying your competitors (your enemies). The enemies will not want to do anything to help you, so if you buy that supplier, they may take their business with that supplier elsewhere. In other words, your ownership of that supplier can trigger competitors to take away their business and reduce the supplier’s cash flow. You have poisoned the well.

Let’s say you want to acquire your distributor. Suddenly, many of your enemies who also use that same distributor may no longer want to use them because they do not want to help a distributor owned by their enemy. Again, the cash goes down due to ownership change. You’ve poisoned your well.

Let’s say that you want to acquire a direct competitor. It may be that a lot of the customers using that competitor were doing so specifically because they did not want to give their business to you. Once you buy that competitor, it becomes a part of you. Therefore, the customers who were trying to avoid you will take their business away from the company you want to acquire. The well is poisoned.

I spoke about this concept in more detail in a prior blogs (here and here). You may want to go back and review them.

Synergies Aren’t As Great As One Thinks
Given the high potential for ruinous poisoning, you’d think that more attention would be given to it. Instead, my experience has been that the bulk of the strategic focus in acquisitions is around synergies.

Synergies are good and they should be looked for, but if we focus too long in this area, we may delude ourselves into seeing more synergies than really exist. Lots of studies have looked into why most acquisitions fail. One of the key conclusions which keeps coming up is that acquisitions rarely achieve as many synergies as one thinks prior to the deal. Apparently, much of that time focusing on synergies was focusing on illusions which will not occur. They deceive us into seeing more value than there really is.

Worse yet, all that time spent on the optimism over synergies may keep us from spending enough time on the pessimism of potential well poisoning. Too much optimism combined with not enough pessimism leads to grossly overvalued estimations of cash flow. The result is that companies pay too much for an acquisition and destroy company value.

The Google – Motorola Mobility Deal
The principle of poisoning the well can be seen in the potential acquisition of Motorola Mobility by Google. Does Google have enemies? Yes, indeed. There’s a reason why Microsoft filed a complaint with the European Commission back in April 2011, alleging that Google was engaged in illegal anti-competitive activity. There is a reason why several companies which don’t usually work well together (Apple, Microsoft, Research in Motion and Sony) combined to outbid Google for Nortel’s intellectual property back in July. They don’t like the power of Google and they want to keep Google from getting stronger.

Then comes the announcement that Google wants to acquire Motorola Mobility. As it turns out, not only does this action give Google’s enemies a chance to poison the well, it also gives Google’s “friends” an opportunity to poison the well.

For example, Microsoft is expected to use this event to tell people in the industry that they cannot trust Google and should put more of their priorities into the Microsoft/Nokia system. This can poison two wells. First, it can take sales that would have once gone to Motorola Mobility and shift them to Nokia. Second, it can make a higher percentage of phones carry the Microsoft software instead of Google’s Android system. The Microsoft system will shift more mobile advertising revenue to Microsoft (through Bing and other sources) which could really hurt Google’s cash flow.

Worse yet, this just might be enough of a boost to Microsoft to give them critical mass in the mobile marketplace, something they can build on and grow. Perhaps if Google had not announced this deal, Microsoft would have eventually given up on the mobile software due to insufficient demand. A similar situation could occur with Research in Motion, who might have eventually gone away, but now may have a chance to revive itself through the poisoning of Google’s well.

Even Google’s device partners (“friends”) in the mobile space (Samsung, LG and HTC) may now become less enamored with their partnership with Google. They may begin to think that Motorola Mobility will get preferential treatment over their own devices. As a result, they might hedge their bets by getting closer to Microsoft, shifting share away from Google’s Android.

If less of the really cool devices (from Samsung, LG, and HTC) carry Android, and if Motorola Mobility puts Android on inferior devices, then consumers may revolt and switch away from Android. Again, more poisoning of the well.

And if Android starts losing significant market share from all these poisonings, it may have less influence in getting priority for cool apps from the development community. This could start a downward spiral, as even more customers see a reason to switch to others who have cooler apps sooner.

The point here is that this type of deal can cause all sorts of negative poisoning of the well. I hope Google fully considered these ramifications when contemplating the deal.

SUMMARY
Acquisitions do more than create positive synergies. They can also trigger negative impacts on cash flow (poison the well). Since the true amount of synergies in a deal tend to be less than expected, and the poisoning of the well can be larger than expected, strategic emphasis during acquisition may need to shift from synergy to poisonings.

FINAL THOUGHTS
In the old stories, it was the enemy who poisoned the well. In business, we tend to poison our own well through poor strategic decisions. Shame on us! This is a preventable problem, because it is under our control. Make sure you consider the potential for poisoning the well whenever you contemplate a move which upsets the status quo.

Analogy #167: Enemies are Our Friend

THE STORY
There’s something special about sports rivalries. They help motivate teams to perform at their best. Even in the down years, when it is time to play a game against a rival, the team finds that extra effort to perform at its best.

Not only do rivalries help to motivate the athletes, they help to energize and bring a sense of pride to their fans. I found this out the hard way.

One of the greatest rivalries in college sports is between Ohio State and Michigan. I am a graduate of the University of Michigan (twice) and am currently living in the home city of Ohio State. I’ve found it doesn’t take much to energize the people around me in Columbus. All I need to do is wear my University of Michigan shirt around town. I don’t do that anymore. I don’t need to create that much energy against me.

During half-time of one of the Michigan-Ohio State football games, I decided to take my car into one of those fast oil places to get a quick oil change. Because the rivalry is so important to the people of Columbus Ohio, every one of the workers at the oil change shop were watching the game on TV while working.

As I pulled into the shop, the mechanic gave me and my car a very mean stare. At first, I was confused. Then I remembered that I had a large University of Michigan decal on my car. Based on the look I got from the mechanic, I was afraid he would sabotage my car. I won’t do that anymore, either.

THE ANALOGY
Intense rivalries are good for sports. They give the athletes the incentive to play harder. They give the fans more to root for. It creates great excitement and energy. Without the rivalry with the Boston Red Sox, the New York Yankees would be less exciting. They need each other.

There’s nothing like having a common enemy to pull a team and a community together. The same can be said for the business world. Enemies can have a great positive impact on motivating a company to act on its strategy.

Without an enemy, a company can become complacent. Enemies can pull a company together and get them play more like an enthusiastic team.

Therefore, if you want to get your company fully motivated to execute a strategy, it can help if the strategy is in some way connected to fighting a common enemy (or rival). So, at the same time you are developing your strategy, it can be beneficial to also develop that common enemy.

THE PRINCIPLE
The principle here has to do with motivation. One of the greatest hindrances to implementing a strategy is a lack of cohesive motivation in the company—a lack of desire to put in the extra effort to do whatever it takes to make the strategy a reality.

According to a survey of 50,000 employees by the Corporate Leadership Counsel, only 11% reported that they felt fully engaged in their current work. There was 76% that were neither engaged or disengaged, and 13% felt fully disengaged.

In this highly competitive world, it is virtually impossible to win with a team where 89% are not fully engaged in their work. The only sports teams which make it to the top are teams where all of the members are highly motivated and fully engaged. This attitude is also needed to win in the business world.

How do you get that extra motivation to become fully engaged in the workplace? One way to do so is by creating a strong common enemy.

There are four benefits from properly managing the idea of a common external enemy. These are each briefly discussed below.

1. External Enemies Minimize Internal Bickering and Squabbles
Just as the Ayatollah Khomeini was able to unite the warring factions of Iran by using a common external enemy of the United States, you can use a common external enemy to bring your warring factions together. By getting the focus on something big and ugly outside of the organization, it makes all the petty little internal bickering seem small and unimportant. Showing that we all share a common external enemy gets us to focus on what we have in common rather than what pulls us apart.

During war, personal ambitions need to take a back seat to fighting the common enemy. This is also true in business. Focusing on the common external enemy makes us more of a cohesive team. We band together for the common strategic fight. The internal bickering and game playing that can derail a strategy subsides as the dialog moves to the common threat.

The common enemy can be a competitor, a country, or any other external environmental threat to the status quo. As long as the common external enemy is positioned as being a greater threat than any internal politics, you can band together and become better motivated to jointly make the strategy to beat the enemy a success.

2. We are More Motivated to Fight Concrete Enemies than Abstract Principles
When you can put a face to the force you are fighting, it is easier to focus your energies against it. Abstract principles are harder to build up a hatred against and a motivation to vanquish. For example, your strategy may depend on excellence in innovation. It’s a noble goal, but somewhat abstract. However, if you say that the goal is to out-innovate competitor “X” and displace them as the innovation leader, then you have motivation.

People like to play to win. It’s hard to feel like a winner if there is no rival to compete against. By putting the strategic goal in a competitive context against an external enemy, there is that extra incentive—a focus on a company to beat.

In a classic Harvard Business Review article called “Strategic Intent,” Hamel and Prahalad talk about the success companies have had when they put a concrete competitor’s name to a strategy. Using the example of Cannon’s “Beat Xerox” and Komatsu’s “Encircle Caterpiller,” the article showed how these companies achieved great success. Putting a concrete enemy’s name to the strategy caused them to think that they could become more than they were today by showing them someone else who had already achieved that level.

In addition, it helped them to visualize the types of things they would have to do to achieve such greatness. Finally, it provided a great rallying cry, a foe to be defeated. Victory is sweeter when it comes from battling a visible foe.

3. Enemies Heighten Activities from a “Check List” to a “Game”
Many activities need to be accomplished in order to fully execute a strategy. If you just put all of those activities on a big piece of paper and give it to someone, it looks like a boring “To Do” list. It can become de-motivating, because of the magnitude of the daunting tasks. There isn’t a lot of fun in putting a check mark next to a difficult task when completed.

It is like all of the drills and exercises that athletes go through. They aren’t much fun. Athletes do them, however, because they know they will help them perform better on game day. It is the motivation to win the game against the enemy that causes them to do all of those difficult and strenuous activities.

The same is true in business. If the “To Do” list is renamed as “skill building exercises needed to beat the enemy,” then those same activities look a lot more appealing. The potential thrill of victory makes all the preliminary activities easier to swallow. It is no longer just work. Now it is a game. Games are more fun than work, even if it is the same activity. Winning battles sounds more appealing than accomplishing tasks. Competing is more fun than just doing.

4. Enemies Can Motivate Speed
A “Check List” doesn’t create much of an incentive to act quickly. You know that if you get a task done quickly, it only means than you get to the next item of work sooner. The reward of getting to do more work if you work quicker is not much of an incentive to work fast.

However, if the work is repositioned as a race against a common enemy, then there is an incentive to work faster. The United States worked faster at getting a man on the moon because there was a “Space Race” against the USSR.

People would rather win than lose. If the strategy is positioned as a race against an external enemy, there is that added motivation from wanting to win the race.

A common principle in strategy is that the first to own a position in the marketplace typically has the upper hand and is the most successful. Therefore, the analogy of a race can be quite applicable—a race to win ownership of a position in the marketplace before someone else.

SUMMARY
There is a lot of work required to make a strategy succeed. This work is usually added on top of one’s everyday responsibilities. In order to get this work done quickly and effectively, it helps if the work is positioned as necessary to defeat a common enemy.

FINAL THOUGHTS
Many many years ago, a friend of mine worked at Miller Brewing. He told me the CEO at the time had a welcome mat in front of his door with the Budweiser logo on it. He wanted everyone to wipe their feet on the enemy before entering his door. Similarly, when I was at Best Buy, the Circuit City company was always referred to as the “Evil Empire.” By personalizing the battle in these terms, it made it easier to motivate people to defeat the enemy.