RESOURCE ANALYSIS
STEP 3: DEVELOP GAP-CLOSING ANALYSIS
As we mentioned above, a well-matched strategy will pass easily through this step and should be carried on to further stages of the Diamond-E analysis. The issue for discussion is whether it makes sense for you to stick with a strategy that creates some significant but potentially addressable gaps. The primary matters to consider here are additional costs that you will incur in the attempt to close the gap, the probability that your efforts will be successful, and the consequences of going ahead with the strategy but failing to close the gap in a sufficient and timely way.
Additional Costs In all likelihood the costs of extraordinary efforts to close resource gaps will not have been taken into consideration in formulating the strategic proposal and in preparing performance forecasts. These now need to be factored into your assessment of the strategy. For example, when John Labatt Limited, a Canadian brewer, purchased a 22 percent stake of the Mexican brewer FEMSA Cerveza for $720 million, it should have subtracted the cost of hedging its currency exposure from the returns expected from the investment. If your strategy cannot stand up to these new costs (as probably would have been the case in the Labatt investment) then it should be abandoned and steps taken to generate new proposals.
The Probability of Success You may recognize a resource gap, you may take
extraordinary action to address it, and you may still fail to close the gap and provide the strategy with the support that you were counting on. Consider Seagram Co.’s high profile $10 billion acquisition of PolyGram, which was aimed at creating a global giant in rock, pop, and classical music. The acquisition price assumed significant operating savings through the merger of PolyGram and Seagram’s existing Universal Music Group. It was no secret that both companies were short on the required people, disciplines, and procedures to achieve these efficiencies. Seagram took extraordinary steps to close this management gap by bringing in an “army” of consultants.17 But this had the side effect of
upsetting the creative executives who were at the heart of both of the businesses, creat- ing the potential for serious operating problems. There was, in short, a good chance that the efforts to fill the management gaps would fall short in the early going and put the economic justification of the transaction at risk. In 2000, Edgar Bronfman Jr., the CEO of Seagram’s, made the decision to sell Seagram’s to Vivendi for $34 billion in stock. Bronfman, a third generation Seagram CEO, felt the sale was the best way to preserve the value of the company for the next generation. However, the deal turned out to be a disaster. The plan had been to build a media giant through the marriage of Seagram’s
Universal Studios and Universal Music Group with Vivendi’s internet, cable television, and wireless divisions. However, Vivendi’s CEO, Jean-Marie Messier, drove the company to the brink of insolvency through a series of deals racking up $19 billion in debt.18
A high proportion of gap-closing initiatives will depend on some form of orga- nizational change. In the case of Boeing, the chances of it closing its manufacturing productivity gaps and containing its losses to those originally estimated will depend on how fast it can implement some fundamental changes in the way that it operates. Later chapters in this book are intended to help you to analyze and to plan organizational changes, and to assess the likelihood of success where the closing of resource gaps is an issue.
The Costs of Failure The failure to close a critical resource gap will handicap a strat- egy and perhaps cause it to fail outright. The consequences of this need to be identified and weighed in the context of other strategic options and the impact of failure on the company as a whole. You need to ask, “what happens if we can’t implement the strategy?”
If the potential consequences of not being able to implement a strategy add up to a “bet the company” situation, for example, you obviously need to do a very searching review of the strategy, of the implementation issues, and of the rationale for assuming that level of risk. In most cases this review will result in a decision to move on and search for a better way.
In some cases, however, such as when a company is already in crisis, the possibility of drastic downside consequences may be acceptable if the strategy offers a better future than doing nothing! Consider, for example, the circumstances of Canadian Airlines in 1995. The airline was facing accumulating losses and predictable failure if it carried on as it was. Management was considering two strategic options, which they had labeled Plan A and Plan B. Plan A was based on seeking concessions from the company’s unions to improve efficiencies significantly, enabling the airline to increase capacity and flight frequencies with minimal increases in cost. The added capacity would then be deployed in an attempt to increase revenues, particularly in the more lucrative business traveler market. There was a serious environmental risk in this strategy, of course, in that Air Canada, Canadian’s arch rival, would respond in kind, starting a war of escalating com- mitment. With this possibility in mind, the internal risks of Plan A were that the con- cessions and productivity gains might not be achieved and that even if they were, the company would not have the financial capacity to survive a price and capacity building war. Plan B, on the other hand, called for shrinking the airline to a defensible core through major reductions in people, fleet, and routes. The risks with Plan B were that once a retreat was started competitors would step in and make the situation increasingly untenable and that this process would be accelerated internally by the departure of good people and the evaporation of financial support. Faced with the dilemma of an unac- ceptable current strategy and two problematic future choices, management moved in the direction of Plan A. In an absolute sense this was a “bet the company” proposition, but in the crisis context at the time it might also be seen as the choice of probable death over certain death.
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In less dramatic circumstances the inability to implement a strategic proposal prop- erly may add up to substantial but affordable penalties in cost, market position, reputa- tion, and so on. Here the issue is whether the strategy still makes sense relative to other possibilities. Given the overall competitive imperatives driving the strategy, the conse- quences of stumbling might well be accepted as part of a risk that needs to be taken. At Seagram, the chain of events following the PolyGram acquisition have cost the company dearly. The scale of consequences and the likelihood of management miscues surely raise questions about whether there were not better alternatives available for the investment of $10 billion.