Success and Failure of Strategic Management in 2015 – Part 2

In part 1 of “Success and Failure of Strategic Management in 2015” I had presented three cases of what I consider good strategic management. In part 2, I will now focus on examples of bad strategic management that emerged in 2015.

Business Failure - Strategic ThinkingBad Strategic Management

Usually, bad strategic management only becomes visible to the public when it is too late, i.e. when serious damage has already happened as a consequence. There is certainly a risk to conclude from every business failure that bad strategic management must have preceded. While this may be true more often than not, it is not automatically the case. With that caveat, it is still fair to say that the year 2015 offered some spectacular cases of bad strategic management. I picked three that in my view stood out.

Volkswagen

In September 2015, the US Environmental Protection Agency, EPA, revealed that Volkswagen Group had circumvented environmental regulations of NOx emissions. This was done via “defeat devices” in its diesel engines of the 2009-2015 models of Volkswagen and Audi cars (see my earlier blog article “Five Strategic Lessons from the Volkswagen Emissions Scandal”).

The systematic violation of environmental regulations in the US and other countries dramatically revealed an approach to strategic management that lacked an appropriate sense of risk and values. It also revealed deficiencies in the leadership culture of the world’s biggest car maker. The scandal reduced the stock value of VW within days by half. As a consequence, Volkswagen chief executive officer Martin Winterkorn resigned.

Until the scandal emerged, VW was extremely successful, and there were only few doubts about its strategic management. Volkswagen stood for the good image of German engineering across the world. Through a dangerous combination of ignorance, complacency and haughtiness, this icon of German industry created a serious crisis. The unconvincing behavior of the VW leadership under its new CEO Matthias Müller did not help to contain what could be the worst crisis in the history of the company. The financial damage and the detrimental effect on VW’s reputation can be attributed to bad strategic decisions and shortcomings of a hierarchical leadership culture which needs to be revised, if Volkswagen wants to return to its former success.

RadioShack

Two decades ago, US electronics retailer RadioShack was the largest seller of consumer telecommunications products in the world. In February 2015, 94 years after it was founded, the company filed for bankruptcy protection. This was the result of a long decline, which started around the beginning of the new millennium. It is a textbook case of bad strategic management.

RadioShack failed to respond in due time to key trends affecting its business, ranging from e-commerce and the entry of competitors like Best Buy and Amazon.com to the resurgence of the maker movement. Once the decline was in full swing, it was hard to stop. RadioShack is a cautionary example of what can happen, if you ignore technological trends and fast rising competitors. At the root of this development is the failure of creating a corporate structure and a strategic approach, which would have enabled RadioShack to discover, reflect and adapt to emerging opportunities and threats when there was still sufficient room to maneuver.

Quirky

In contrast to RadioShack, which mainly failed due to a combination of complacency, ignorance and lack of adaptability, Quirky is an example of a completely different kind of strategic failure.

The invention platform Quirky was founded in 2009 and immediately attracted millions of startup funding. Altogether, Quirky raised 156 million euro in seven years from firms like Norwest Venture Partners LP, RRE Ventures, General Electric Co.’s GE Ventures LLC, and Andreessen Horowitz Fund LP.

It is easy to understand why so many respectable investors believed in Quirky’s business idea to connects inventors through a platform with companies that specialized in a specific product category. And the interest by inventors and companies was overwhelming: by August 2015, 280,000 inventions had been registered via the portal; business partners included General Electric, Mattel, Harman, and PepsiCo.

What made the business model very risky was that Quirky manufactured and marketed the inventions that it considered promising while paying royalties to the inventors. Initially, it seemed to work – first products like the Pivot Power, a flexible power strip that sold more than 1.5 million units, turned out to be successful.

However, Quirky did not really have a plan B in case of less fortunate product choices, like the digital egg tray that told consumers how many eggs were left in the refrigerator. The ensuing losses ate up capital at a frightening speed, as its roster of products grew from 34 to 150. Quirky’s rapid expansion of its operations was not matched by a coherent product development approach.

In early 2015, Quirky decided to get out of the product development business. However, this did not solve the liquidity problems of the company. When Quirky CEO Ben Kaufman was fired in August 2015, it was already too late to change the downhill course or Quirky – the company filed for chapter 11 bankruptcy in September 2015.

Quirky highlights the risks for investors betting on a brilliant but risky business idea. Good risk management and flawless strategy implementation are hallmarks of good strategic management. Quirky showed what can happen to a promising business idea, if risks are not addressed appropriately in time.

Most startups fail. From that perspective, Quirky would not have been special. What made it special was the huge amount pumped into the company by over-optimistic investors who ignored the requirements of good strategic management.

About Milon Gupta

Milon Gupta is an international business strategy coach and consultant from the Heidelberg, Germany area.
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