There are some curious ideas being bruited about in the computer industry these days. It seems that cash is burning a hole in the pockets of healthy companies such as IBM and Cisco. Rather than have the cash sit around earning basically nothing at today’s low interest rates, the companies have decided to start looking for acquisitions. While that can be a splendid strategy in the right circumstances, the combinations being discussed don’t make much sense. Shareholders would be better off if the companies followed Oracle’s example and declared a dividend.

We’ve finalized two working papers that apply our research to today’s business challenges. The first, “Beyond Fear and Greed,” is an overall look at current strategic opportunities and pitfalls. Read the paper here, or download it in PDF form. The second paper, “Perfecting the Art of the Deal,” applies our research to potential mergers and acquisitions and is available in a separate blog entry.

Beyond Fear and Greed:
Capitalizing on Opportunities in the Current Crisis

By Paul B. Carroll and Chunka Mui

Warren Buffett says his guiding principle is to “be fearful when others are greedy and greedy when others are fearful.” There’s certainly plenty of fear out there, and thus plenty of opportunities to get greedy. Greed, however, does not necessarily translate into wealth. In this article, we draw on our two years of research into more than 2,500 major corporate failures and our related consulting work to describe the landmines that companies are mostly like to hit as they try to capitalize on today’s market turmoil. We also lay out a process for ensuring that greed does not send you down the wrong path–increasing the chances that you’ll pick a prosperous road.

Remember when the health-care cost crisis was at the top of our concerns, before the credit crunch, the recession, the potential demise of the U.S. banking and auto industries, etc., sprang up to demand our attention? Well, while the headlines have been dominated by other pressing concerns, health-care costs have gotten no better. Some sobering numbers: In 2008, according to the National Coalition on Health Care, total national health expenditures were expected to rise 6.9%–two times the rate of inflation. Total spending was $2.4 TRILLION in 2007, or $7,900 per person. Health-care spending represented 17% of the gross domestic product. Health-care expenditures played a significant role in bringing down the Big Three auto makers and are inexorably pushing federal and state budgets over the edge of sustainability. According to the Congressional Budget Office, the current system will claim more than 30% of GDP by 2035.

So, as we get ready for the coming debate about universal health care, we thought it worthwhile to point out an interesting article by Atul Gawande in a recent New Yorker about learning from others’ experiences. The lessons apply to corporate strategy as well.

Let’s say a pharmaceutical company is conducting clinical trials on a drug. Two trials find major problems. Several similar tests by others end in failure, too. Would the company get the drug approved? Of course not. Yet Pfizer is trying to drum up enthusiasm for its plan to buy Wyeth for $68 billion, even though its two other major acquisitions since 2000 have flopped and even though the track record for big M&A deals in the pharmaceutical industry is spotty at best.

In the process, Pfizer is raising numerous of the red flags that, according to our research, can mean a strategy is in peril. Pfizer seems to be seeing synergies that aren’t there; is underestimating the complexity that can come with additional size; may be paying too much; isn’t learning from prior mistakes; isn’t considering all its options; and is acting more because of problems in its core business than because of opportunities in a new one.

As we mentioned in an earlier post about the challenges being faced by the board of directors at Bank of America, we have an article in the First Quarter 2009 issue of Directors & Boards. That issue is now available and we’ve posted the final text below. As always, we welcome your comments.

Change the Dialogue with Management
In looking for approaches to head off embarrassing strategic errors, we found that this is the key.

If the blame game goes as it usually does, criticism about the mistakes that led to the current recession and to poor performance at so many companies won’t stop with the CEO. Aspersions will be tossed at boards, too. To see how this might look, read the withering complaints about the Lehman Brothers board that failed to stop the CEO from running the company out of existence.

Because Google is now an 800-pound gorilla, it’s hard to remember just how slight its prospects were at birth a decade ago. If Yahoo hadn’t made Google the default search engine on the Yahoo site in 2000–giving Google both broad exposure and a big endorsement–it’s easy to imagine that few people would ever have heard of Larry Page and Sergey Brin. Now, the Wall Street Journal reports that Microsoft had its own version of Google technology being developed around the same time that Page and Brin were starting their company–but killed it for fear that the technology would cannibalize other revenue streams. Imagine how little chance Google would have had in a competition with Microsoft in the late 1990s, when Google was just a handful of people and a few million dollars of venture capital.

Bill Taylor, on his blog at HarvardBusiness.org, has an insightful post piggybacking off a Daniel Gross dispatch from the 2009 World Economic Conference in Davos, Switzerland. Taylor and Gross observe that there seems to be little soul-searching going on at Davos relative to the roots of the worldwide financial mess. Gross puts it this way: “At least with regard To finance and business, the consensus [at Davos] seems to be clear: Success is the work of Great Men and Great Women, while failure can be pinned on the system.” Taylor is more blunt: “So it goes for the world’s economic elite: We’ll gladly take the credit (and the pay) for good times, but don’t Blame us (or deny us our bonuses) when things go sour. Welcome to the no-fault economy!”

While we’re sympathetic to both bloggers’ ire, we believe that those at Davos are just exhibiting a common human tendency. We’re all simply wired to think highly of ourselves and our efforts, so we don’t dwell on possible failures.

As reports surface that Dell is considering entering the market for smart phones, we think the company is smart to not just hunker down and hope that problems in its personal-computer business go away. They won’t go away, not any time soon.

The whole industry is under such pressure that even Intel and Microsoft are feeling it. And, before demand plunged, the industry was moving away from Dell. It had thrived in a time when people mostly used desktop computers and purchased them based on how much computing power they provided for a given price. Now that laptops are ascendant, customers are much more concerned with how the computers look, with how the keyboard feels and with other subjective measures. But Dell barely has a presence in the retail channel, so customers have little opportunity to try Dell’s laptops. Besides, Dell has never shown great strength in the kind of design that catches a consumer’s attention the way Apple does.

Which brings us to the Red Queen–and why the move into smart phones is likely to be a bad idea.

The recent attacks on the Bank of America board, related to the ill-fated decision to buy Merrill Lynch, underscore the need for boards to change the dialogue with management.

A New York Times piece on BofA focuses, as many articles do, on the clubby nature of many boardrooms–you serve on my board, I serve on yours, and we make nice with each other. But the issue is broader than that. Even if you have a truly independent board with lots of diverse viewpoints, the CEO will still carry the day almost every time. He has all the information and controls how it’s presented to the board. He makes the decisions, while the board pretty much is limited to deciding whether he gets to continue in the job or whether he should be replaced–a call that boards seldom make unless the situation is dire.

IBM surpassed $100 billion in annual revenue in 2008, which is laudable–but 18 years late. Therein lies a tale about the dangers of what author Jim Collins labeled Big Hairy Audacious Goals.

In the early 1980s, IBM’s then-CEO John Opel declared that IBM would hit $100 billion in revenue by 1990. Although it may be hard to remember back that far, IBM was the world’s most profitable company in the 1980s. Its market capitalization accounted for roughly three-quarters of the value of the entire computer industry. Opel wanted to keep IBM from getting too complacent, so he challenged the company to increase in size from $40 billion of annual revenue in 1983 to the magic $100 billion mark by the end of the decade.