How Not to Turn-Around a Company

Last Updated Sep 19, 2008 9:00 AM EDT

Ever wonder why, just when you seem to have things under control, everything goes to hell, just like that? You know why that happens? Nature's inexorable tendency toward chaos - entropy.

It's the same with companies.

Call it business entropy. When one company dominates a market for too long, a competitor suddenly swoops into the competitive void to wreak havoc. Just like matter getting sucked into a vacuum. Woosh.

Wow, did I just suggest that microeconomic theory is a function of the second law of thermodynamics? I guess I did.

Regardless of how or why it happens, all companies hit a wall from time to time. For whatever reason, their strategy and operating model are no longer effective. That's when CEOs really get to earn their lucrative compensation and boards are supposed to provide strategic oversight. Or not.

There's little doubt that Yahoo has fallen victim to business entropy, courtesy of its friends at Google. Moreover, I think Yahoo's board - led by chairman Roy Bostock - and CEO Jerry Yang fit nicely into the "or not" category for failing to turn around the once-unstoppable internet pioneer.

It's been a sad and troubled year for the Yahoo faithful - shareholders and employees alike. But if nothing else, we can learn from their misfortune. So here are the top five ways to not turn-around a company. Or is it not to turn-around a company? Well, you know what I mean.

Hire the wrong guy for the job It seems like an eternity, but it was just over a year ago that Yahoo's board accepted then-CEO Terry Semel's resignation following a contentious annual shareholder meeting. But rather than search for a seasoned turn-around specialist, the board â€" just one short week later â€" thrust inexperienced chief Yahoo! Jerry Yang in the CEO spotlight. Sure, Jerry's a smart guy, but he's never run a company, let alone turned one around - an extraordinarily challenging task for even the most seasoned and talented chief executive. Big mistake.

Don't change the strategy
Obviously, Yahoo needed a new vision and strategic plan to circumvent the Google threat and steer the company back to a path of growth and profitability befitting an internet leader. We waited and waited for Yang to implement a process to reposition the company. We're still waiting. All he appears to have done is reinforce the company's internet portal and display advertising strategies. In other words, status quo.

Botch your only bailout option
In what may have been the most botched negotiation in M&A history, Yang et al managed to screw up a sweetheart $33 a share bailout from Steve Ballmer and Microsoft. With the stock currently trading near multiyear lows, shareholders were deprived of roughly $20 billion in market cap. And it appears that Yang actively fought to "fend off" the takeover. In what bizarro universe was that in the best interest of shareholders?

Lose 100 plus key executives With morale at an all-time-low, what does Yang do? Reorganize again and again. Reorg-du-jour is a neon sign for dysfunctional management, but more importantly, it's a huge morale and productivity killer. It's no wonder that Yahoo is experiencing one of the most crippling talent drains in corporate history. At last count, more than 100 executives have jumped ship since Yang took office.

Desperately attempt to stem the operating spiral
Just as the textbooks say, poor leadership, bad strategy, botched bailout, loss of key talent, can only result in one thing: operating decline. Quarterly revenue growth has shrunk to a paltry 5.8% year-on-year, while operating margins hit an all-time low of 5.5% in the most recent quarter.

But what about the Yahoo-Google search ad deal? Contrary to Yang's spin on the deal, it's a desperate strategy to improve operating results. Unfortunately, it's critically flawed. The deal essentially turns Yahoo into a hollowed out reseller of archrival Google's technology. It's eerily similar to how Intel hooked personal computer makers on Intel Inside coop advertising funds. Similarly, the Google deal will do Yahoo more harm than good in the long run.

All that said, Yahoo's far from alone. The corporate graveyard is filled with hundreds of once-great companies that failed to turn the corner when the competitive landscape changed. Just look at the U.S. computer industry. Remember Apollo, AST, Atari, Commodore, Data General, Digital Equipment, Egghead Software, Osborne, Silicon Graphics, Tandon, Tandy, or Wang Laboratories? Probably not.

Conclusion Does business entropy mean that corporate decline is inevitable? If we go strictly by the laws of thermodynamics, the answer would be yes. But in practical terms, unlike people, corporations have the unique ability to cheat death. Not forever, but they can live on for generations, under the right conditions.

That said, those conditions are by no means easily met. Corporate survival, in the face of ever-changing market conditions and ever-increasing global competition, requires wisdom, competence, and fortitude that are hard to come by. So don't judge Yahoo's leaders too harshly; successful turn-arounds are far more the exception than the rule. In the end, entropy usually wins.

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