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The Inopportune Case of the Airbus A340 Aircraft: When Tomorrow Left Yesterday Behind

April 1, 2026 By Nagesh Belludi Leave a Comment

Airbus A340 Aircraft: A Casualty of Shifting Aviation Economics

If ever there were a textbook example of the risks of launching an ambitious project years, even decades, before knowing whether the world would still want it, the Airbus A340 aircraft is it. It stands as a true victim of the shifting economic tides between its conception and market launch.

Conceived in an era when four engines were synonymous with reliability, airlines operated with seemingly vast budgets, and regulators remained deeply skeptical of twinjets crossing oceans, this long-haul aircraft entered service as a relic before it had a chance to prove otherwise.

Airbus’s vision for the A340 took shape in the mid-1970s, a time when aviation adhered to traditional doctrines with near-religious fervor. Twin-engine reliability remained under suspicion, and Extended-range Twin-engine Operational Performance Standards (ETOPS), the still-in-blueprint regulatory framework dictating how far twin-engine aircraft could stray from emergency landing sites, severely restricted their range. Fuel efficiency was more of a luxury than a necessity, and airlines wielded significantly more pricing power than they do today. Determined to avoid twinjet constraints, Airbus forged ahead with a four-engine design, ensuring unrestricted intercontinental routes while sidestepping ETOPS limitations entirely.

The A340 is a Monument to Misjudged Ambition

To Airbus’s credit, its risk managers were not naive. Their hedge was simple yet shrewd: develop the A340 alongside a twin-engine counterpart, the A330. Faced with uncertainty about the aviation industry’s future trajectory, they created two aircraft with nearly identical airframes but distinct operational roles, one tailored for long-haul missions, the other optimized for medium-haul efficiency. The A340, with its four engines, would conquer the world’s longest routes unburdened by ETOPS restrictions, while the A330, with just two, would handle shorter yet commercially vital segments. Both aircraft shared a high degree of design commonality, including identical wings, and were assembled in the same factories using the same production lines. This strategy streamlined manufacturing and maintenance while granting airlines unprecedented flexibility in fleet planning. If the A340 struggled, the A330 could still succeed, and succeed it did.

By the early 1990s, as the A340 finally entered commercial service, the world had already moved on. Advances in engine technology had erased old concerns about twin-engine reliability, transforming twinjets from a calculated gamble into an industry inevitability. Airlines, newly fixated on cost-cutting, saw no reason to pay for four engines when two could offer equal dependability at a dramatically lower operating cost.

The A340’s fundamental flaw was that it entered service already obsolete. The market had already evolved past the need for it. Boeing’s 777 and Airbus’s own A330 delivered nearly identical capabilities at significantly lower costs. When Singapore Airlines, widely regarded as one of the industry’s most influential fleet strategists, abruptly retired its new A340-300s in favor of the Boeing 777, the message was unmistakable. The rest of the industry quickly reassessed its commitments to the quadjet.

Was the Airbus A340 a Failure, or the A330's Foundation for Success?

The Market Did Not Kill the A340—It Simply Outgrew It

Boeing’s final, decisive blow came with the 777-300ER. Offering the same long-haul capabilities but with vastly superior efficiency, this twinjet eliminated any lingering doubts about the necessity of four engines. Airbus scrambled to salvage its position, launching stretched A340-500 and A340-600 variants, but the damage was irreversible.

Adding insult to financial injury, the 777-300ER featured a standard 3-3-3 economy-class seating layout, immediately making more efficient use of cabin space compared to the A340’s (and A330’s) more passenger-friendly 2-4-2 configuration. Airbus had long promoted the comfort of its twin-aisle layout, fewer middle seats and better aisle access, but the industry had already shifted decisively toward revenue optimization. Boeing’s twinjet could seat more passengers per row, and as airlines grew more aggressive with capacity planning, the denser 3-4-3 configuration became the new standard on the 777, maximizing profitability per flight.

Faced with the harsh reality of economics steamrolling passenger comfort, airlines defected en masse. Boeing had delivered not just a fuel-efficient aircraft, but one that redefined how airlines extracted profit from every available square foot of cabin space.

The A340 Was Designed for an Era That Had Already Slipped Away

The Inopportune Case of the Airbus A340 Aircraft: When Tomorrow Left Yesterday Behind Despite the 777-300ER’s dominance in high-capacity, ultra-long-range operations, the Airbus A330 carved out its own space in the market. Continuous design improvements somewhat enhanced its operational flexibility, cost efficiency, and versatility, allowing it to thrive as a preferred choice for airlines needing reliable performance across a broad range of routes. Over time, its long-haul capabilities increasingly aligned with the missions originally envisioned for the A340, solidifying its role as an indispensable aircraft for medium- and long-haul operations.

In the end, the A340’s demise was not the result of incompetence, but of irrelevance. It was neither a failure nor an error in the traditional sense. It was comfortable, reliable, and capable. But it was designed for an era that had already begun to slip away and released into a market that had ruthlessly reshaped its priorities. In an industry where decades of forecasting can make or break billion-dollar programs, misjudging future trends is not just an inconvenience. It is a slow-motion catastrophe.

The A340 fell victim not to its own deficiencies, but to the relentless march of progress. In other words, the A340 did not fail because it was bad. It failed because everything else got better.

That is a cautionary tale, not of human folly, but of time’s merciless indifference, dismantling even the best-laid schemes with a quiet, unceremonious shrug.

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Filed Under: Business Stories, Managing Business Functions, Mental Models Tagged With: Aviation, Critical Thinking, Decision-Making, Efficiency, Entrepreneurs, Innovation, Leadership Lessons, Problem Solving, Risk, Starbucks, Strategy

The Tyranny of Previous Success: How John Donahoe’s Tech Playbook Made Nike Uncool

March 16, 2026 By Nagesh Belludi Leave a Comment

The Tyranny of Previous Success: How John Donahoe's Tech Playbook Made Nike Uncool There’s an old adage that warns, if all you have is a hammer, everything looks like a nail. It’s meant as cautionary advice, but in the world of business, it’s more often a prophecy—executives convinced that their one winning strategy applies everywhere, blindly imposing their methods on industries with vastly different economic characteristics.

It’s the fatal overconfidence that led Ron Johnson to believe the sleek minimalism of Apple’s retail stores could translate seamlessly to J.C. Penney. In his seventeen-month tenure as CEO 2011–13, he eliminated discounts, ditched coupons, and tried to rebrand the department store into a collection of boutique-style mini-shops. The result was catastrophic. Sales plummeted as longtime bargain-hunting customers fled.

Expertise is valuable, but only when properly applied. Johnson’s misstep proved that misreading an audience is just as damaging as lacking experience altogether.

John Donahoe’s tenure at Nike unfolded in much the same way. After years in consulting and e-commerce—rising to CEO of Bain & Company in 1999, leading eBay 2008–15, and later running ServiceNow—his track record had its share of admirers and skeptics. Some credited him with steering companies toward digital transformation. Others argued his leadership at eBay had left the platform struggling against Amazon’s dominance. In 2014, he joined Nike’s board, gaining insider exposure before stepping in as president and CEO in January 2020. But being inside the walls isn’t the same as understanding the foundation, and his decisions soon reflected a tech executive’s mindset imposed on a company built on sport, culture, and product innovation.

How Silicon Valley Strategy Derailed Nike: Why John Donahoe's Tech Mindset Failed Donahoe tried to run a high-performance culture company as if it were a standardized tech firm. His defining move was an aggressive pivot to direct-to-consumer sales, an approach that worked during the pandemic but quickly backfired. By prioritizing Nike’s digital platforms, he neglected key wholesale partners like Foot Locker, leaving retail gaps that competitors were eager to fill. At the same time, Nike’s traditional strength in innovative footwear appeared stagnant as rivals such as Hoka and On surged in popularity. Instead of reinvesting in its product lineup, Nike poured resources into NFTs and metaverse ventures. Apparently, nothing says athletic excellence quite like pixelated sneakers floating in cyberspace.

By October 2024, the writing was on the wall. Investors decided a course correction was needed, and Donahoe was forced out, replaced by longtime Nike executive Elliott Hill. The shift back to an internal leader signaled a belief that Nike’s success required deep cultural understanding, not just a digital strategy. And given Donahoe’s five-year tenure as a board member before stepping in as CEO, it’s reasonable to ask whether protecting the company’s identity was ever on his to-do list. He failed not because he lacked intelligence, but because he misread the game entirely. Nike’s new CEO is currently attempting to undo the changes Donahoe wrought.

Idea for Impact: Strategy isn’t one-size-fits-all. Real leadership is about adaptation—recognizing that each challenge demands a tailored approach, not a recycled solution. Success comes from understanding context, adjusting tactics, and shaping strategies to fit the problem rather than forcing problems to conform to a familiar framework.

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Filed Under: Business Stories, Leadership, Managing Business Functions, Mental Models Tagged With: Biases, Change Management, Decision-Making, Innovation, Leadership Lessons, Management, Strategy, Success, Transitions

Your Product May Be Excellent, But Is There A Market For It?

July 24, 2019 By Nagesh Belludi 1 Comment

Akio Morita, the visionary co-founder of Sony, liked to tell a story about recognizing opportunities and shaping them into business concepts.

Two shoe salesmen … find themselves in a rustic backward part of Africa. The first salesman wires back to his head office: “There is no prospect of sales. Natives do not wear shoes!” The other salesman wires: “No one wears shoes here. We can dominate the market. Send all possible stock.”

Morita, along with his co-founder Masaru Ibuka, was a genius at creating consumer products for which no obvious demand existed, and then generating demand for them. Sony’s hits included such iconic products as a hand-held transistor radio, the Walkman portable audio cassette player, the Diskman portable compact disk player, and the Betamax videocassette recorder.

Products Lost in Translation

As the following case studies will illustrate, many companies haven’t had Sony’s luck in launching products that can stir up demand.

In each case in point, deeply ingrained cultural attitudes affected how consumers failed to embrace products introduced into their respective markets.

Case Study #1: Nestlé’s Paloma Iced Tea in India

Marketing and Product Introduction Failure: Nestle's Paloma Iced Tea in India When Swiss packaged food-multinational Nestlé introduced Paloma iced tea in India in the ’80s, Nestlé’s market assessment was that the Indian beverage market was ready for an iced tea variety.

Sure thing, folks in India love tea. They consume it multiple times a day. However, they must have it hot—even in the heat of the summer. Street-side tea vendors are a familiar sight in India. Huddled around the chaiwalas are patrons sipping hot tea and relishing a savory samosa or a saccharine jalebi.

It’s no wonder, then, that, despite all the marketing efforts, Paloma turned out to be a debacle. Nestlé withdrew the product within a year.

Case Study #2: Kellogg’s Cornflakes in India

The American packaged foods multinational Kellogg’s failed in its initial introduction of cornflakes into the Indian market in the mid ’90s. Kellogg’s quickly realized that its products were alien to Indians’ consumption habits—accustomed to traditional hot, spicy, and heavy grub, the Indians felt hungry after eating a bowl of sweet cornflakes for breakfast. In addition, they poured hot milk over cornflakes rendering them soggy and less appetizing.

Case Study #3: Oreo Cookies in China

Marketing and Product Introduction Case Study: Oreo Green-tea Ice Cream Cookies in China When Kraft Foods, launched Oreo in China in 1996, America’s best-loved sandwich cookie didn’t fare very well. Executives in Kraft’s Chicago headquarters expected to just drop the American cookie into the Chinese market and watch it fly off shelves.

Chinese consumers found that Oreos were too sweet. The ritual of twisting open Oreo cookies, licking the cream inside, and then dunking it in milk before enjoying them was considered a “strangely American habit.”

Not until Kraft’s local Chinese leaders developed a local concept—a wafer format in subtler flavors such as green-tea ice cream—did Oreo become popular.

Idea for Impact: Your expertise may not translate in unfamiliar and foreign markets

In marketing, if success is all about understanding the consumers, you must be grounded in the reality of their lives to be able to understand their priorities.

  • Don’t assume that what makes a product successful in one market will be a winning formula in other markets as well.
  • Make products resonate with local cultures by contextualizing the products and tailoring them for local preferences.
  • Use small-scale testing to make sure your product can sway buyers.

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Filed Under: Business Stories, Leadership, Managing Business Functions, MBA in a Nutshell, Mental Models, Sharpening Your Skills, The Great Innovators Tagged With: Biases, Creativity, Customer Service, Entrepreneurs, Feedback, Innovation, Leadership Lessons, Parables, Persuasion, Thought Process

3G Capital and the Fringes of Cost Management // Summary of Bob Fifer’s ‘How to Double Your Profits in 6 Months or Less’

April 24, 2019 By Nagesh Belludi Leave a Comment

3G Capital’s Playbook: Look at EVERYTHING—There are No Sacred Cows in Cost-Cutting

Brazilian private equity firm 3G Capital's Playbook for Cost-Cutting: Zero-based Budgeting During the past decade, the achievements of the Brazil-based private equity group 3G Capital have drawn attention to the aggressive cost cutting methods outlined in management consultant Bob Fifer’s How to Double Your Profits in 6 Months or Less (1995.)

3G has raised the profitability of its acquired businesses by sacking thousands of workers, shutting down factories, simplifying operations—even using cheaper ingredients. In Israel, the 3G-controlled Heinz was forced to rebrand its iconic ketchup as “tomato seasoning” after a cost cutting-inspired shift to GMO-derived constituents. 3G’s playbook, however, encourages increasing budgets for strategically important business functions—for instance, Kraft Heinz has increasingly expanded spending on advertising and product improvement.

At every 3G-run company—Anheuser-Busch InBev, SABMiller, Heinz, Kraft Foods, Burger King, Tim Hortons, Popeyes,—the “zero-based budgeting” accounting tool forces managers to justify all claims on their organizations’ financial resources. As I noted in a previous article, this method forces managers to justify every line item on a team’s budget as if it were new a claim for an entirely new project, instead of merely being carried over from the prior year:

Zero-base budgeting advocates say that it detects inflated budgets and unearths cost savings by focusing on priorities rather than simply relying on the precedent. Managers secure a tighter focus on operations by justifying each line-item in their budgets, thereby reducing the money they allocate to the lowest level possible. Managers can also contrast competing claims on their ever-scarce financial resources and therefore shift funds to more impactful projects.

How to Double Your Profits has become a must-read for all managers affected by any 3G deal. This obscure book, purportedly written in just 15 hours, was also a favorite of such business luminaries as Sanford Weill (of Citigroup,) Bob Lipp (Travelers Insurance,) and Jack Welch (General Electric.)

3G’s methods have upended an entire industry known for characteristically lower profit margins. The specter of being acquired by 3G has forced Unilever, General Mills, J.M. Smucker, Nestle, Pilgrim’s Pride, Phillip Morris, and other consumer staples companies to implement sweeping cost cutting programs.

Every Expense is Evaluated to Be Cutback Unless It Contributes Directly to the Bottom Line

'Double your profits' by Robert M Fifer (ISBN 0963688804) How to Double Your Profits obsesses about cutting costs by any and all means possible. Every corporate resource is a cost-center that must be pared down to the bone—unless it’s a strategic function. When it comes to marketing, for example, the author recommends outspending the competition in both good and bad times.

Seventy-eight brief chapters (“steps”) deal with every possible drain on time, money, and people in the modern corporation: reducing layers of management, cutting the amount of time managers spend in meetings, shrinking corporate expense accounts, eliminating first-class air tickets, getting rid of pointless reports, and so on.

  • Focus on profits. “We’re here to make a profit. In fact, we’re here to make as much profit as we possibly can. Profit is the most accurate, most all-encompassing measure of whether we truly are the best. … Profits benefit all of us … when the profits slow down, we all suffer.”
  • Run a true meritocracy. Set expectations about how performance will be measured and what rewards will accrue to what levels of performance. “Within any level or group of employees, there must be wide disparities in salary, tied to demonstrable differences in performance and contribution to the bottom line.”
  • Avoid paralysis by analysis, make decisions faster. “Superb managers are instinctual, making the right decision most of the time based on limited data. The quantification that less-skilled managers insist upon is in fact illusory: They wind up making decisions based upon that which can be quantified rather than that which is important. Most of the critical variables in any business decision can only be judged and evaluated based on experience and instinct, not quantified.”

Much of the advice is effective, if predictable, but some suggestions are clearly crooked:

  • Step 24 / Declare Freezes and Cuts: “Send a letter declaring an across-the board 3% reduction to suppliers. Make sure the letter is from someone high up and intimidating….(after getting the bill) deduct 3% from the bill and say, ‘Didn’t you read my CEO’s letter? Are you trying to get me fired? “
  • Step 37 / Accounts Payable: “Never pay a bill until the supplier asks for it at least twice. You’ll be surprised: A few suppliers will take as much as two years before they finally get around to asking for their money.”

But Then Again, There is only so Much Fat to Cut out: The Crisis at Kraft Heinz

When discharged without due forethought, elements of Fifer’s cost-cutting mindset could lead to corporate myopia and an utter disregard for such intangible assets as human capital, brand value, and corporate philanthropy.

Certainly, in businesses with substantial cost inefficiencies and bloat, cost-cutting can produce considerable gains in profits, but even with these firms, gains will be time-limited, because there is only so much fat to cut out.

Cost Cutting and The Crisis at Kraft Heinz Aggressive cost-cutting has been blamed for the recent travails at Kraft Heinz. Over the last three years, Kraft Heinz’s fading return on invested capital and decreasing sales point toward a leadership team that has been giving precedence to near-term cash flows to the detriment of its long-term competitive position (“moat.”)

With the expansion of cut-price private-label brands, consumers are no longer remaining devoted to brands like they once did. Kraft Heinz’s roster of products is less appealing to customers than it used to be, and cost cutting hasn’t helped—Kraft Heinz has invested just 2%–3% of its sales on brand spending, as against 7%–9% at comparable consumer goods companies.

Recommendation: Fast Read ‘How to Double Your Profits’

Bob Fifer’s How to Double Your Profits in 6 Months or Less, even if out-of-date and brash in style, could help drive systematic cost-consciousness in large firms that have bloated cost structures in the hypercompetitive business environments.

Entrepreneurs, managers, and employees will find in How to Double Your Profits many ideas for establishing a culture where every employee feels liable for adding value to the organization’s bottom line. The key takeaway lessons are:

  • Determine which costs are strategic (costs that bring in business and improve the bottom line) and over-invest in those processes as long as they are effective, i.e. producing better results. “Place the burden of proof on justifying costs, not on eliminating them.”
  • Avoid over-quantifying and over-analyzing processes and results, particularly when the extra precision will not have any bearing on business decision-making.
  • Consider business processes as a means to an end—a focus on business results should trump a focus on business processes. In other words, focus single-mindedly on business results.

Complement with Francisco Souza Homem de Mello’s The 3G Way (2014) and Cristiane Correa’s Dream Big (2014)—informative books on 3G written by Brazilian business journalists who’ve covered 3G and its founders over the years. Warren Buffett, who regularly teams up with 3G Capital, recommends these books.

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Filed Under: Leading Teams, Managing Business Functions, Managing People, MBA in a Nutshell, Mental Models Tagged With: Budgeting, Discipline, Efficiency, Entrepreneurs, Leadership Lessons

How to Buy a Small Business // Book Summary of Richard Ruback’s HBR Guide

June 26, 2018 By Nagesh Belludi Leave a Comment

Beyond the capital markets and startups, I’ve been exploring buying a suitable small business to invest in and operate. To inform myself with the process of searching and valuing privately-held establishments, I recently perused Richard Ruback and Royce Yudkoff’s resourceful HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company (2017.)

'HBR Guide to Buying a Small Business' by Richard S. Ruback (ISBN 1633692507) The authors of this HBR Guide teach a popular Harvard Business School class on “acquisition entrepreneurship.” Their curriculum trains self-employment-inclined MBA students to search, negotiate, and buy an established business and become an entrepreneur-CEO within a year or two.

According to the authors, MBA students are drawn to their class by the prospect of a meaningful leadership responsibility earlier in their careers, as opposed to slowly climbing the corporate ladder or taking on the great risk of starting a company from scratch and establishing a viable business model.

The first section of the HBR Guide to Buying a Small Business can help you decide if entrepreneurship is a good match to your temperament, lifestyle, work-experience, and career ambitions. The largest part of the book provides a comprehensive roadmap for all aspects of acquiring a business—bankrolling the search process, deal-sourcing, managing risk, organizing equity- and debt-financing, running due diligence processes, structuring the purchase, and closing the deal. The final section of the book discusses changing the leadership over and transitioning into operating management.

Reflection: Is Acquisition Entrepreneurship Right for You?

  • Self-employment is not for everyone. Entrepreneurs need to be smart, driven, business-savvy, self-motivated, strategic, resilient, persuasive, and be able to deal with uncertainty.
  • On top of the challenges of self-employment, acquiring and operating a small-business will require reaching out, projecting self-confidence, and persuading people you don’t know—business brokers, financiers, investors, regulators, sellers, employees, and customers.
  • During your exploration of what business to buy, you’ll have to quickly learn about unfamiliar industries, markets, and companies. As a leader, you must be able to develop cross-functional expertise quickly.

Searching: A Full-time Job in Itself

  • Plan to commit full-time for six months to two years to raise funds from financiers, identify and vet potential acquisition targets, and negotiate with sellers on a realistic purchase price. Afterward, plan for no less than three more months to perform due diligence and complete the transaction.
  • “When you are seeking out a business to buy, you might face months when you work 12 hours a day and simply not find a desirable prospect. It’s a frustrating experience with lots of effort and no reward.”
  • Arrange for debt and equity financing from potential backers and risk-sharing partners. Contact affluent folks in your network and investors who specialize in small-businesses. The networks of people you bring together to help your mission can also lend a hand during the deal making and the due diligence processes.
  • To find potential businesses to buy, try reaching out directly to businesses whose owners may be inclined to sell. Engage small business brokers (there’re some 3,000 small business brokers and intermediaries in North America,) or comb through databases of small businesses for sale.
  • For potential sellers, look for business owners who, after building their firms over the decades, are approaching retirement and don’t have an inheritor interested in running the business. Many aging business owners are determined to ensure that their businesses live on.

Seek Enduringly Profitable Businesses: Recurring Customers and Predictable Revenue

  • Look for “enduringly profitable businesses”—stable, slow-growth companies in dull-and-boring industries (such as sandblasting, equipment maintenance, industrial repair and overhaul, window-cleaning, service-providers) in small, defensible niche markets.
  • Seek businesses whose business-to-business customers are unlikely to switch vendors because the product or service their customers buy isn’t a big part of the costs of their business. Consequently, they’re not motivated to shop around for lower-cost vendors and squeeze margins.
  • Focus on businesses with yearly revenues of $5 million to $15 million and cash flows of $750,000 to $3 million.
  • Avoid promising start-ups and risky turnaround opportunities; “it is tempting to imagine buying a troubled business or one with uneven performance, because the purchase price would be very low. But we strongly advise against it, because you’ll have to reinvent the business model and doing so is a very difficult and risky endeavor. Instead, buy a profitable business with an established model for success—one that is profitable year after year.”
  • Avoid high-growth businesses because “high growth means that your new customers will quickly outnumber your existing ones. Because new customers bring new demands, there are many ways to get in trouble. New customers are, well, new; they have no loyalty to the company and no history. High growth requires great management effort. It also absorbs money rapidly, and raising that money puts a strain on the business and its owner. A rapidly growing firm also attracts competitors, which see the expanding market and the opportunity to attract new customers. So, in a high-growth business, you could work hard and still fail if you cannot keep pace with your competitors. And even if your business survives, you might find that competition has forced you to sell at low prices, so you enjoy little financial reward after all. Making this all the harder, the seller will demand a much higher price for a business that has the potential to grow quickly.”
  • Avoid technology-driven companies (they face shifting customer needs and therefore demand constant reinvention,) cyclical business, and businesses with well-established competitors.
  • Small business-owners usually don’t hire large consulting firms or investment banks to sell their businesses. Their businesses are too small to appeal to private equity firms. “We think it makes sense to buy a business with between $750,000 and $2.0 million in annual pretax profits. … At the upper end of our size range—$2 million or more in profitability—we find that institutional investors, like smaller private-equity firms, start to become interested and that competition raises the purchase price, reducing the financial benefits of owning the business.”
  • “EBITDA margin (EBITDA/revenue) ≥ 20% for services and manufacturing or 15% for distribution and wholesale”

A Checklist for Enduringly Profitable Businesses

Initial Filters:

  1. Is the prospect consistently profitable?
  2. Is it an established business instead of a startup or turnaround?
  3. Is it in the right size range?
  4. Is it located in a place you are willing to live?
  5. Do you have the skills to manage it?
  6. Does it fit your lifestyle?

Deeper Filters:

  1. Is the prospect enduringly profitable?
  2. Is the owner serious about selling the business?

Valuing the Company and Negotiating a Deal

  • Use the company’s past financial information to project future earnings and your return on investment. Then decide on how much you should pay for a small business: “You’ll need to base the offer price on the general range of 3x–5x EBITDA.” Adjust the multiple for profit margins and growth prospects.
  • Run a primary due diligence—“a focused period of rapid learning in preparation for making an offer. This is when you’ll test the seller’s initial claims and verify the information that has made the business appealing to you. … You’re looking for any reason that you might not want to acquire this business.”
  • Finance using equity and debt. “Visit banks and approach your investor network to raise money for the acquisition. You should be prepared to provide information about the business and its industry, details on the due diligence that you’ve done, your financial projections, and the deal terms that you are proposing.”
  • Once your offer has been accepted after negotiations, run a confirmatory due diligence “in which the company’s records will be fully open to you. You will typically have around 90 days to work with your accountant and attorney to check for any inconsistencies and red flags. … This can be an extremely nerve-racking time for both the buyer and the seller, so it’s important to be patient and calm.”

Transitioning into Leadership and Emphasizing Business-as-Usual

  • As part of the negotiated deal, try to get the seller to stick around for 3 to 6 months to help you in the transition.
  • “After closing the sale, you should focus on four tasks: introducing yourself to all your managers and employees, meeting with external stakeholders, communicating the transition plan to everyone, and taking control of your cash flow.”
  • “The most common trouble for small firms under new owners is running out of cash. … So set up a process whereby you approve all payments before they go out, and review your accounts-receivable balances at least weekly. You should also implement a 90-day rolling cash-flow forecast.”
  • Meet with all the constituencies and reassure them that they won’t see any immediate changes. Lay emphasis on “your overarching goals for the company—for example, excellent customer service, commitment to quality, a satisfying work environment—and encourage people to stay focused on their work.”
  • Visit every major customer as soon as you can. Keep your ears open for ideas to improve your product- and service-offerings.
  • Don’t make any big changes early on, get to know the business, and be very respectful of all the constituents—they know more about the business than you do.

Recommendation: Read ‘HBR Guide to Buying a Small Business’ for a Very Good Introduction on How to Buy and Organize Finance for a Business

Richard Ruback and Royce Yudkoff’s HBR Guide to Buying a Small Business is excellent manual for prospective entrepreneurs, employees of small businesses, financiers, and value-seeking investors. You will also become acquainted about interactions with bankers, brokers, sellers, accountants, and attorneys you meet while searching for a business to buy.

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Filed Under: Career Development, Managing Business Functions, MBA in a Nutshell Tagged With: Books, Customer Service, Entrepreneurs, Leadership Lessons, Personal Finance, Persuasion, Strategy

Is IBM Becoming Extinct?

April 9, 2018 By Nagesh Belludi Leave a Comment

Change Forces Leaders to See Business Models Afresh and Imagine New Paradigms

The American venture capitalist Guy Kawasaki often tells the following story about the need for entrepreneurs to adapt themselves to emerging market settings and stay relevant.

In the latter part of the nineteenth century, a sizeable ice cutting and trade industry flourished in the US Northeast. Harvesters sawed off blocks of ice from frozen lakes and rivers, and transported and sold them for industrial and commercial consumption around the world. The biggest consignment of natural ice weighed some 200 tons; half of it thawed en route to India, but the remaining 100 tons of ice returned a profit.

In due course, the invention of icemaking machines caused the downfall of the natural ice harvesting industry. Anybody needing ice could purchase artificial ice during any season from ice factories. As a sign of the times, the trade publication Ice Trade Journal changed its name to Refrigerating World.

Subsequently, the emerging popularity of commercial and domestic refrigeration units put the ice factories out of business. Residences, stores, and businesses could make their own ice conveniently and maintain cold storage.

The Best Leaders Anticipate Change and Nurture Their Own Innovations

During the first of the aforementioned disruptions, according to Kawasaki, the ice harvesters did not recognize the benefits of industrial ice-making and did not adapt to the revolution in their industry. Instead, they chose to defend their existing trade—they continued to innovate sawing equipment, invest in efficient storage, and improve their rail- and ship-transportation systems.

Correspondingly, the industrial icemakers of the following generation never embraced or adapted to the emerging advent of consumer refrigeration.

The take away lesson is that many successful companies are so set in their ways that they don’t pivot themselves when they face disruption in their industries.

Successful Companies Can Become Victims of Their Own Success

Kawasaki’s anecdote illustrates how disruption drives many companies into stagnation. Every so often, entire industries vanish into oblivion.

Major economic disruptions can compel companies to question what they stand for. Sadly, many companies choose to defend their existing domains instead of raising their technological edge and reinventing their products, services, and brands.

When the fundamentals of a time-honored business drastically change, the most successful companies are often the slowest to recognize the shifts and pivot. Well-established in the comfort of routine and stability, they entrench deeper into their tried-and-true formulae. As described in Harvard strategy professor Clayton Christenson’s well-known thesis The Innovator’s Dilemma, the strategic inertia often gets companies with at-risk, but established business models into a state of denial. Consequently, they refute the challenges posed by fiery startups.

Can IBM Beat the Odds?

IBM has fought off a technological and economic disruption once before. During the 1980s, IBM fell from glory, but got reborn as a vibrant corporation after Lou Gerstner became CEO in 1993. He redefined IBM’s businesses, fortified its value proposition, and changed the mindset of the company, its employees, and its customers. As Gerstner detailed in his bestselling biography about IBM’s reinvention, Who Says Elephants Can’t Dance?: Inside IBM’s Historic Turnaround (2002,) this was an astonishing achievement given how deeply-rooted IBM was in its existing, but increasingly irrelevant business model.

At present, IBM is struggling in the midst of yet another digital revolution—one that is exemplified by the commoditization of hardware and the enterprise-adoption of cloud computing. Shackled with legacy business models of older, less-differentiated products and services, IBM has struggled to catch-up with cloud platforms offered by Amazon, Microsoft, and Google.

Instead of reckoning honestly with the growing shift to cloud-based services, IBM has concentrated for far too long on its Wall Street-pleasing financial shenanigans (buying back shares to prop up earnings-per-share, cutting costs, firing employees, reducing tax rates, selling less-profitable operations, and the rest.)

The jury is still out on the long-term success of IBM’s much-ballyhooed Watson platform and its cloud computing initiatives. What makes this cycle of disruption worse is that IBM faces aggressive competitors who are pushing profit margins toward zero in a bid to dislodge IBM’s historical footing in the enterprise IT landscape and to establish dominance.

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Filed Under: Managing Business Functions, The Great Innovators Tagged With: Leadership Lessons, Parables, Strategy

How Smart Companies Get Smarter: Seek and Solve Systemic Deficiencies

August 26, 2016 By Nagesh Belludi Leave a Comment

At Toyota, as cars roll off the assembly line, they go through a final inspection station staffed by astute visual and tactile inspectors. If these inspectors spot a paint defect, they don’t just quietly fix the problem merely by touching up the paint to satisfy the customer or their plant manager.

As part of Toyota’s famed kaizen continuous improvement system, floor workers identify the systemic causes that led to the specific defect on the specific car. They then remedy the root cause of the problem so it won’t happen again.

Fostering an atmosphere of continuous improvement and learning

Most companies cherish employees who are watchful of problems and take it upon themselves to detect and solve problems without criticism or complaint. A software company, for example, may treasure a programmer who observes an unforeseen coding mistake, and swiftly develops a patch to keep her project moving forward.

In contrast, companies like Toyota who are obsessive about quality improvement, organizational learning, and developing collective intelligence don’t reward or tolerate such quiet fixers.

At companies that have adopted the kaizen philosophy, continuous improvement originates from the bottom up through suggestion systems that engage and motivate floor employees to look out for systemic problems, raise quality concerns, and help solve those problems. These companies encourage their employees to actively seek small, simple, and incremental improvements that could result in real cost savings, higher quality, or better productivity. According to Taiichi Ohno, the legendary Japanese industrial engineer identified as the father of the Toyota Production System, “Something is wrong if workers do not look around each day, find things that are tedious or boring, and then rewrite the procedures. Even last month’s manual should be out of date.”

Idea for Impact: To develop collective intelligence and build smarter organizations, discourage employees from heroically patching up recurring problems. Instead, encourage them to find, report, analyze, experiment, and fix systemic problems to prevent their recurrence.

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Filed Under: Business Stories, Leadership, Managing Business Functions, Mental Models Tagged With: Japan, Leadership, Problem Solving, Quality, Toyota

Find out What Your Customers Want and Give it to Them

April 22, 2016 By Nagesh Belludi 1 Comment

“Nobody asked the dogs what they wanted”

Once upon a time, a pet-foods company struggled to sell a new dog food product they’d recently introduced to the market.

The company’s CEO called the department heads together to discuss why the new product wouldn’t sell.

The head of production said he’d done everything right; it wasn’t his department’s fault.

The heads of the sales, advertising, finance, packaging, shipping, and distribution departments had done everything right. None of them were to blame.

The CEO demanded, “Darn! What happened? Why won’t our new product sell?”

A junior staffer shouted from the back of the room, “Sir, it’s just that the dogs simply won’t eat our doggone food. You see, nobody asked the dogs what they wanted.”

Idea for Impact: Customer Focus Drives Company Success

Your research and development efforts will be successful only if they’re driven by a thorough understanding of what your customers want. Engage your customers. Pay close attention to their needs in every phase of product/service design including idea generation, product design, prototyping, production, distribution, and service. Remember Peter Drucker’s dictum that “the purpose of a business is to create and keep a customer.”

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Filed Under: Business Stories, Leadership, Managing Business Functions, The Great Innovators Tagged With: Creativity, Customer Service, Innovation, Parables, Peter Drucker, Thought Process

Three Leadership Lessons from Ron Johnson’s Debacle at J.C. Penney

April 11, 2013 By Nagesh Belludi Leave a Comment

Monday’s dismissal of J.C. Penney CEO Ron Johnson comes as no surprise.

In late 2011, J.C. Penney had hired Ron Johnson from Apple to revive the sagging fortunes of the storied retailer. He was deemed as a retailing genius who had proved himself by creating Target’s hip-yet-inexpensive cachet and then by leading Apple’s highly lucrative retail stores.

During his 17-month tenure, Ron Johnson had poured hundreds of millions into rapidly remaking the retailer. Mostly, his attempt at the high-stakes makeover of J.C. Penney hadn’t worked. Revenue deteriorated sharply, feedback from customers and employees was persistently negative, and the J.C. Penney share price declined by over 50%.

Lesson 1: Don’t disenfranchise your traditional customer base

Over the years, J.C. Penney’s economic moat had declined considerably. J.C. Penney lost customers to higher-end retailers and specialty stores who had started to offer better value at lower prices. At the other end, Wal-Mart and Target wooed price-sensitive customers with better-than-basic goods.

When retailing relatively undifferentiated merchandise, one of the key levers to revenue is discounts and promotions. Like other retailers, J.C. Penney had trained its customers to buy largely when its stores had a sale. Shoppers recognized that J.C. Penney’s tag prices were made-up to be marked down during sales events and were fixated on coupons, discounts, and promotions. Shoppers had come to regard of shopping at J.C. Penney as a treasure hunt for significantly marked-down merchandise.

Within weeks of joining J.C. Penney, Ron Johnson observed that three-quarters of everything sold had been discounted by at least 50% from list price. Instead of marking up the tag prices and then using deep discount sales to attract customers, he initiated a new “fair and square every day” pricing strategy. By offering good prices every day he attempted to change customer bahavior and dissuade them from waiting for markdowns. Further, by minimizing sales, promotions, and coupons, Ron Johnson eliminated the thrill of pursuing markdowns, a key characteristic of J.C. Penney’s conventional customer. When the pricing strategy flopped, Ron Johnson reinstated sales and coupons, and even brought back “fake prices.” The successive changes confused employees and customers. Additionally, J.C. Penney stopped carrying some traditional brands that many of its long-time customers had favored and injected trendy brands to appeal to younger customers. Ron Johnson’s team created exciting marketing and advertising that was seen as too edgy and further confused traditional customers.

Lesson 2: Don’t be so hubristic as to wager big on hunches without prototyping

At Apple, Steve Jobs frequently shunned extensive consumer research because he had the exceptional genius to introduce the right products, with the right features, at the right time. Drawing from his success at the helm of Apple stores, Ron Johnson was perhaps overconfident that he had all the right answers and could therefore forego the crucial feedback from employees and customers before embarking to “revolutionize retailing” by “teaching people how to shop on their terms” and “fundamentally disrupting the traditional retailing paradigm.”

The gravest error Ron Johnson made at J.C. Penney was not testing his new pricing strategy in a handful of stores. According to this WSJ article, when a colleague proposed a limited store-test of the new pricing strategy, Johnson allegedly responded, “We didn’t test at Apple.”

Clearly, what Ron Johnson thought of value was not what its customers saw as value. As a result, J.C. Penney overlooked the reality that, for its customers, pursuing discounted goods on sale was part of the fun of shopping at J.C. Penney. Ron Johnson set about to tear down an old business model before he had switched over to a new business model without prototyping.

Ron Johnson possibly had a compelling out-of-the-box vision for J.C. Penney. However, he did not stay closely connected to J.C. Penney’s customers and employees before the launch of a radical strategic change. It is challenging to be an effective leader when customers and employees don’t understand and buy major changes.

Incremental improvements to J.C. Penney’s merchandising strategy through extensive prototyping and measured makeover could have provided the opportunity to learn through trialing and encouraged ownership of the strategy by employees, especially those in customer-facing roles.

Lesson 3: Beware of the “Halo Bias” in rating leaders

We tend to attribute a manager/leader’s success to his apparent genius and we overlook the role of the context (team, product, industry, timing, and luck) in his success. Thus, we come to expect him to have the same success in a different context. We anticipate that the very tactics and devices that proved successful in the past would work for him in the new context. (See my earlier article on the halo and horns biases in rating people.)

Ron Johnson certainly proved his retailing genius by first creating Target’s hip-yet-inexpensive brand image and then, for ten years, by leading Apple’s highly lucrative retail stores where he most famously introduced the Genius Bar concept. Nevertheless, his experience with selling premium-priced products at full price all the time with no promotions at the Apple stores did not translate well to J.C. Penney’s undifferentiated merchandise and its customer base of bargain hunters.

In June 2011, J.C. Penney stock spiked by 17.5% when the company announced Ron Johnson’s appointment as CEO. Wall Street saw in him a proven leader with the silver bullet. Investors got overly optimistic that he would remake the embattled retailer and overlooked the fact that J.C. Penney lacked the brand image of Apple and its most-sought-after products. Alas, J.C. Penney stock slid by over 50% during Ron Johnson’s 17-month tenure. The golden boy of retail never hit his stride.

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Filed Under: Leadership, Leading Teams, Managing Business Functions Tagged With: Apple, Leadership Lessons, Winning on the Job

How to Think and Perform like a CEO: Link the External World with the Internal Organization

June 22, 2009 By Nagesh Belludi 1 Comment

A.G. Lafley on the Unique Work of CEOs

In this article (PDF of full article) in the May 2009 issue of the Harvard Business Review, Proctor & Gamble’s Chairman and outgoing CEO, A.G. Lafley reflects on the unique responsibilities of CEOs. What makes this article engaging is that A.G. Lafley uses the context of his commendable achievements at the helm of Proctor & Gamble to elaborate on the teachings of management guru Peter Drucker.

“The CEO is the link between the inside and outside. He alone experiences the meaningful outside at an enterprise level and is responsible for understanding it, interpreting it, advocating for it, and presenting it so that the company can respond in a way that enables sustainable sales, profit and total shareholder return (TSR) growth.”

Drawing from Peter Drucker’s teachings, A.G. Lafley identifies the four fundamental tasks of a CEO. Here is a summary:

  1. Defining and interpreting the meaningful ‘outside.’ Identifying which external stakeholders matter the most. Recognizing where results are most meaningful. Clarifying and communicating the priority of external stakeholders.
  2. Identifying and focusing on the competitive spaces where the organization can win. Inquiring, “What is our business? What should it be? What is not our business? And what should it not be?”
  3. Balancing the present and the future. Determining the optimum balance between yield from present activities and investment in a highly uncertain future. This involves, (1) defining realistic growth goals, (2) creating a flexible budgeting process, and (3) allocating human resources in a way that identifies and develops good people for today and tomorrow.
  4. Shaping the values and standards of the organization. Winning with those who matter most and against the very best.

Think like a CEO, Focus on Organizational Performance

I believe that everybody is a CEO. Whatever your span of responsibilities—supervisory, managerial or leadership—you are accountable to the external stakeholders. These stakeholders measure you purely by your ability to identify opportunities and get things done through the resources you have. Here are five essential initiatives to help you think and act like a CEO.

  1. Understand the context of your organization or project. Change your perception away from the minutiae of your organization and seek to understand what your organization means in the broader context and how it fits into the external world. Draw from this external perspective to establish the right directions and align the work of your entire organization with these organizational goals. Differentiate between short-term and long-term opportunities.
  2. Identify the primary external customers—these could be higher-level managers, other groups within your company or a consumer who uses your products. Use this customer standpoint to make every strategic decision and choose the right actions. Connect each initiative to its beneficial results to your customers.
  3. Communicate your direction and priorities to your organization. Help your employees determine where to focus their own efforts and how they eventually fit in the broader context of the external world.
  4. Focus on execution and achieving results. Introduce a culture of accountability. Ensure that each employee actually does live up to the values and goals of the organization.
  5. Coach your employees and develop them. Understand and align their personal values and aspirations to those of the organization, to the extent possible. Per Peter Drucker, “make sure that the performing people are allocated to opportunities rather than only to ‘problems.’ … Make sure that people are placed where their strengths can become effective.” Plan for succession.

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Filed Under: Managing Business Functions, Sharpening Your Skills Tagged With: Peter Drucker, Winning on the Job

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About: Nagesh Belludi [hire] is a St. Petersburg, Florida-based freethinker, investor, and leadership coach. He specializes in helping executives and companies ensure that the overall quality of their decision-making benefits isn’t compromised by a lack of a big-picture understanding.

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