10 Strategy Magazine

www.sps.org.uk I Issue 28 I March 2012

Were strategy errors behind the crisis?
While the 2008 crash and its aftermath are inextricably linked in the public’s view with ‘greedy bankers’, the conditions for a recession were already present in other sectors. Disasters like Northern Rock and Royal Bank of Scotland were caused not by banking blunders but basic errors of strategy. By Kim Warren

H

ad the recent crisis been limited to banking, as most of the public believes, the downturn may have been less destructive. However, mistakes occurred in other sectors, even among otherwise successful companies. Spectacular cases may hit the media but they are only the visible tip of a large iceberg of strategy errors that damage value across all sectors. Starbucks, for example, has mostly been outstandingly successful, but its recent history shows costly errors. Not only did the company suffer a major drop in profits during 2008-09, but it also had to close more than 500 underperforming stores – stores previously opened at a cost to shareholders of hundreds of millions of dollars. Its smaller UK rival, Costa Coffee, suffered no such collapse in profits, even though its market also saw a drop in consumer confidence. Starbucks’ error is all the more remarkable because, just a few years earlier, McDonald’s publicly explained that it had made exactly the same mistake.

Problems do not just show up in recessions. In 2005, eBay acquired Skype for $2.6 billion, with more to follow if Skype met certain targets. eBay’s rationale relied on unspecified growth synergies between its consumer-trading business and Skype’s free phone service. But in October 2007, eBay wrote off $1.4 billion on its Skype purchase. Strategy failures are not limited to what we might call ‘type 1’ errors – doing something wrong that destroys value, whether a little or a great deal.