The Business Book

(Joyce) #1


It makes sense for the share-buying
public not to follow mass trends,
but is the same true for business
leaders? In 2008, US mass-media
corporation AOL, noticing the
growth in social network sites,
bought the social-networking site
Bebo for $850 million. It joined the
herd and lost out badly. In 2013, it
sold the same business back to its
founders for $1 million.

Following trends
Business leaders, then, must be
as cautious as anyone else about
treading the same path as the
majority. There are three main
types of herd to ignore. The first,
as mentioned, is the occasional
stampede to make takeover bids.
In this case, business leaders worry
that if they do not buy a rival,
someone else will and perhaps
create a bigger, more difficult
competitor. At such times, there is
much talk of synergies (the sum
being worth more than the parts)

but little mention of long-standing
research, which suggests that 60
to 66 percent of all takeovers
destroy shareholder value for the
winning company. In other words,
most takeover bids prove to be
a disappointment.
The second herd behavior to
ignore is the strategic clash between
focus and diversification, and the
way the market tends to concentrate
on one of these two at any one time.
When “focus” is the market mantra,
share prices rise in companies that
sell off peripheral assets or divisions
of the business. This is what
happened to British Aerospace
(BAe) when it sold its 20 percent
stake in the Airbus aircraft business
in 2006. At the time, the stock
market liked its $2.99 (£1.87) billion
sale of the largely civilian aircraft
maker, since it focused BAe on the
defense and military sector. By 2013,
this view looked absurd, as Airbus
powered ahead but governments—
especially the US—cut back on


Global market shares of smartphones in 2009–13 varied
greatly: Apple stayed relatively stable; Nokia and RIM, who
had responded with herd instincts to the iPhone’s success,
saw huge losses; Samsung’s shares soared, reflecting its
development of products that would stand the test of time.

military spending. A worried BAe
then approached the owner of
Airbus, suggesting a merger and
implying that a mix of civilian
and military businesses was a
preferable focus. Could things
really have changed that much
between 2006 and 2013, or was
BAe responding to the trend for
diversification? Strong business
leaders look to the long-term and
ignore fads and fashions among
stock-market analysts and
management consultants.

Following the leader
The third herd behavior to avoid
is “followership.” This occurs
when companies develop “me-too”
products to imitate market
innovators. Of course, if a business
already has a genuinely
differentiated offering, it is wise to
follow a new trend. Often, though,
businesses rush out copycat
products to demonstrate that they
are staying competitive in a sector.
When the iPhone was launched in
2007, Nokia could boast more than
40 percent of the global smartphone
market. Despite a series of new
product launches by the company,

Those entrapped by the
herd instinct are drowned
in the deluges of history.
But there are always the
few who observe, reason,
and take precautions,
and thus escape the flood.
Anthony C. Sutton
UK economist (1925 –2002)









2009 2010 2011 2012 2013




Free download pdf