Five mistakes that killed giant brands
By Maina Gachanjah
| May 2nd 2018 | 4 min read
Life is all about making mistakes, learning, un-learning, falling and getting back up.
However, in the world of business, you don’t always have the luxury of making decisions for the sake of the experience.
Mistakes can be costly and have led to the exit of giants, so as an entrepreneur, where possible, learn from others’ experiences and errors.
Here are some of the missteps that led to the premature demise of well-known global brands.
1. Spreading the business model too thin
Before collapsing, UK’s second-largest infrastructure contractor, Carillion, had a turnover of £5.2 billion (Sh726 billion).
Carillion had a unique business model. It was selective in bids and would engage in infrastructure projects that struck at the heart of ordinary British citizens. It had projects in education, health, transport, defence and the English Premier League.
Carillion was always the lowest bidder, hence the preferred government contractor.
However, the cost of contracted jobs eventually ended up costing more than the company could finance. It was forced to borrow £1.5 billion (Sh210 billion) to stay afloat.
However, its house of cards eventually collapsed, leading to the firm’s eventual liquidation.
Had Carillion maintained competitive bids, even with the fear of losing out on some contracts, it may have survived a lot longer in the infrastructure contracting market.
Alternatively, it could have spread its wings into the private sector as a back-up plan.
2. Failure to deliver on the brand promise
Hustle ran a feature on Theranos sometime last year, and it makes for sad but educational reading on brand promise.
Theranos, a contraption of therapy and diagnosis, was valued at Sh900 billion at its height.
Elizabeth Holmes, the firm’s founder, came up with the idea of a device that could process and analyse blood samples without having to inject needles into patients.
The idea was born of her fear of hypodermic needles and the outbreak of SARS between 2002 and 2003.
Elizabeth sold the idea to pharmaceutical venture capitalists, and in a year raised $6 million (Sh600 million) in seed funding for her idea. That was in 2003 when Elizabeth was 19.
Six years later, venture capitalists, salivating over the lucrative tech innovation, pushed Theranos’ seed funding to $92 million (Sh9.2 billion).
By 2014, Forbes valued Theranos at $9 billion (Sh900 billion), with $700 million (Sh70 billion) coming from venture capitalists.
But after years of a media blitz and numerous accolades directed at Elizabeth, who’d become known as the world’s youngest self-made billionaire, Theranos came tumbling down.
A journalist from Vanity Fair looked into Theranos’ claims, and the results bled the firm to $0. Around August 2015, regulators found major inaccuracies in the testing Theranos was doing on patients.
“They also discovered that some of the tests Theranos was performing were so inaccurate that they would leave patients at the risk of internal bleeding or of stroke among those prone to blood clots,” Vanity Fair reported.
Theranos had claimed it could test for more than 240 health disorders with a simple finger prick; it turned out its machines could only process about 15 types of tests. And even for these tests, the results were often inaccurate.
3. Overstretching the debt register
Nakumatt’s debt level is now estimated at Sh30 billion, with Sh15 billion owed to suppliers and Sh8 billion owed to banks.
Strategy gurus were ill-advised to rely heavily on debt for the retail chain’s massive branch expansion and also in a bid to cover its working capital shortfalls.
In taxation jargon, it’s said debt is cheaper than equity. However, you must maintain sustainable debt levels, with an eye on repayments that your business can comfortably handle now and in the future.
4. Retaining unethical leaders
If you’re a finance or audit practitioner, you must have heard of the 2001 Enron scandal, and the eventual dissolution of the audit firm, Arthur Andersen. It’s considered one of the US’ worst audit failures.
Enron was formed in 1985 by Kenneth Lay after it merged with Houston Natural Gas and InterNorth.
Several years later, Jeffrey Skilling was hired as CEO and he developed a staff of executives that – through the use of accounting loopholes, special-purpose entities and poor financial reporting – hid billions of dollars in debt from failed deals.
Chief Financial Officer Andrew Fastow and other executives not only misled Enron’s board of directors and audit committee on high-risk accounting practices, but also pressured Arthur Andersen to ignore the issues.
Enron shareholders filed a $40 billion (Sh4 trillion) lawsuit after the company’s stock price – which hit a high of $90.75 (Sh9,000) per share in mid-2000 – plummeted to less than $1 (Sh100) by the end of November 2001.
On December 2, 2001, Enron filed for bankruptcy. Its $63.4 billion (Sh6.3 trillion) in assets made it the largest corporate bankruptcy in US history until WorldCom’s bankruptcy the following year.
5. Overpricing products
Compaq was one of the largest sellers of personal computers in world in the 1980s and 1990s. The company became one of the first companies to legally reverse-engineer the IBM PC.
However, Compaq ultimately struggled to keep up in price wars with Dell, which used a direct sales model, and was eventually acquired for $25 billion (Sh2.5 trillion) by HP in 2002. HP retained the Compaq brand for lower-end systems until 2013 when it was discontinued.
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