PDF Summary:Dead Companies Walking, by Scott Fearon

In today's fast-paced business world, many investors and executives rely heavily on historical data and conventional wisdom. But as Scott Fearon illustrates in Dead Companies Walking, leaning too much on past performance and dismissing the potential for seismic shifts in markets, customer preferences, and business models can doom companies to failure.

Drawing on real-life examples of corporate collapses and dramatic turnarounds, this book warns of the dangers of becoming overly reliant on predictions and formulas that may no longer hold true. It stresses the importance of carefully monitoring trends, remaining adaptable, and connecting with customers to stay ahead of the curve.

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Krispy Kreme’s managers, in a misguided attempt to grow rapidly, negotiated territory management agreements with a handful of franchisees, who were then responsible for opening up to ten locations in their designated areas. This risky move proved disastrous when several of those franchisees struggled to turn a profit and went bankrupt, thus leaving many areas nationwide with no access to Krispy Kreme’s products.

Practical Tips

• Consider running a pilot program to test new market strategies before fully implementing them. For example, if you're considering eliminating a product line, try reducing its presence gradually in a controlled segment of your market. Monitor sales and customer feedback closely to assess the impact before making a company-wide change.
• Implement a feedback loop where customers can regularly provide input on your offerings. This could be a simple suggestion box in a physical location or an online survey sent after purchase. Make sure to review the feedback consistently and look for patterns that indicate what your broader customer base desires.
• Create a mutual benefit agreement with other small business owners in your area. For instance, if you own a coffee shop, partner with a nearby bookstore where buying a book gets the customer a discount on coffee and vice versa. This cross-promotion can help both businesses grow and attract more customers.
• Develop a contingency plan for your business by identifying alternative revenue streams that can be activated if the primary product or service struggles. For instance, if you own a coffee shop franchise and sales are down, consider offering specialized workshops, selling merchandise, or providing a subscription service for regular customers to stabilize income.

Peer Pressure and Exuberance Can Cause Investors and Executives to Ignore Contradicting Evidence

During manias or asset bubbles, many investors dismiss any indication that suggests their chosen ventures could potentially lack value. They're so swept up in the heady excitement of the booming market, they come to believe that things will always go up, no matter what. That's what occurred during the dot-com boom, when any company with the word “.com” in funding from VCs. But the dotcom frenzy is not unique. Manias are a common occurrence in finance, and Fearon urges investors to remain receptive and not be blinded by enthusiasm for a specific business or sector of the economy.

Dotcom Companies Like Quokka Sports and Women.com Fell Due to Hype and Invincibility

Fearon gives the example of two dotcom busts, Women.com and Quokka Sport, whose executives were so swept away by the excitement, they overlooked obvious flaws in their business models. Women.com's CEO, Marleen, believed the business was immune to failure. When Fearon asked her what could possibly go wrong that would cause the company’s stock to lose value, Marleen was unable to answer the question, because, as she confidently assured him, there was literally “no chance that anything will go wrong." She was incorrect. Within a year, Women.com declared insolvency, and its stock dropped to nothing. Fearon chalks up Marleen’s absurd confidence to the general atmosphere of that period, stating that the dotcom craze was so fervent "people intentionally ignored difficult truths like math.”

Another dotcom casualty, Quokka Sports, sought to attract a huge online audience by broadcasting the yacht races of the America’s Cup. Fearon disputed the CEO's point about how little most Americans cared about sailing, but as usual, the executive failed to see the flaw in his strategy and insisted that Quokka’s revolutionary “immersive viewing” approach would transform the sport into a national obsession. A year later, the business filed for bankruptcy.

Context

• There was immense pressure from investors to capitalize on the internet boom, which often led executives to make overly optimistic projections and ignore potential pitfalls.
• There was a widespread belief that technology would solve many business challenges, leading to an underestimation of the complexities involved in building successful internet-based businesses.
• Insolvency typically results in job losses and financial losses for employees, suppliers, and other stakeholders who are dependent on the company's operations.
• Many investors and executives failed to conduct thorough due diligence, often overlooking fundamental business principles such as supply and demand, competitive analysis, and financial sustainability.
• The America’s Cup is one of the oldest and most prestigious yacht races in the world, but it traditionally had a niche audience, primarily appealing to sailing enthusiasts rather than the general public.
• The technology required for truly immersive experiences was still in its infancy, with limitations in bandwidth, streaming quality, and user accessibility, which could hinder widespread adoption and satisfaction.
• Many dotcom companies, including Quokka Sports, struggled to develop sustainable revenue models. They often relied on advertising revenue, which was difficult to secure without a large, engaged audience.

Analysts Often Push Unwise Deals Driven by Emotion Over Analysis

Fearon was often shocked by the quality of the research published by investment banks and how their institutional salesmen acted when pitching clients like him on shares. Instead of focusing on factual analysis, these experts created ways to justify exorbitant valuations and coined terms like “future terminal multiple" to convince portfolio managers to accept their schemes. A salesman named Rick from Montgomery Securities bluntly explained the motivation for these shenanigans. “Nobody stops me from collecting a commission,” Rick told Fearon, after trying to sell him on a stock offering for a soon-to-be-bankrupt bank in Oklahoma.

Other Perspectives

• Investment bank research is subject to peer review and critique by other professionals in the field, which can serve as a quality control mechanism.
• The behavior of a few salesmen, such as the one named Rick, may not be representative of the entire profession or industry practices.
• The use of innovative valuation methods does not necessarily imply that the deals are unwise; it could reflect a deeper insight into market trends and the evolving nature of business valuation.
• Portfolio managers are typically well-educated in finance and are capable of critically evaluating the terms and methodologies presented to them.
• Salesmen may argue that commissions are a legitimate part of their compensation structure, rewarding them for the hard work and expertise they bring to their role.

Disconnected Leadership Risks and Skillful Management to Rescue Failing Companies

Savvy leaders identify difficulties and take action to remedy the situation. During troubled periods, it’s important to do more than just be "hands-on"; you also must be mindful of your own potential culpability in creating the problem. Also crucial is the ability to engage with, and motivate, the employees who perform the work of operating a business.

Disconnected Leaders Can Ruin Their Companies

Rob from BMHC exemplifies how investors and business leaders should maintain an appropriate lifestyle to sustain the morale of employees, who are responsible for the actual work of creating and growing a successful enterprise.

BMHC's Robert Mellor and JCPenney's Ron Johnson Made Decisions Ignoring Core Customers

While BMHC’s finances were crumbling beneath an ocean of debt and collapsing demand for its low-margin products, its CEO, Mellor, had the audacity to keep its corporate headquarters on San Francisco’s waterfront in a highly expensive location. By maintaining this imperial corporate lifestyle, and continuing to pay himself a seven-figure salary, Mellor demonstrated his disconnect from economic realities and unwillingness to make the necessary sacrifices to prevent his own business from annihilation. This was not lost on BMHC’s shareholders. A prominent money manager named Robert Chapman capitalized on the company’s plummeting stock price to acquire a significant stake in it, and he began to publicly castigate Mellor for his extravagant lifestyle and urged BMHC to reduce its “bloated cost structure.”

JC Penney’s CEO, Ron Johnson, made a similar series of mistakes. After taking over as the CEO, he refused to move his family to Plano, Texas, where the company was headquartered. Instead, he stayed at the Dallas Ritz-Carlton at company expense and commuted from Silicon Valley on JCPenney’s private jet weekly. Johnson also made another elitist mistake—he was said to begin releasing monthly video messages (a number of which were filmed in his California living room) and obligating JCPenney employees to view them.

Practical Tips

• Implement a transparent salary review process involving feedback from peers or a board of advisors. This could be a bi-annual review where stakeholders assess the appropriateness of your salary given the company's financial health. They can provide insights or vote on adjustments, ensuring that your compensation is aligned with the company's current situation and not solely decided by you.
• Develop a habit of questioning every purchase by asking yourself if it's a want or a need. Before buying anything, wait for a 48-hour period to consider if the purchase is necessary. This cooling-off period can help you avoid impulse buys and focus on spending money only on things that add true value to your life.
• Propose a reward system for cost-effective business practices within your team or company. Encourage your colleagues to come up with innovative ways to save money for the company. For instance, the person or team that suggests the most effective cost-cutting measure that is implemented could receive recognition or a small bonus, fostering a culture of fiscal responsibility.
• Start a feedback loop by asking your team to submit questions or topics they'd like addressed in your next video message. This encourages a two-way communication channel and ensures that your updates are relevant and valuable to your team. You might use a simple online survey tool to collect responses and then address the most common or pressing issues in your video.

Remote Management by Executives Like Q.T. Wiles at MiniScribe Often Enables Fraud

Fearon gives the example of the scandal involving MiniScribe, which later became infamous and nearly brought down a high-flying San Francisco investment bank named Hambrecht & Quist. As MiniScribe’s revenues and share price collapsed, Hambrecht & Quist convinced its fellow directors to hire Bill Hambrecht’s personal “fix-it” guy, Q.T. Wiles, to save the company. Unfortunately, MiniScribe was based in Longmont, Colorado, and Wiles wouldn't relocate closer to the company's offices. Instead he ran things remotely from his home in Los Angeles, reportedly traveling to Longmont just once every three months or less. This absentee management style created a poisonous atmosphere at the company, as executives were so focused on meeting Wiles’s aggressive revenue goals that they started to alter their accounting records and shipping invoices. Ultimately, Wiles, Hambrecht, and their firm, Hambrecht & Quist, faced a lawsuit from MiniScribe’s investors. Wiles was convicted of committing fraud and engaging in insider trading. Hambrecht & Quist escaped total annihilation but was forced to pay $550 million to settle the lawsuits and suffered lasting damage to its reputation.

Practical Tips

• Develop a habit of cross-verifying financial reports with operational data. Even if you're not in finance, you can compare the general output of your team or department with the figures presented in reports. If you notice significant inconsistencies, such as reported sales not matching the level of activity you've observed, bring this to the attention of a trusted supervisor or the appropriate department.
• Engage in role-playing exercises to simulate decision-making in a leadership position. Gather a group of friends or colleagues and assign each person a role within a fictional company. Create scenarios that challenge the 'CEO' with tough decisions, such as budget cuts or strategy pivots. Discuss the outcomes and how different leadership styles could lead to different results. This activity will help you explore the consequences of leadership decisions in a risk-free environment.
• Create a checklist of qualities you need in a crisis manager based on the successful attributes of turnaround specialists like Q.T. Wiles. This might include strong leadership skills, financial acumen, and a history of making tough decisions. Use this checklist when interviewing potential candidates to lead a struggling project or team within your organization. This ensures you're looking for the right qualities and not just going by gut feeling.
• You can enhance remote management by setting up a virtual office hour. Dedicate a specific time each week where you're available for video calls, allowing team members to drop in with questions or updates, fostering a sense of presence and accessibility despite the physical distance.
• You can foster a positive work environment by scheduling regular check-ins with your team. Set up a bi-weekly or monthly meeting where team members can discuss their current projects, challenges, and successes. This creates a platform for open communication and ensures that you are actively engaged with your team's work, which can help prevent the sense of neglect that comes from absentee management.
• Develop a habit of transparent self-reporting by keeping a detailed journal of your activities and outcomes. If you're working on a project, document your actual progress and setbacks. This practice will help you stay honest with yourself and others, and it can serve as a learning tool to reflect on what strategies worked and what didn't.
• Create a personal risk management plan to protect against potential financial losses. Identify the types of risks you're exposed to, such as market volatility or company-specific risks, and determine strategies to mitigate them, like diversifying your portfolio or setting stop-loss orders on your investments.
• Educate yourself on the legalities of trading and investment by enrolling in a free online course on financial ethics. Understanding the boundaries of legal trading can prevent you from inadvertently engaging in fraudulent activities. For example, websites like Coursera or edX offer courses taught by university professors that cover the basics of ethical investing and the consequences of insider trading.
• Implement a "reputation reflection" routine where, at the end of each week, you jot down actions you took that could influence how others perceive you. Consider whether these actions align with the personal or professional image you wish to maintain. If not, plan corrective steps for the upcoming week to mend any potential damage before it escalates.

Effective Management Salvages Troubled Companies Through Adaptability

The best managers recognize that things will inevitably go wrong, and they react proactively when confronted with changing conditions. This adaptability was the key to the recovery of two businesses Fearon took long-term positions in after initially betting against them.

Executives Revived Fortunes by Focusing on Core Customer Values and Eliminating Unprofitable Initiatives at Zales and Cost Plus

Fearon watched as Cost Plus, the hunt-for-treasures retailer he had frequented as a child, almost went bankrupt after its executives attempted to remake it into a generic luxury goods retailer. They lost their key customers by filling their outlets with high-end furniture and eliminating their hallmark eclectic atmosphere, then they compounded this mistake by pursuing a hypergrowth strategy of simultaneously opening dozens of new locations, which only strained the company’s resources. Consequently, the business's comps turned negative, its revenues declined, and its stock price fell from $44 a share in 1999 to 50 cents a share by 2009.

Then, seemingly miraculously, a new CEO, Jane, was internally promoted and reversed Cost Plus’s fortunes by reinstituting its original, quirky treasure hunt model. Jane admitted to Fearon that the company's expansion and upscale marketing plan had been "a huge error" and assured him that Cost Plus's leadership had every intention of returning the company to its roots. Within a year, the company's comps had turned back to positive, and by 2012, Cost Plus had agreed to be acquired by Bed Bath & Beyond for twenty-two dollars per share.

Zale, another retailer that resurrected its business, made similar mistakes as Cost Plus. Its leadership mistakenly assumed they could grow their revenues by stocking more lower-priced “fashion jewelry” and, like Cost Plus, they pursued a risky hypergrowth expansion strategy. Zale's new leadership was forced to drastically curtail its expansion plans by closing more than forty underperforming locations and putting resources into new, higher-margin exclusive product lines, including a partnership with designer Vera Wang. This turnaround worked spectacularly. Zale's per-share earnings turned positive, and its operating margins improved to levels not seen in years. Shortly after, Signet bought the company for $21 per share.

Practical Tips

• Conduct a "brand audit" on yourself by asking friends, family, and colleagues what they perceive as your unique qualities or services. Use their feedback to understand how others see your value proposition. This can prevent you from making drastic changes that could confuse or alienate your personal "customer base" – the people who rely on you for specific talents or knowledge.
• Try implementing a 'nostalgia corner' in your store to preserve the eclectic vibe while introducing high-end items. Dedicate a section of your retail space to feature classic, quirky, or vintage items that reflect the original character of your business. This can serve as a bridge between the traditional and the new, catering to both long-time customers and those seeking premium products.
• Implement a phased growth approach for personal goals. Instead of trying to achieve multiple goals at once, focus on one at a time. This mirrors a more sustainable business expansion model. For instance, if you're looking to improve your fitness and learn a new language, start with establishing a workout routine first, and once that's a habit, begin language lessons.
• Develop a habit of reading market news summaries daily to spot trends in different industries. Use a news aggregator app to follow business and financial news, focusing on stories about company revenues and stock performances. Over time, you'll start to notice patterns and may be able to predict which companies might face similar issues as Cost Plus did.
• You can revitalize your garage sale by turning it into a treasure hunt for buyers, placing unique or quirky items in unexpected places. This approach can create an engaging experience for shoppers, encouraging them to explore more thoroughly and potentially buy more. For example, hide a vintage camera inside an old suitcase or place collectible coins inside a book.
• Create a "lessons learned" board in a visible area of your workspace or home. Whenever you recognize a mistake or a learning opportunity, write it down on a sticky note and place it on the board. This visual reminder will keep the lessons at the forefront of your mind, encouraging you to apply them in real-time situations.
• Start a journal to track the impact of returning to your roots. Document the changes you make and how they affect your daily routine, mindset, and interactions with others. This can help you measure the benefits of this approach and motivate you to continue.
• Engage with local business owners to learn about their cost-cutting strategies. Visit local businesses and ask the owners about the changes they've made to reduce costs and improve their bottom line. Take notes on strategies that could be applicable to your own situation, such as negotiating with suppliers, reducing waste, or optimizing operations.
• Engage in discussions with online investment communities. Join forums or social media groups focused on stock investments and acquisitions. Share your observations on recent acquisitions and seek feedback on your investment criteria checklist. This interaction will provide you with diverse perspectives and help refine your understanding of the market, potentially revealing new investment strategies.
• Conduct a personal inventory of possessions to assess value versus volume. Take a day to go through your belongings and categorize them based on their cost and how much you use or value them. This can reveal if you're accumulating lower-priced items that don't add significant value to your life, similar to how Zale stocked fashion jewelry. You might find that decluttering these items and focusing on fewer, more meaningful possessions can enhance your living space and well-being.
• Create a virtual simulation of a hypergrowth scenario using business simulation software. Customize the parameters to mimic a hypergrowth environment and make decisions as if you were managing a rapidly expanding company. Analyze the outcomes to gain insights into resource allocation, market saturation, and potential pitfalls without the real-world risks.
• Use a "stop-doing" list to complement your to-do list. Regularly update this list with tasks or commitments that are no longer serving your goals or are consistently draining without providing adequate returns. This practice encourages you to actively disengage from less productive activities, mirroring the strategic pruning of a business's operations.
• Leverage social media to create buzz around your exclusive offerings. Use platforms like Instagram or Pinterest to showcase the story behind your exclusive products, including the partnership process, the craftsmanship involved, and the limited availability. This not only markets the product but also builds a narrative that customers can connect with, making them more likely to purchase and share with their network.
• Create a personal earnings report to track your financial progress over time. Just as a company tracks its per-share earnings, you can monitor your income versus expenses on a monthly basis. Use a simple spreadsheet to record your earnings and expenses, and review it regularly to ensure you're moving towards a positive net income.
• Create a personal case study by tracking a merger or acquisition from announcement to completion. Choose a current merger and follow it closely, noting the share price, market sentiment, and any regulatory hurdles. This hands-on approach will deepen your understanding of the process and its impact on stock value, which can be valuable for future investment decisions or business strategy considerations.

International Gaming Technology's Leaders Innovated and Restructured to Regain Dominance Despite Near-Bankruptcy

Unlike Cost Plus and Zale, the slot machine manufacturer International Gaming Technology (IGT) didn't have to shift back to a once successful formula—it needed to create one. Despite enjoying a windfall when many states relaxed their gambling laws and the rise of Indian casinos in the 1990s expanded the market for slots, the company’s stock had been languishing for years and was trading for cents per share in the 1980s. Fearon discovered IGT’s key to recovery when he went to their headquarters in Reno, Nevada. Even while the company faced dire circumstances, its CFO, Tom, told Fearon that IGT had refused to cut its research and development budget. He said luck played no part in bringing the company back to health. Instead, they had saved their business by making the bold choice to spend more in the hopes of discovering a revolutionary new product, which they did, first by inventing the progressive jackpot slot and subsequently by designing the game "Wheel of Fortune," the best-selling slot machine in history. Tom also explained that IGT had innovated a novel way to distribute these machines. Instead of selling them outright, the company leased the machines to casinos, earning a sizable percentage of each coin played in them. These two innovations — a revolutionary product (the progressive slots) and a new distribution model (casino leasing) — made IGT the biggest player in the industry.

Practical Tips

• Challenge yourself to innovate by setting a "No Repeats" week where you commit to not using any of your usual solutions to problems. For example, if you typically solve a work issue by consulting with a specific colleague, try resolving it independently or seeking input from a different team member. This can help you develop new approaches and avoid falling back on familiar patterns.
• Create a personal "Penny Stock Portfolio" game to simulate investing in low-priced stocks. Use a spreadsheet to track imaginary investments in real low-priced stocks, updating the spreadsheet weekly with the actual performance of the stocks. This exercise can help you understand market trends and identify what to look for in potential investment opportunities without risking real money.
• Reach out to professionals in your network for a 'day in the life' experience. Spend a day shadowing someone in a role or industry you're interested in. This firsthand observation can provide insights into successful practices that you can adapt to your own context.
• Create a 'future opportunities' jar where you contribute ideas or skills you want to learn every time you encounter a problem or gap in your knowledge. Periodically review the jar and select an idea to research or a skill to develop, ensuring you're continuously investing in your personal 'R&D'.
• You can allocate a small percentage of your monthly budget to a "personal R&D fund" to explore new skills or hobbies. Set aside an amount you're comfortable with each month to invest in online courses, books, or materials that allow you to experiment with new interests. For example, if you've been curious about digital art, use your fund to purchase a drawing tablet and a course on digital illustration.
• Create a board game night with friends where you design a simple progressive reward system for the winner, similar to a jackpot. This can help you understand the psychological appeal of progressive rewards and how they can be applied to motivate behavior in various settings, such as education or workplace incentives.
• Analyze popular culture trends to inspire new product designs, mirroring how the "Wheel of Fortune" slot machine capitalized on a popular game show. For instance, if you're creating a new board game, consider themes from current hit TV series or viral social media content to make your game more appealing and relatable to the public.
• Offer a trial period for your service to build trust and demonstrate value. If you provide a service, such as consulting, personal training, or landscaping, offer a short-term, low-commitment trial to potential clients. This could be a week of free advice, one training session, or a lawn care evaluation. The trial period allows clients to experience the benefits of your service without a long-term commitment, similar to how casinos can see the profitability of machines before purchasing them.
• Explore consignment arrangements with local businesses if you create physical products. You could place your handmade crafts or art in a local shop, where you and the shop owner agree on a percentage of the sales price for each item sold. This approach allows you to benefit from the shop's foot traffic without the need to rent your own space.
• Collaborate with a local college or university to develop a case study based on your business's challenges and invite students to propose innovative solutions. This partnership can lead to fresh ideas that could propel your business forward. It's a win-win: students gain real-world experience, and you receive potentially groundbreaking ideas.