Management

How Strategic Opportunism Creates Luck


Roman philosopher Seneca said, "Luck is what happens when preparation meets opportunity." But all too often, executives miss business openings because they refuse to deviate from their carefully prepared strategies. Fortunately, some business innovators are adopting what I call "strategic opportunism"—a rock-solid business plan with agility that enables them to pounce on the right opportunities.

For examples of epic wins and staggering losses surrounding strategic opportunism—and what we can learn from them—let's look at the soft drink industry.

In the early 1990s, Snapple Beverage was a fast-growing company, thanks to its having established a successful "cold channel" network of small, independent distributors who provided cold bevereges to hundreds of thousands of mom-and-pop stores and coffee shops. The market took note. Private equity firm Thomas H. Lee Co. led a $143 million leveraged buyout of Snapple in 1992 and then took the company public.

A year after Snapple's IPO, the then Quaker Oats Co. gobbled up Snapple for $1.7 billion. At the time, Quaker's sports drink, Gatorade, was a big hit in supermarkets, and senior management believed that they could simply reuse Gatorade's blueprint to make Snapple fly off the shelves. Instead, Snapple was trampled by Coca-Cola ( KO), Pepsi (PEP), and other established brands in the supermarket channel. It lost $100 million in three years.

The outcome was anticipated but still stunning: Quaker offloaded Snapple to Triarc for $300 million. The private equity firm promptly reversed Snapple's decline by steering it back into the cold channel and sold the company to Cadbury Schweppes in 2000 for $1.4 billion. Eight years later, Cadbury Schweppes spun off Snapple and more than a dozen brands into a separate publicly traded company, Dr Pepper Snapple (DPS). Despite the Dr Pepper and Snapple brands' strength among their core consumers, the new company finally acknowledged that it was fighting a losing battle against soft-drink giants Coke and Pepsi.

The bottom line in this flurry of deals: Snapple's corporate owners appear to have lost a combined $1.9 billion. Meanwhile, Snapple's private equity owners have realized a $2.6 billion gain, with an average annual return of 121 percent before the effects of leverage.

Where did the corporate owners go wrong? For starters, Quaker and Cadbury had the strategy only partly right and the timing completely wrong. Despite already having strong beverage brands (Gatorade and Dr Pepper, respectively), they lacked the size to compete against soft drink industry giants and didn't scale their operations to support multiple brands in fiercely competitive grocery channels such as supermarkets and discount stores. The preoccupation with supermarkets also caused Snapple to lose ground in the cold channel.

Both companies also missed opportunities to acquire Snapple for a fraction of what they ended up paying. Why didn't Quaker buy Snapple before it was public, and why did Cadbury pass on the company when it only had a $300 million price tag? Primarily because corporate executives fear failure too much. Failure messes up careers and is awkward to explain to shareholders. Too often, executives forget to think like capitalists and look for opportunities to buy in at a low point. In 1992, Snapple was too risky for most corporate buyers. By 1997, it was considered untouchable.

By contrast, neither private equity owner was constrained by public investor perceptions, and they both saw beyond Snapple's short-term challenges. Thomas H. Lee recognized that Snapple carved out a successful niche even though it was a tiny fraction of the beverage industry as a whole. Triarc saw that Snapple's problems in 1997 arose in large part out of Quaker's attempted expansion into mass markets, and that at its core, Snapple still had a strong cold-channel business.

Even worse, Quaker missed out on opportunities to exploit the Gatorade brand in new ways. Since Pepsi acquired the much-weakened Quaker, it proved the untapped potential in Gatorade by extending the brand into new-use occasions with its Prime, Perform, and Recover products for before, during, and after exercise. The result is that Gatorade has turned into one of Pepsi's fastest-growing drinks franchises.

So what lessons can we take from this? Smart business leaders should think beyond short-term operating results and examine how to position a business for long-term success. Is recent poor performance the result of ill-conceived management decisions that can be fixed quickly? Or does it reflect systemic challenges that will be difficult to change (e.g., strong competitors, concentrated customers, etc.)? If it is the former, then there may be an opportunity to acquire the business at an attractive price and create value through the turnaround. If it is the latter, duck!

Also, look out for companies "fighting above their weight"—those that enjoy surprising growth for two or three years but face tough challenges sustaining this success as they bump up against larger and stronger competitors. If you are witnessing a heroic but unsustainable performance, get out before the bottom falls out.

Corporate culture can also cloud executives' judgment. Case in point, the corporate culture and the disproportion of consequences for management made it difficult for Quaker or Cadbury-Schweppes to buy Snapple at the right time and price. A successful deal might mean a nice bonus, but a failed one could be career-ending. So executives naturally gravitate toward buying companies they perceive as low-risk—usually the ones that are being widely praised and are at the peak of their valuation. Successful buyers who apply the discipline of strategic opportunism will find ways to overcome these corporate biases.

Such buyers are not afraid to create their own luck by preparing to adapt their strategies and accelerate maneuvers or bide their time based on market conditions. Instead of obsessing about how to buy into last year's top performers at a premium, they focus on highly attractive opportunities for forward-looking growth and value creation.

Stuart_jackson
Stuart E. Jackson is a vice president of L.E.K.Consulting and author of Where Value Hides: A New Way to Uncover Profitable Growth for Your Business (Wiley, 2007).

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