Read Larry Popelka’s latest Bloomberg Businessweek article and find out how companies are using resource constraints as a competitive advantage… also why Mark Zuckerberg should become an Oakland A’s fan. Here are some of the highlights:
The Wealth Paradox
In baseball and in business, there is a “wealth paradox.” Teams and companies with extreme riches often fail because that wealth reduces creativity, judgment, and focus.
This year, three baseball teams spent more than $170 million on player salaries, and two of them (the Boston Red Sox and the Philadelphia Phillies) have losing records. Meanwhile, the Oakland A’s, with the lowest average salary ($55 million total payroll), have the second-best record in the American League. As if to underscore my point, the A’s swept the Red Sox in a three-game series this weekend by a combined score of 33-5. A’s General Manager Billy Beane of Moneyball book and movie fame has been scrappy and creative, while the Red Sox overpaid for bad talent.
In many businesses we see this same phenomenon. Wealth leads to poor decisions, while scrappy, cash-constrained upstarts rule the day.
In 1970, Kmart dominated discount retailing, and Wal-Mart (WMT) was a startup with just 24 stores. Kmart had plenty of expansion capital, while Wal-Mart—funded almost entirely by Sam Walton—had little. Wal-Mart’s limited resources led it to develop innovative cost-saving strategies: cross-docking, computer-managed inventories, and everyday low pricing, concepts that redefined discount retailing. Kmart used its cash for acquisitions like Borders, Builder’s Square, and Sports Authority instead of building its core capabilities. As a result, Kmart lost market share and soon went bankrupt.
At many companies today, cash is a distraction, not an enabler, or at best it’s poorly invested. For years General Motors (GM) churned out cash but failed to invest wisely. During the early 2000s, the company routinely invested more than $8 billion per year in R&D—enough to send a man to the moon—but got very little in return.
Meanwhile Toyota (TM) used its smaller R&D budget to develop hybrid engines, lower-cost production, and better fuel economy, gaining market share and ultimately contributing to GM’s bankruptcy…
Looking for one more reason to hate Facebook (FB)? Check out their post-IPO cash reserves—over $10 billion. There are few other public companies sitting on that much cash. Facebook is not even in an industry that needs cash to expand. So at best the money will be wasted on boneheaded moves. Or worse, it will be invested in adjacent businesses that cause management to take its eye off the ball—and create an opening for a competitor. We can only hope Mark Zuckerberg is an Oakland A’s fan… (Click here to read the full article)