When a business team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
– Warren Buffet
I love this quote. The FT printed it in their Lex article on Marissa Mayer taking the CEO job at Yahoo (paywalled, so no link) but it applies equally at startups. When a company is underperforming it is tempting for boards and shareholders to believe that the problem is with execution rather than with an underlying underlying feature of the business. That way they can reach for the easier fix of changing management and avoid dealing with the fact that their investment thesis was flawed. However, as anyone who has been around lots of companies knows, sometimes the problems are fundamental in nature and radical restructuring is required to save or maximise value, not just better execution. This is the point I think that Buffet is trying to get to with this quote – when a business has flawed economics (fundamentals) then good execution alone doesn’t help.
Mayer is a very impressive character and Yahoo have done well to land her. It is also easy to see the attraction from her side of trading a senior exec team roll at Google for a CEO position at a $19bn market company. The tech press this morning is full of speculation about whether there are enough good bits in Yahoo (large audience, good media partnerships, strong cashflow) for Mayer to work with. I think she will have to be brilliant to succeed – Yahoo’s technology, products, and culture are a mess, they are rapidly losing market share, and the good bits aren’t the sorts of things you can build a company on – unlike, say, a dominant position in search. Perhaps most concerning is that it doesn’t sound like she has a mandate for truly radical change. Mayer is talking about spending her first period in office touring the company and getting to know the business better before outlining her strategy. If she was planning a radical overhaul I would expect her to be starting to build momentum now.
I saw something similar play out at one of the startups we were involved with. The company was missing budgets and failing to grow, so we brought in a new CEO who had previously been successful at a similar business, but his better execution didn’t translate into an improvement in business performance. In order to turn things around we had to radically overhaul the business model. The core product proposition remained the same, but we dropped the price by up to 60-90%, cut investment in R&D by a similar amount and innovated to find a much more efficient sales process. The company isn’t out of the woods yet, but has recently secured new investment and is doing much better. With hindsight we made the mistake I described above of taking the easy option of fixing the execution when the business model was the issue.