Promotional Products Industry Analysis
A Strategic Weakness Presents Itself as Companies Grow
Apr 24, 2009
In this cycle owners and company founders are selling out to larger firms. As these firms get larger, investor groups are typically purchasing them in turn. While these groups are strong in the investment side, the relationships dimension of the promotional products business is foreign territory to them.
They bring an infusion of capital, a large part of which goes on to be used in the acquisition of other companies to make the acquiring organization still larger. These firms then typically run into trouble digesting these acquisitions and that leads to the introduction of what some refer to as the easy way of management, easy because it uses the quick, easy fix.
What is the Source of this Trouble?
When organizations experience the stresses of poor performance such as a case of acquisition indigestion, they “retreat to the familiar” under that stress. This would be in similar fashion to a soldier in a foxhole who will assume the prenatal position during a shelling. The familiar course for investors is the numbers. “Let’s see the numbers, just the numbers.”
Industry observers are seeing two common approaches that are generally combined together.
- Executives with little experience with the culture of an organization were brought in to improve the place. Bright, young, and educated managers are brought in to “upgrade” the middle management staff. Just imagine the consequences if the Marine Corps replaced its cadre of experienced gunnery sergeants in this fashion. The people are simply costs to be reduced and no value is attached to the “organizational memory” captured in their knowledge and experience.
- The other is the hiring of efficiency consultants remove inefficiencies from an operation by reducing staffs and inventory. While this approach works very well in commodity firms in efficiency oriented supply chains, it hasn’t shown itself to work well in a response oriented supply chain such as this one. What is achieved is the glow of improved performance over the short term but disastrous performance when there are not enough experienced people to handle an increase in business.
- Unwise inventory reductions also creates insufficient inventory for a fast turn around of orders.
Asking these firms to compete at a high level now is like asking starved and beaten POWs to step into the ring against Olympic athletes in their prime.
Looking Ahead
Still, there are healthy organizations present and they foretell a continued record of poor performance for these investor-driven organizations. Yes, they may experience some stability and perhaps even some modest growth, but they certainly will not capitalize on the opportunities that are out there. They have tried to replace the entrepreneurial energy that was formerly at the head of these organizations with their own version of efficiency and that version is not compelling.
The recession underscores the likelihood that there is no short-term fix as healthy cultures and organizational spirit need time to develop. Eventually these firms will be sold to one that understands this industry and that transaction price will be considerably below investors’ expectations. The lesson here is don’t take that entrepreneurial energy for granted.
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