Mistakes I Have Witnessed (And Sometimes Made)

This piece from the CIMS July/August 2014 Newsletter presents an article written by Jim Guskin which discusses four common mistakes often made by management regarding innovation.

Search for “management/innovation mistakes” and you’ll find “Top Ten Innovation Mistakes,” “Five Innovation Mistakes to Avoid,” “Three Innovation Mistakes You Don’t Want to Make,” “Three Management Mistakes That Crush Innovation,” and more.  While these are mostly compiled by consultants and editors, the short list below comes from an experienced executive who has spent over 20 years as an investment banker, strategic thought leader and senior corporate finance decision maker.

Currently managing partner of investment banking and advisory firm Cobb Bay Partners, LLC, Jim Gruskin has executed over 50 capital market and strategic transactions valued at over $70 billion. In the process, he has observed “a few mistakes,” which he revealed to attendees at the CIMS Sponsors meeting in May with the caveat, “If we are honest with ourselves, we would have to admit that we have all made at least some of these mistakes.” Gruskin summarizes them here:

 1. Over-Reliance on Anecdotal Information

“The temptation to form premature theories upon insufficient data is the bane of our profession,” famed detective Sherlock Holmes explained in Sir Arthur Conan Doyle’s “The Valley of Fear.”

But sometimes anecdotal information is all we have. That in and of itself is not a problem. However, I have seen people from CEOs on down who are convinced they are making data-driven decisions when all they are doing is churning through a limited pool of stale information that in some cases was gathered with a great degree of selection bias. That is rarely the best way to achieve an optimal outcome.

2. Experience-Driven Myopia

In the mid 1990s I worked on several financing and M&A transactions for pager companies when these were common communications devices.

I remember distinctly a financing roadshow during which the CEO of one client company mentioned that he couldn’t understand why people would want to abandon their pagers for pricey cell phones when cell phone battery life was terrible and coverage was spotty at best.

His theory: Why have an expensive cell phone conversation that is likely to be plagued by a poor signal (or dropped altogether) while powered by a battery that may not last for the entire call when you could instead send a text page or direct someone to make a clear-sounding call from a reliable land line?

We sat in meetings with hedge fund investors and pension fund managers while the CEO successfully made his case; his assertion — ludicrous with the benefit of hindsight — was based on the information available at the time and was quite plausible to many intelligent executives and momentum-driven investors.

Ultimately, funds flows began to reflect a secular shift, and the pager industry ceased to exist. Several billion dollars of equity market capitalization evaporated within a couple of years. Pager companies—particularly those with significant financial leverage — filed for bankruptcy protection or sold at valuations that reflected their distressed situations.

At the same time, major telecom companies and startup wireless infrastructure providers expanded cellular networks and towers to support new technologies.  The major telecom companies that saw changing usage patterns and technology evolution early, as well as those who either invested in companies that participated in the wireless infrastructure boom or sold short the shares of paging companies, were the ones who profited from this shift

To read the about the third and fourth mistake click here.

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