I Was Seduced by the New Economy
Some of the smartest CEOs around bought into the myths of the new economy. Here's what they learned--the hard way
In order to survive-- and thrive--in today's virtual, global, tech-savvy, knowledge-managing, turbocharged, just-in-time economy, every CEO must fuel megagrowth while mastering the discipline of empowering intrapraneurs to innovate--or die.
Or so the business gurus would have you believe.
The landscape of the 1990s has become littered with sexy concepts for explaining how business has changed, catchy slogans proclaiming that everything you know is wrong, and rebellious new rules for making it in this, the new economy.
The proliferation of all these "revolutionary" ideas created new imperatives for CEOs and entrepreneurs. Call them the Myths of the New Economy: Grow as fast as possible or perish. Raise as much cash as you can, and right now. Empower your employees to become like entrepreneurs. And so on.
It became impossible to ignore the hype. A lot of entrepreneurs bought into these promises too hard. They reshaped their businesses and their lives. They forgot, for the moment, that there is no easy answer. (Gertrude Stein once wrote, "There is no answer. There never was an answer. There never will be an answer. That's the answer.")
The smart ones caught themselves in time. Take the few who tell their stories here. They rectified ill-conceived moves made in the heat of the moment. They learned timeless lessons about trusting their own experience and common sense. Now they share those lessons in these war stories from the front lines of the new economy.
7 MYTHS OF THE NEW ECONOMY
- Grow or die
- You must be virtual
- Go global
- Capital is easy
- Everybody is an entrepreneur
- Technology makes life easier
- You must be on the Web in a big way
MYTH NUMBER 1: 'GROW OR DIE'
Grow like crazy
THE PRESIDENT: Mark Begelman
THE COMPANY: Office Depot Inc., a Delray Beach, Fla., retail giant
THE BUY-IN: "I always felt there was tremendous pressure on us to continue the rapid growth."
In the early 1990s, when Mark Begelman was president of Office Depot Inc., it was the world's largest office-supply chain, but it wasn't big enough for Begelman. He believed that the only way to remain competitive was to grow, grow, grow. "We were a rapid-growth company that traded on future earnings," he says.
To achieve that kind of explosive growth, Office Depot had to crack whole new markets. The company had always served a small-business clientele, the type of customer who would drop into a store for staples and Scotch tape. In 1993 only 17% of its sales were to large corporations. Begelman decided the time had come to ramp up his share of the big-ticket market. "I went on a shopping spree," he says, spending "hundreds of millions of dollars."
In 1993 and 1994, Office Depot acquired eight independent office-product dealers operating in 20 states, all serving big corporate customers. "I thought we would be able to leverage Office Depot's buying clout and reputation, and get this commercial business cranked up and rocking," he says. "I figured, How hard could it be?"
The answer: very hard. "This thing hit us like a brick wall," Begelman says. Almost immediately, he saw disappointing results. Office Depot wasn't oriented to the large-company purchasing agent. "I thought it would be a challenge that we could quickly overcome," he says. "Instead, it gave me a big headache."
The new acquisitions operated as semiautonomous fiefdoms with scant coordination. Begelman had expected an Office Depot big-business catalog to appear within one year. It took two.
"We were just working hard to hold on to existing customers," Begelman admits. He left Office Depot in 1995. At the time, sales to large companies accounted for 23% of the company's revenues.
Begelman's tenure as company president was successful by most measures. During the years he ran Office Depot, from 1991 to 1995, its revenues jumped from $625 million to $5.3 billion, and the number of stores increased from 173 to 501. But he had believed there was no such thing as bad growth, and now his regret over the way he orchestrated the expansion is almost palpable. "You must think carefully about what you're stepping into before you step into it," he says. "We were always behind the eight ball."
Today, Begelman has a hot new start-up, Music and Recording Superstore (MARS), a $200-million Fort Lauderdale-based music-products retailer with 21 stores in 10 states. And he has a new appreciation for the principle of moderation. In the future, he says, "I will be less inclined to acquire and more inclined to build from the bottom up." --Marc Ballon
Life after growth
THE CEO: Bob Cooney
THE COMPANY: Laser Storm Inc., a chain of laser-tag arenas based in Denver
THE BUY-IN: "In this market, it's eat or be eaten."
Bob Cooney was so set on growing Laser Storm into a national powerhouse that he took the company public in May 1996. All the experts--investment bankers, the press, even members of his CEO networking groups--said no company, large or small, could survive unless it grew as large as possible. "It certainly seemed like a good idea at the time," Cooney says. "We totally bought into that."
What he no longer buys into is the idea that all growth is good, no matter how you achieve it. When he took Laser Storm public, Cooney's plan was to acquire other amusement companies, including both suppliers and retail operations. Cooney says he saw an opportunity to consolidate the mom-and-pop industry.
Cooney thought he had no choice if he wanted Laser Storm to survive. "We're in a pretty small niche market, yet there are 12 to 13 other companies doing the same thing," he says. "We thought we needed to position ourselves for the future. There was a real fear that if we didn't do anything, in 10 years we'd fall by the wayside."
Although Cooney anticipated problems with really rapid expansion--cultural issues among all the smaller acquired companies, for instance--his real problems came out of the blue.
Not long after he signed an engagement letter for a $12-million secondary offering, Cooney's underwriter was suddenly sold and its West Coast operations were shut down. There he was, deciding how to integrate the international operations of a company Laser Storm was acquiring, when his cell phone rang. The party on the line asked why Laser Storm's underwriter had fallen "off the box."
"I said, 'Don't joke with me right now," says Cooney. But it was no joke. Laser Storm's stock price fell from $3 and change to less than a dollar by the end of the day.
"We lost all support for the stock and all of our ability to raise capital after that," says Cooney. Nine months later the company filed for Chapter 11. "We've spent the last two years scraping to recover," Cooney says. "We had sales of $6 million at the time, but we were three days away from being a $20-million company. We were up to 70 people. Now we're just 4."
Cooney has regrouped, creating a leaner and meaner Laser Storm. He plans to restructure the company and try to grow again, through an industry roll-up. This time "we'll be coming more from a position of weakness than strength," he says. --Christopher Caggiano
MYTH NUMBER 2: 'YOU MUST BE VIRTUAL'
There's no place like in-house
THE CEO: Susan Sargent
THE COMPANY: Home-furnishings maker Susan Sargent Designs, in Pawlet, Vt.
THE BUY-IN: With a little technology, you can build an empire from your living room.
Susan Sargent wanted to live the life of an entrepreneur without sacrificing the lifestyle of an artist. So when she established her first business, in 1996, Sargent set up shop in a barn near her home studio in rural Vermont. Her stated mission: to create "a model company" with "best-in-the-world creative talent." How did Sargent plan to build such a world-class organization so far from the beaten path? By outsourcing and creating a virtual company, one united by technology instead of real estate.
Sargent didn't have to go far for help with her vision. Her husband is celebrity business guru Tom Peters. It's hard to miss the buzz when you're living with the author of such new-economy manifestos as Thriving on Chaos and The Pursuit of WOW! Every Person's Guide to Topsy-Turvy Times. Peters even runs a popular seminar that's all about being virtual and exporting work to employees wherever they are.
So when Sargent set out to "run this business very differently from traditional furnishings companies," she was well prepared to explore all the options. She began by outsourcing her entire sales operation, linking a distant sales manager and 120 independent reps by phone and E-mail.
To her dismay, it was a disaster. She expected the reps to act and feel as if they were an extension of the office. But "they weren't savvy with laptops," she says, and they never jelled as a group. Even though all the reps had access to Sargent's real-time database of inventory, few used it. They weren't selling her newest products, because they didn't know about them. Worse, they took orders for products not in stock. A disconnect developed between the company and its retail customers. "We were getting this from stores: 'You never have what I want," Sargent says.
She lost sales--and made sales to customers she didn't want, retailers that couldn't properly showcase her hand-crafted products.
Sargent's sales manager, some 3,000 miles away in San Francisco, was too far away to deal effectively with all the problems. "There was a big missing piece in how we all related," Sargent says.
So she abandoned the dream. She brought sales in-house, hiring a new sales manager who calls Vermont home. "Home base needs to be our office and not a home 3,000 miles away," says Sargent.
Then she cut loose 118 of the 120 reps. "Instead, we have six customer-service people here on the phones, everyone listening to each other's conversations," she says. "There's no replacement for that in a virtual company. We're just too busy, swamped, and overwhelmed to try to catch up with each other at the end of the day. In our own office, with our own people, everybody shares the excitement when new product samples come in. It keeps them pumped up."
Sargent's headquarters, which originally housed a staff of two, has moved from the barn to a converted Victorian farmhouse. She has 15 employees working there. The company has partnered with 35 stores, each of which devotes a corner to a Sargent "boutique." The company's 1998 sales were about $3 million. But Sargent has learned a hard lesson. Virtual companies just don't work, she says: "Not when you're evolving madly every day. I can't see any substitute for having everyone in one place." --Susan Greco
Go right to the outsource
THE CEOS: Cherie Serota and Jody Gardner
THE COMPANY: New York-based maternity-clothing maker Belly Basics
THE BUY-IN: Everything can be outsourced.
To Cherie Serota and Jody Gardner, the concept of a virtual company was the right idea at the right time. It became the entire basis for the 1994 launch of their Manhattan apparel business.
At the time, Serota was pregnant and fashion frustrated. She and Gardner were both executives at Henri Bendel. They conceived Belly Basics--a line of clothing with 1998 sales of $3 million--as a resource for women who wanted stylish maternity clothes. They knew they'd need lots of outside help.
The pressure to act like a much larger company was intense. Shortly after agreeing to carry the Belly Basics line, retail chains demanded that the young company be fully automated with electronic data interchange (EDI) systems, for instance. It certainly made sense to outsource those technical back-office functions. Gardner and Serota did just that, but they didn't stop there. They tried to outsource themselves.
The CEO of their very first retail customer, Bloomingdale's department store, predicted that his store alone would sell $1 million worth of Belly Basics apparel in the four months from Labor Day to Christmas 1994--and it did.
The prospect of such fast growth was intimidating. Gardner and Serota knew they couldn't do all the work themselves, so they contracted out some critical design tasks. They brought in a graphic-design agency to work on such projects as a packaging redesign, but working with the agency became a convoluted process that distracted the partners at a crucial time. "We ended up wasting a lot of time and money on a package we could have done ourselves," Gardner says. "After lots and lots of meetings, the agency said to us, 'Gosh, it looks like you're right on it.' And we're thinking, 'Thanks very much, I didn't need to spend thousands of dollars to find that out."
The partners also tried to use an outside designer for some of their garments. "The same thing happened," Serota recalls. "Now we won't outsource anything that has to do with anything creative."
The two had counted on outsourcing so they could make the most of their own talents, but that created more problems than it solved. Now they've learned that easy answers aren't easy in the end. There is no substitute for their own sensibilities, and they organize their time to ensure that their focus is on the higher functions of the company.
Still, the whole experience delivered something of a rude shock. "We stepped back and were surprised to find that we couldn't outsource everything," says Gardner. --S.G.
MYTH NUMBER 3: 'GO GLOBAL'
The Yanks are coming
THE CHAIRMAN: Joe Mansueto
THE COMPANY: Morningstar Inc., a Chicago-based financial-information and -research company
THE BUY-IN: "We figured we'd just put an ad in the London paper and start selling."
Five years ago, when Joe Mansueto opened a new office in London, he thought it would be a slam dunk. Everywhere, he read stories of companies that were conquering new foreign markets--growing beyond their wildest dreams by taking their formulas for success overseas. It certainly sounded like Morningstar was perfectly positioned to do the same. Many of the same trends in the United States that had catapulted his company onto the Inc. 500--increasing investment in mutual funds, the shifting of the retirement burden from government to corporations--were playing out around the world. What he didn't know then was how much time and money it would take to break into an overseas market.
To begin with, his product proved to be tough to transfer. "You can't just take mutual-fund ratings to another country and start selling them," he says. "We had to go over to England and create a new database from scratch based on the funds over there. That's a very expensive proposition."
What added to the expense was that he sent five staff members over to London to set up the office and then hired eight more over the next six months. "By the time you add in benefits, you end up doubling their salaries," he says. And office space in London cost a fortune. The expenses mounted up fast.
Then there were the regulatory issues. "We figured it wouldn't be a big deal," he says. "We'd just put an ad in the paper and start selling. We never dreamed that publishing investment information would be blocked by the process. That doesn't really exist in the United States."
Mansueto was confident that Morningstar's application to publish investment information would be approved quickly. Unfortunately, the British regulatory officials had other matters to tend to. "They were in the process of merging two agencies together, so the application just sat dormant," he says. "Meanwhile, we had a full staff burning up cash. We couldn't publish, we couldn't market, we couldn't make any movement forward."
After 18 months, Mansueto decided to cut his losses and close up shop. He had spent $1 million in the process. The lesson: breaking into foreign markets is a complicated business. There are whole new sets of rules to master. "It's not as though we were ignorant," he says. "But no matter how well you think you're prepared, you never know what can creep up behind you and stab you in the back."
Morningstar remained dormant on the international front until last year, when Mansueto decided to take the company into the Japanese market. This time he got some help. He established a joint venture with a Japanese company, which contributed capital and local expertise. Mansueto plans to do the same as he ventures back into the European market. In December he announced plans to begin operations in Sweden, with moves into other countries to follow. "Local partners will put up a lot of capital in exchange for the Morningstar know-how," he says. And Morningstar will use its street smarts to establish more realistic footholds in overseas markets. --C.C.
Brave new world of dreams
THE CEO: Ken Hawk
THE COMPANY: 1-800-Batteries, a supplier of rechargeable batteries based in Reno, Nev.
THE BUY-IN: "We knew there was an international opportunity."
Sometimes myths are dangerous not because they're wrong but because they're only partly true. Sure, there have been opportunities in newly opened foreign markets in recent years. No doubt, some companies should pursue those opportunities. Some maybe shouldn't. And some should do so only when the timing is right.
Just ask Ken Hawk, founder of 1-800-Batteries. He spent four months last year working to raise $6 million in equity investments. He was so sure his company should go global that at first he earmarked half the money to fund overseas expansion. "We knew there was an international opportunity," he says. "Foreign customers were constantly contacting us through the Internet."
But the timing was wrong, and the investment was too aggressive for some of Hawk's constituents. He says he lost the interest of at least three potential investors because they viewed his plans as unrealistic. "We planned to go too far too soon," he says. "No one on our team had much international experience, especially not in Europe."
Potential investors quizzed Hawk on why he wasn't taking advantage of the untapped opportunity on the domestic front before launching the far-more-dicey international push. "And they were right," he says. "We could expand a great deal here in the States with much less risk."
Hawk revised the pitch to focus on expanding primarily through the Internet. He's happy to report that he eventually was able to raise the money--and at an even higher valuation than he had originally projected. Hawk still plans to expand internationally--but not as quickly. "Plus, the upcoming changes in the European market--the common currency, simpler shipping across borders--are going to make it a lot easier. The timing for us to expand internationally is going to be much better." --C.C.
A simple plan in a complex world
THE CEO: David Giuliani
THE COMPANY: Optiva Corp., a dental-products maker based in Bellevue, Wash.
THE BUY-IN: Europeans can't get enough of American consumer products.
David Giuliani of Optiva thought he had a pretty good idea of what it would take to make his company an international player. That is, until he tried it. "It all proved to be more difficult than we expected," he says. "Probably by a factor of two."
Giuliani assumed that going global would be a relatively straightforward process. In the mid 1990s, business books and magazines were packed with stories of companies like his achieving incredible success in Europe, Russia, and China. What those stories didn't explain is that it takes a lot of infrastructure to support operations so far from home. "It took longer than we thought to go through the various stages," he says. "I underestimated the complexity."
Giuliani found he couldn't just park his products on foreign shelves and expect sales to skyrocket. Each market had to be thoroughly evaluated on its own merits. French consumers, for example, placed a much lower priority on dental care than their U.S. counterparts did, so the per capita sales of toothbrushes in France lagged far behind those in the United States. At home Optiva could count on the professional dental community to pass along the word about its brand of electric toothbrush. European dentists proved to be much less cooperative. And European distributors were much less motivated than Giuliani had hoped.
Giuliani says he still plans to grow internationally, but in a much more measured way. From now on he'll set up his channels of distribution market by market. "It wasn't as simple as we thought," he says, "but experience is a great teacher." --C.C.
MYTH NUMBER 4: 'CAPITAL IS EASY'
From road show to spin control
THE CEO: Mogens Smed
THE COMPANY: Smed International, a $200-million office-furnishings maker based in Calgary, Alberta, Canada
THE BUY-IN: "In May, it looked like extremely easy money."
When is easy money really easy? When you raise $42 million in a day and have to turn investors away. When does it get hard? Four months after you raise $42 million, when your stock drops from $20 to $5 a share. That's what happened to Mogens Smed. If there was anything he believed about business, it was that the more money you can raise, anytime you can raise it, the more you can make. But now he wishes he'd never seen a dime of the money he raised last May.
At the time, Smed International was riding the capital-raising bandwagon. It had gone public in 1996; in its third offering in two years, the company raised more in that one shot than it had ever done before. "We were overbooked on the first day," recounts Smed, "and by the end of the road show we were oversubscribed by five times."
Then the tide turned for Smed. Among other problems, the office-furniture industry tanked in the wake of the Asian crisis. Smed International's sales suffered, and it had its first losing quarter as a public company. "We had expected to make $2 million; instead we lost $2 million," says Smed.
That was just four months after Smed's investors poured $42 million into the company. The market quickly returned the blow. Eight to ten days after the results were announced, 800,000 shares were traded and Smed International's stock lost 75% of its value. At the same time, 350 employees, including 60 members of the office staff, lost their jobs in a layoff that shook the company's close-knit culture.
Reeling from the setbacks, Smed found himself facing a firing squad of institutional investors in Toronto. Having so recently plowed $42 million into the company, they wanted a piece of the CEO's hide for letting its value fall so hard. "We assumed the 'dying cockroach position' and let them beat us with a stick," he says.
Ironically, Smed had wanted to raise the $42 million only as a "reserve"--extra capital for a rainy day. Then the storm broke, and the reserve became a burden instead of a resource. The lesson? One that Smed himself used to hear from one of his mentors, whom he describes as "a 75-year-old Jewish man who escaped the ghetto in Warsaw. He always said that if it looks too good to be true, it is." --S.G.
Do it all and do it now
THE CEO: Gary Russell
THE COMPANY: North American Sports Camps, based in Norwich, Conn., an organizer of soccer camps for young players
THE BUY-IN: "If you build it, they will come."
In 1994, Gary Russell's North American Sports Camps (NASC)-then called North American Soccer --was on top of its game. Russell had run soccer camps for 26 years. Revenues were around $2 million or $3 million.
Then Russell had a chance reunion with a former camper. Paul Garofolo had made it big as a sports agent, and he had big ideas. He said that with all the capital available to entrepreneurs in the mid 1990s, NASC should have no problem raising enough to break into other sports and become a national player. With Garofolo's offer to help direct Russell to ready capital, and with visions of becoming a "bazillionaire," Russell charged ahead.
To attract investors, NASC needed some big-name credibility. Russell formed alliances with the NFL, golfer Jack Nicklaus, and Major League Soccer. That did the trick. NASC raised $2 million in two private placements. (See " The Deal," October 1996.) Russell used the funds to roll out football, golf, and more soccer camps in 1996. "'If you build it, they will come' became our motto," Russell says. "I thought I'd just open camps with the NFL and Jack Nicklaus, and kids would knock the door down."
He was wrong. Russell had no contacts in the youth-football and -golf worlds. NASC planned to open 80 football and 75 golf camps in 1996, but the demand was so slack that Russell could run only 12 and 25, respectively. NASC registered a $1-million loss, its biggest ever.
NASC has since rebounded. The company posted a $250,000 profit on revenues of $5.7 million in 1998. Good numbers, but Russell is still making annual interest payments of $240,000 on his $2-million debt and has yet to make a single payment on the principal. "If I had it to do all over again," he says, "I would have never taken that money. I would have kept our nose on what we do best, soccer. We'd be a lot farther along if we had." --M.B.
Raising capital is job one
THE CEO: Scott Budoff
THE COMPANY: Catalog retailer Fulcrum Direct, in Rio Rancho, N. Mex.
THE BUY-IN: "Going public was just another way to raise money."
When Scott Budoff hooked up with a partner to build a children's clothing company, the duo's timing couldn't have been better--at least as far as the financial markets were concerned. From 1994 to 1996, as Fulcrum Direct grew from a start-up to a $38-million business, so did investors' appetite for small companies. "The market was much more willing to take small-cap risks," says Budoff. "As we grew we expected to go public. It was just another way to raise money."
In fact, he'd banked his business plan on being able to raise megamillions from both the private and public markets. Budoff and his managers became experts at unearthing money from every financing source imaginable, starting with friends and family and moving on to angels, institutional investors, banks, factors, corporations, and strategic partners.
What he and no one else expected was how much all this fund-raising would distract attention from Fulcrum's core business. Barely three years old, the company had yet to solve some basic operational problems when its management began preparing for an IPO in earnest.
The pending offering was like an insatiable monster, eating an "exorbitant amount of the management team's time and resources. As hard as it is to raise money in private markets, it's even harder in public markets," says Budoff.
Once a company heads down the IPO path, he adds, "you can't stop. The business was geared up for a certain level of volume, and we needed the capital." Besides, at the time, capital was there for the taking--wasn't it? Budoff was buoyed in that belief by other small-cap deals in the catalog industry and so, he says, were his investment bankers. Fulcrum was poised to complete a $35-million offering in October 1997. Sales that year were on their way to $62 million.
Then a funny thing happened on the way to the market. "We were advised the market no longer had any interest in small-cap deals at that time," Budoff says. In so many words, Fulcrum was told it could have a road show, but no one would show up. The company went back to private sources looking for more help. It considered scaling back operations. Nine months after the IPO that wasn't, Fulcrum's board, out of cash and out of possibilities for raising cash, filed for Chapter 11 on July 29, 1998.
Budoff says he's taken away several lessons. Lesson one: "There's no such thing as easy capital in any market." Even money from friends and family "is very expensive because of the relationships and the expectations."
Lesson two: "Being successful in private markets doesn't mean you're going to be successful in the public market."
Lesson three: When you're focused so much on raising capital, he warns, "you're spending a lot of time on something very important to your business but which has nothing to do with your business." --S.G.
MYTH NUMBER 5: 'EVERYBODY IS AN ENTREPRENEUR'
Too hot to handle
THE CEO: Andrew Sather
THE COMPANY: San Francisco strategic Internet consultancy Adjacency Inc.
THE BUY-IN: "We assumed employees would want to know all the nitty-gritty financial details."
Adjacency CEO Andrew Sather and his partner, Chris DeVore, figured that for their four-year-old company to become a powerhouse, they would have to tap into the entrepreneurial instincts of every staffer. That meant treating all employees as if they were partners. All were given equity stakes. "I tried to set up the kind of company where I'd like to work," Sather says.
Last year, Sather and DeVore gathered their 25 workers together every week to discuss the most intimate details of their company, including cash flow and potential customers. The partners could tell that workers appreciated the honest communication. At meetings, employees would pepper the partners with loads of questions. But it quickly became apparent that there were some things employees would rather not know. For instance, they didn't want to hear about Adjacency's close calls with missing payroll--not an uncommon syndrome in the entrepreneurial world, but one that employees find quite unnerving. "We overestimated our employees' desire to be entrepreneurs, and sometimes we scared them," Sather says.
Sather and DeVore also overestimated their staff's ability to keep secrets. Last summer they told employees about a huge, potentially lucrative deal with a hot new client. One worker left the meeting so pumped that he bragged to a friend at a competing company. Bad move. The "friend" relayed the news to his bosses, who promptly tried to persuade the coveted customer to dump Adjacency and go with them. "We almost lost the client," DeVore says. "The client was livid, and rightfully so."
The partners considered shutting down the flow of sales information but decided against it. Now they're careful to identify what information is top secret.
"We've learned to get a lot more explicit about how information can be used," Sather says. In fact, the partners still divulge just as much confidential information as they did before the incident, conveying to employees that they trust them more than ever. There is one topic, though, that Sather and DeVore are careful to avoid: the nitty-gritty details of cash flow. "We've learned to filter some information that employees find disconcerting," Sather admits. --S.G. and M.B.
Share the power
THE CEO: Steven Rifkind
THE COMPANY: Steven Rifkind Co., marketer, New York and Los Angeles
THE BUY-IN: Give smart employees an opportunity to soar and they will always make it happen.
Steve Rifkind started his company in 1989 with a phone, $1,500, and a worn pair of basketball shoes. Steven Rifkind Co. flourished by using young guerrilla marketers to promote music and clothing products to urban youth. Then two years ago Rifkind launched a movie division. He counted on getting lots of energy and commitment from employees by encouraging them to be entrepreneurial.
Rifkind signed up one of his idols, a movie-company executive with an enviable rÉsumÉ, to head up his new unit. He counted on his new hire to be entrepreneurial and to have the same lean-and-mean ethic he had when he founded his company: a minimal staff, late hours, lots of commitment. But Rifkind's new executive was accustomed to being at a large company and "wanted to hire 10 to 15 people immediately," he says.
During the unit's first 18 months, the new division head invested heavily in staff and office space without increasing revenues by one dime. Rifkind lost $5 million by the time he was forced to buy out some pricey employee contracts and start over.
Today the movie division's sales are back to $3 million--exactly where they were before the big-company executive came in. Rifkind has returned to his original model for new-venture creation: one person, one phone, one pair of shoes. "I learned a very expensive lesson," he concedes, "but it taught me a lot about what it means to be a leader." --S.G.
MYTH NUMBER 6: 'TECHNOLOGY MAKES LIFE EASIER'
THE CEO: Jonathan Katz
THE COMPANY: Special-effects developer Cinnabar Inc. of Burbank, Calif., and Orlando, Fla.
THE BUY-IN: The more technology, the better.
Cinnabar founder Jonathan Katz always had faith in the powers of technology. His $17-million company, which creates scenery and special effects for commercials, movies, and theme-park attractions, was an early adopter of all kinds of tech, from cell phones to E-mail. "We were very attuned to the latest technologies because they allowed us to stay in constant contact with our clients," he says.
Whenever there was an unexpected crisis--a budget problem erupted, a prop had to be redesigned--Cinnabar employees knew exactly what to do. They would get on the phone or shoot out an E-mail to their contacts at client production companies. By working in cyberspace, they didn't even have to be in the same city. The arrangement worked beautifully--at first. Cinnabar's revenues skyrocketed. But sometimes human beings just need to be able to bang their heads together in person. "The virtual world can lull you into thinking that it works just as well as face-to-face interaction," Katz says. "In fact, sometimes it doesn't work at all."
At the beginning of 1997, Cinnabar's commercial and film business dropped off. Katz couldn't figure out what the problem was. Then he had an epiphany. "My people had become complacent and too reliant on the conveniences of electronic communication like faxes, E-mail, and telephones," he says. "The real heart of our business, which came out of direct contact with our clients, was not happening."
Katz asked his people to put away their electronic toys and pay personal visits to directors, producers, and art directors at production companies. The orders were clear: Network. Do lunch. Circulate. Go to shoots.
Cinnabar employees have learned that technology just can't replace a good old-fashioned face-to-face schmoozefest. As if to prove the point, the company's commercial business grew 50% in the last quarter of 1998. "I knew I was right," says Katz. --M.B.
A question of human nature
THE CEO: Roger Bergen
THE COMPANY: The Nature Co., a national retailer based in Berkeley, Calif.
THE BUY-IN: "We bought into the idea that computers will always make your life easier."
Roger Bergen is recalling how, during his 10 years as CEO of the Nature Co., he believed that technology would cure any problem. In the early 1990s, the national chain of stores was growing fast. "Instead of asking how we could make a complex business simpler," he says, "we bought technology we thought would make our lives easier. Big mistake."
The Nature Co. spent a fortune on systems that were obsolete before the company could grow into them. The worst cost was "the effect on employees," Bergen says. "We never had a system everyone could rely on. I saw employees create manual systems to support the computer system."
Bergen's first response was to buy more technology. "We let the technology nerds talk us into spending tons of time and money on systems that are extremely complicated," he says. "I found it very hard to stand up to techies who spend their lives convincing you if you don't accept the leading edge, you are an old fart. You aren't competitive."
Despite the problems, the Nature Co. grew to $130 million in sales during Bergen's tenure. He left in 1995, after selling the company to the Discovery Channel. Now he's president of the Earthwatch Institute, in Watertown, Mass., where he's determined to learn from experience. "The mistake," he concludes, "is in thinking that technology will [always] make your life so much easier." --S.G.
MYTH NUMBER 7: 'YOU MUST BE ON THE WEB IN A BIG WAY'
Wait for the Web
THE CEO: John Peterman
THE COMPANY: Lexington, Ky., catalog retailer J. Peterman Co.
THE BUY-IN: Every retailer has to leap into E-commerce right away.
There's one item John Peterman sells more of than practically any other clothing cataloger does: romantic intrigue. So perhaps it's fitting that the founder and CEO of J. Peterman Co. was smitten by the seductive powers of the Web. "I kept hearing that this was the new way to make millions of dollars in direct-to-consumer purchasing while saving on print and postage costs," he says.
So in 1996, Peterman put his entire catalog--more than 100 items--on-line. Customers were underwhelmed. The Web site didn't move much merchandise and certainly didn't make millions; it didn't even save much in postal costs. Nor, Peterman fears, did it win him any new fans.
The digital catalog was short on romance and long on aggravation. "It was so laborious to call up anything," says Peterman. "The images took too long to download. I would get terribly impatient trying to go from one place in the site to another. I couldn't even stand it--and it was my own catalog!"
After nine months, in mid 1997, Peterman drastically scaled back the Web site, which now features only a handful of items for sale. Fully half the people who order from J. Peterman on-line are already receiving the catalog.
Peterman no longer buys the line that every retailer must leap into the E-commerce arena. The way he sees it, the Web site has driven up advertising costs quite a bit while increasing orders by just a tad. He knows there are some sites, like Amazon.com, that sell like crazy; but he's in a different business. When it began, the J. Peterman site sold only $100,000 worth of apparel a year. "For us, it needs to be $1 million at a minimum to be a viable distribution channel," says the CEO, whose company has annual sales of approximately $75 million.
It's not that Peterman thinks the Web won't ever work for him. The lesson he learned was that there is a high price for early adoption--and no penalty for waiting for technology to improve. In fact, the site brought in nearly $500,000 in 1998, but that was due to the popularity of a line of merchandise tied to the release of the movie Titanic. And "a lot of time and effort went into that $500,000," says Peterman, who notes that servicing the site occupies the entire company. "The merchandising department gets involved, as well as marketing and production. It feels like we could generate more money somewhere else. It all comes down to where you want to put your resources."
Peterman is happy to put the Web on hold. "There's a lot of hype, but in the apparel business it's not going to take the place of a printed catalog" anytime soon, he says.
Besides, the old technologies are still working fine. Most days, he'll walk down to the mail room of his Lexington, Ky., headquarters. "I get 300 to 400 letters a week," he says. "I get only 20 to 30 E-mails, and half of those talk about the print catalog." --S.G.
Great moments in the new economy
"By the beginning of the next century, the corporation as we have known it for eighty years will have largely disappeared...[Those that delay] the process of becoming virtual corporations will be swept away."
--William H. Davidow and Michael S. Malone, The Virtual Corporation, 1992
"By some estimates, one-quarter of the working population will be working from home by the end of the century."
--Charles Handy, The Age of Unreason, 1989
"The market will demand...that each employee be...turned into a businessperson. Yes, it means being empowered. It also means having all the organization's information at your fingertips--make that everyone's fingertips."
--Tom Peters, Liberation Management, 1992
"Those who do not find the wave [of globalism]...are bound to falter as the wave crashes around them."
--John L. Daniels and Dr. N. Caroline Daniels, Global Vision, 1993
"Western companies that fail to participate in the great Asian boom will not only lose opportunities, but may also undermine the competitiveness of Western corporations."
--John Naisbitt, Megatrends Asia, 1996
"Information technologies are the core for today's economy, and to survive all businesses must informationalize...from small mom and pop stores to giant global corporations."
--Stanley M. Davis and William H. Davidson, 2020 Vision, 1991
"The observation that in business, you are either growing or dying is true now more than ever."
--Robert M. Tomasko, Go for Growth!, 1996
"Fire all the consultants."
--Albert J. ("Chainsaw Al") Dunlap with Bob Andelman, Mean Business, 1996