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%ase Analysis &osing the Strategic Focus - Poul Houman Anderson rom a learning point of view (disregarding for a moment the huge financial losses and how this may have affected the lives of thousands of people), the spectacular transformation of Vivendi from a major utility company into a media group represents an interesting case of strategic `drift.' From the onset, the case looks like a classical e ample of a company, which !y forking and re"forking its strategic focus over a #$"year time span loses sight of its core competencies, moving increasingly further away from familiar !usiness conditions and into uncharted !usiness territory.
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%he core !usiness of Vivendi is (or was) structured around its a!ility to manage and develop infrastructure. %he company indeed came a long way, starting with physical infrastructure and corresponding !usinesses (utilities, water treatment, waste management and real estate), gradually moving into digital infrastructure with the investments into telecom and wireless communication. &n the !eginning, the '()* ac+uisition of ,gence -avas meant only a !rief slide in strategic focus for the company, as this !usiness had much in common with e isting activities. .perating a ca!le %V !usiness such as /anal 0lus is also a!out linking up users to an infrastructure grid, much like water and waste management, although other !usiness areas (such as providing venture capital for movies) were included in the package. 1ith the !enefit of hindsight, it is o!vious that this investment introduced new ideas and possi!ilities to Vivendi's top managers. 2iversification, however, really kicked in as the company increasingly invested in !ecoming a dominating provider of media content, particularly focusing on `creating and providing personali3ed information and entertainment and services to consumers everywhere.' %his, paired with the investments in several dotcom operations (such as 4p*.com), suggests that the company had a keen eye on the promises of the `new economy.' 1e can easily see the company lose ground as it moved away from its core !usiness. /learly, it should have paid more attention to the internal consistency of the !usinesses and should have refrained from entering !usinesses, where the usefulness of e isting managerial talent was dou!tful and its position e tremely vulnera!le. 5ignificantly, Vivendi consistently overpaid for ac+uiring what it !elieved to !e promising media and6or dotcom companies. 1e certainly can point a finger at 4essier for not dealing with the escalating net de!t of the company from '(() onwards. &t is clear that the fate of this once gigantic company was a result of poor governance. %hese !ashing contests are already present in the !usiness press. -owever, there are two pro!lems with this approach. First, finger"pointing does not really provide us with an e planation on what made Vivendi take on the rather adventurous strategy of !ecoming a media giant in the first place. 5econdly, one wonders what delayed the company's management and the !oard in addressing these pro!lems as they continued to

e pand in the two years !efore the significant losses in #$$# and #$$*. 5tarting with the first issue, and attempting to provide some possi!le e planations for what led the company to take on this transformation approach, we must try to forget our !ackground knowledge concerning the shaky !usiness models upon which most of the dotcom companies rested. 1e, of course, know now that entering into the digital economy is a risky !usiness and that the possi!ilities of generating returns from these investments are fairly small. -owever, in the heydays of the dotcom era, things looked very different. %he shares of these companies were skyrocketing. %he ,merican economy loomed and all specialists were ensuring anyone listening, that we were entering the world of new growth economicsled !y the digitali3ation of information. %his developmentwe were toldwould radically disrupt the e isting corporate dynamics in all industries. ,s the &nternet would lead to the un!undling of scope economics relating to administration, the `old companies'the !rick and mortar unitswould !e challenged !y new !usinesses which would face entry costs approaching 3ero. %he writing on the wall was clear in many !oardrooms and was echoed !y major consulting firms7 2igitali3e or die8 For companies such as Vivendi, time was ripe to move upwards in the value chaincloser to !ecoming a provider of information content rather than providing only infrastructure utilities. &n the !eginning of 4essier's reign, this certainly looked like a !eneficial strategy. From the investor's point of view, Vivendi was earning good money, as its earnings per share steadily increased in the period '((9"#$$$. :ven though !etting on the wrong horse, it seemed as if moving ahead into open plains of digital space and attempting to take hold of land was the right thing to do. ;o!ody e pected the dotcom !u!!le to !urst and the prolonged downturn of the <5 economy. 5hould not investors, management and the !oard with 4essier as the /hairman have seen the dangers of the transformation strategy sooner= ,fter all, the net de!t was growing considera!ly and cash flow pro!lems emerged even !efore Vivendi went on its spending spree. /ertainly even 4essier, as suggested !y the introduction +uote, would have preferred a more cautious approach in the !eginning of the case. .ne possi!le e planation for 4essier ignoring the red, !linking lights may have !een the comple ity of the operations he was involved in, and the fact that his dispositions were not really challenged !y the !oard until much later when he lost a vote of confidence. %he !uying policy of Vivendi <niversal during #$$' has strong similarities to the investment philosophy of the media !usiness. &nvestments in the media !usiness are su!jected to very different rules than those found in other types of !usiness. 4uch like !etting, assessing the likelihood of a movie !eing a !o office hit is virtually impossi!le and the loss6profit profile is e treme. &nvestors in film"making therefore attempts to spread risk through investments in a !road range of movies, hoping that one (typically out of #$) will turn out a !o office success, which is a!le to payoff for the investments not reaching pay !ack. -iding the financially distressed situation so that the !oard had no chance for !alancing his views was the !iggest mistake made !y 4essier. -owever, the more important +uestion is why did the !oard not approach 4essier much earlier. &t is possi!le that wishful thinking and strong emotional issues are involved here as well, overshadowing the !usiness concerns and the a!ility to ask critical +uestions. 2espite its international growth, ideologically, Vivendi remained a French corporation, which saw itself as a protector and communicator of French culture, through supporting French film making, through provision of venture capital and !y purchasing !roadcasting rights. .!viously, French (and :uropean) commentators and politicians were proud of this company, challenging the hegemony of the leading <5"!ased media groups. The author is professor and Associate Dean for Research at the Department of International Business, Aarhus School of Business, Denmark.

' (he )%FA) *niversity +ress , All -ights -eserve., %ase Analysis +aying the +rice o/ Strategic 0lun.ers - Scott J Behson ypically, when a firm grows through ac+uisitions, it pays a!ove market prices for its targets. %his is not always a !ad thing to do, as long as the companies ac+uired add strategic value !y allowing entry into new markets, e ploiting opportunities for synergy, or achieving higher levels of cost"efficiency. &f the ac+uisition adds strategic value, one can more than recoup the initial investment. -owever, if, as in the case of Vivendi, the pattern of ac+uisitions does not advance the strategic goals, the ac+uiring company will wind up paying too much, fail to generate sufficient revenue, and !e !urdened !y de!t.
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Vivendi's am!itious pattern of rapid growth through ac+uisition does not, in itself, represent a poor strategy. -owever, the !ra3en path Vivendi traveled led to failure for a few critical reasons that 4essier and Vivendi should have had the foresight to avoid7

1iven.i entere. too many .iverse mar2ets 3ithout assuring that there 3oul. be synergy bet3een the e4isting an. ne3 lines o/ businesses. Vivendi chose a conglomerate strategy at a time when most conglomerates were divesting themselves of product and service lines that were insufficiently related to their core !usiness. For e ample, it is hard to see how 5eagram's non"<niversal lines of !usiness could ever lead to synergy for Vivendi> or how water treatment, transportation and telecommunications can complement each other. :ven if Vivendi <niversal as a multimedia entertainment entity made strategic sense, !y the time this entity took shape, the company's de!t was !ecoming unmanagea!le. 1iven.i too2 on too much .ebt by ac5uiring too many companies6 an. too many at the height o/ their value, :ven if one argues that de!t is not always a !ad medium"term strategy, the fact remains that in Vivendi's case, the enormous de!t turned off investors and creditors. 4ore importantly, its de!t !urden reduced its slack financial resources, resulting in an ina!ility to !e fle i!le to changing market conditions.

/ompanies that may have !een a !argain three years !efore or three years after Vivendi !ought them were decidedly not !argains at the time of ac+uisition. Vivendi was not alone in failing to understand that the tech !u!!le would eventually !urst. <nluckily enough, its wide array of investments in technology, communications and media were all in !usiness sectors that were hit the hardest during the glo!al market downturn. %his com!ination of factors left Vivendi with only one course of action when things turned sourselling the !usiness units ac+uired recently at a loss. For e ample, they !ought Vodafone for ?#.@ !n and su!se+uently sold it for ?($ mn. 5elling off assets to reduce de!t is o!viously not a sustaina!le course of action.

Messier an. his top management team .i. a poor 7ob in managing the public's perception o/ 1iven.i, %he `French /ultural : ception'how the French television industry must su!sidi3e the failing French movie industryis just one e ample of how intrusive French governmental policies reduce the a!ility of French companies to compete and win on the glo!al turf. 4essier was right a!out this issuethe e ception is harmful and will, !efore long, !e dead. ,nd he is pro!a!ly correct in critici3ing many other aspects of French economic policy. -owever, he handled these issues very indelicately, and, as a result, alienated a significant set of stakeholders customers, regulators, partners, and even employees. %his just goes to show that sometimes,

even when you are right, you can !e wrong. Messier an. his top management team probably cease. critically analy8ing their o3n .ecisions. %he e pression `0ride comes !efore the fall' is certainly true for Vivendi. ,lthough the case does not mention Vivendi's corporate values and the management team's decision"making styles, it is reasona!le to assume the following may !e indicative of the company's top management's !eliefs7

'. .ur egos dictate that we must !ecome as !ig and dominant as ,.A6%ime 1arner and Bupert 4urdoch. #. .f course we can succeed where other companies have failed. 1e are Vivendi8 *. 1e have !een successful in the past operating this way, so there is no need for us to +uestion how we do things or change how we operate. C. 1e are smart enough to get away with fudging the financial num!ers. &t is not uncommon for the top management team to develop an arrogant, dysfunctional attitude when a company !ecomes wildly successful. &n short, decision"makers start !elieving that they are always correct, and, as a result, do not need to hear dissenting voices or look outside of the company for alternate ideas. ,s a result, the company continues to pursue a failed strategy even when confronted with data showing that it is on the wrong track. :ven worse, such an attitude lends itself to unethical decision"making. &n order to justify a failed strategy and6or recover from the aftermath, it is not uncommon for managers to try to hide the truth. .f course, this only makes things worse. Vivendi's lack of disclosure in its financial statements only served to further anger and alienate investors, creditors, and regulators. %hus, Fourtou's jo!saving the company from its prior decisions!ecomes considera!ly harder. Defore he can fi the company, he first has to win !ack everyone's trust.

1iven.i probably pai. insu//icient attention to integrating its ne3ly ac5uire. businesses, , lot needs to !e said a!out the way in which the management integrated the ac+uisitions into the company. .ne would hope that they took the time to not only perform due diligence on the financial fit !etween the two companies, !ut also to critically analy3e whether the organi3ational cultures and people systems would integrate well. /ompanies like /isco, who have !een successful in rapidly growing through ac+uisitions, make it a point to ac+uire only those companies that they feel they can effectively work with and create a satisfying `marriage' of their employees and systems. &n my e perience, too many companies fail to place the proper emphasis on people"related issues when entering into a merger or ac+uisition. &n order to increase the chances of a successful merger, one should7

'. 5creen potential targets not only for their financial and market assets, !ut also for how well their cultures and operating systems complement yours. #. 0erform due diligence of people processes (compensation, career development, etc.). *. Degin planning the integration !efore the transaction is finali3ed. C. ,ssign a small team to lead the integration of the two companies. @. <se teams of employees from !oth companies to plan for and implement changes in policy or culture. 9. /onstantly and proactively communicate to employees, even if you have !ad

news (layoff etc.) E. ;ever underestimate how important it is that employees at all levels of the !usiness understand and support your proposed actions. The author is professor of Business Management at Silberman College of Business, airleigh Dickinson !ni"ersit#, $e% &erse#, !SA. 'e also teaches Change Management and (rgani)ational Beha"ior and pro"ides consulting ser"ices in the $e% *ork+$e% &erse# area, !SA. ' (he )%FA) *niversity +ress , All -ights -eserve.,