Making Credibility Your Strongest Asset

Making Credibility Your Strongest Asset
HBSWK Pub. Date: Nov 21, 2005

Dealmakers often forget the power of a good reputation.

In this article from Negotiation, HBS professor Michael Wheeler tells why having a storehouse of credibility will put you head and shoulders above the competition.
by Michael Wheeler

Negotiation is a breeze if you're selling a unique product or service that others desperately need: Just sit back and let the bidding begin. Likewise, if you're a buyer in a buyer's market, getting a bargain is a snap.

But what happens when lots of other people are selling what you've got, or many others are bidding for what you want? One solution to distinguishing yourself in competitive environments is to build your bargaining endowment—storing up credibility and resources by developing relationships, burnishing your reputation, and controlling key assets.

When you're trying to prevail amid fierce business competition, your bargaining endowment can spell the difference between closing the deal and being shut out. A healthy bargaining endowment explains how Darren Rovell won a job on national television while other journalism graduates were lucky to be doing programs on cable access. It's also how Tony Lucci got box seats for the World Series when thousands of others were shut out. And it explains how Bob Kraft positioned himself to buy a professional football team.

Although Rovell, Lucci, and Kraft operated in very different contexts, they all met their goals by enhancing their own credibility and discerning the interests of other key players. Their three stories illustrate different elements of the process of building your bargaining endowment: (1) grab someone's coattails, (2) foster a reputation for generosity, and (3) plan several moves ahead.

Grab someone's coattails
Lots of people have great ideas for new products and services, but most lack the imagination and doggedness to actually get them launched. Darren Rovell is a notable exception. As a college student, he had a passion for the business of sports—licensing deals, complex stadium financing, and hardball negotiations between free-agent players and teams.

Media coverage of this terrain had been haphazard. Rovell saw that omission as a great opportunity, but he had two problems. First, media giants such as Sports Illustrated and ESPN didn't think the business beat would appeal to the average fan. And—oh, yes—Rovell was just a kid in his teens.

Nevertheless, he launched a business-of-sports talk show on Northwestern University's student radio station, WNUR. His "producer" (actually, a roommate) aggressively pursued big-name players, general managers, and agents. Most declined, but a few said yes. Once Rovell recruited a celebrity, that person often would cheerfully give him another star's direct line. Rovell quickly built an impressive Rolodex.

You can succeed without explicitly swapping favors.
Tapes of the show enhanced his credibility as an interviewer and also demonstrated the power of his idea. But Rovell knew that T.V. and newspaper sports departments are flooded with resumes and demo tapes from thousands of wannabe reporters. To ensure that his material wouldn't be lost in the shuffle, he mailed it in the largest box that the post office would deliver.

The gambit worked. Right after graduating in 2000, Rovell landed a job at ESPN.com as its first business-of-sports anchor. He's now regularly featured on the network and writes prolifically for its online magazine.

On the surface, Rovell's story illustrates the value of confidence and persistence. Dig a little deeper, and important negotiation lessons emerge.

First, you can succeed without explicitly swapping favors. After all, Rovell had nothing of substance to offer successful sports figures. But by being respectful, persistent, and doing his homework, he persuaded them to appear for free.

Second, Rovell was careful to build and test a prototype. His college radio show was small potatoes in terms of listeners, but he proved his ability to pull off the new concept.

Finally, and perhaps most important, he rapidly built his own credibility by "coattailing" on the credibility of others. The athletes he attracted had never heard of him, but they knew the name of the All Star who had appeared on the show the prior week. As Rovell's reputation grew, his past success became a resource. Today his calls get answered, and people phone him with stories.

What's remarkable is that Rovell did all this without a patent or a copyright. In theory, anyone could try to horn in on his territory. Surely some are trying; there are no formal barriers to entry. Rovell's competitive advantage is his reputation.

Foster a reputation for generosity
Now consider Tony Lucci, who founded, and whose family still operates, a sporting goods store in suburban Boston. Having worked in business for decades, he was well known in his niche but not beyond it. In a telling anecdote, Tony relayed to me how, one October afternoon, he got a call from a stranger, a television producer frantically looking for a radar gun. The producer's network was broadcasting the World Series that night, and the radar gun—the device that tracks the speed of pitches—was on the blink.

The producer had made several fruitless calls, and many people had said, "Try Tony. He might be able to help." As it happened, Lucci didn't have a gun, either, but said he'd ask around.

He tried several coaches and the operator of a baseball camp, but these leads came up dry. Then, out of the blue, he got a call from someone else looking for a favor, a coach involved in a police athletic league for troubled kids. "Some Red Sox players have agreed to autograph baseballs that we can auction off for fundraising," the officer told Lucci. "Could you could contribute a couple dozen?"

"Absolutely," said Lucci. "By the way, Officer, could you look the other way while a radar gun leaves your precinct for the evening?" When Lucci explained the situation, the cop said he'd drop the equipment off in twenty minutes.

Lucci called back the television producer. "Good news!" he said. "You've got your radar gun."

In return, Lucci might have asked the network to cover the cost of baseballs or asked for free publicity for his store. Instead, Lucci said, "Do you have tickets for tonight's game?" That's how he got eight box seats for the World Series in Fenway Park.

This story offers two important lessons. First, the deal worked only because each party brought different resources and needs to the table.

Second, over time, Lucci built a reputation as someone who could get things done. There are lots of sporting-goods stores in Greater Boston and lots of radar guns, too. Yet Lucci went to the game while others watched it at home on TV.

Why? In part, because he was careful not to squeeze people. When the network asked if he could find a radar gun, he didn't ask, "What's in it for me?" Likewise, when the officer asked for baseballs, Lucci didn't say, "You can have them if you'll loan me a radar gun."

The fact that Lucci didn't condition his helpfulness made it more likely he'd get calls in the future. Much like Darren Rovell, Lucci built his bargaining endowment by stockpiling a network of valuable relationships. There probably are similar people in your company or community whom others turn to when they're under pressure. Odds are, they're willing to help even when they are busy, and they're unlikely to haggle about return favors.

The same dynamic applies to external relationships with longtime customers, vendors, and clients. Negotiating successfully in a competitive environment isn't just a matter of driving a hard bargain or maximizing joint gain. Also important is how each transaction enhances—or compromises—one's reputation for treating other people. Reputation is relevant, of course, only when people are known and past relationships are remembered. Yet even in e-commerce transactions, where negotiators rarely meet, rating systems have emerged to reward good service and integrity.

Plan several moves ahead
Bob Kraft owns the New England Patriots, one of the most successful franchises in professional sports. Notably, he didn't get the team by outspending other prospective buyers. Instead, years in advance, Kraft put himself in a position to make a smart move when the time was right.

When the Patriots first went on the market in the late 1980s, Kraft was wrapped up in other businesses and apparently didn't have the wherewithal to put a deal together. The team was purchased by Victor Kiam, then the president of Remington Products Co. However, Kraft and a partner did place the winning bid for the Patriots' stadium, which was sold separately from the football team.

The fact that [Tony] Lucci didn't condition his helpfulness made it more likely he'd get calls in the future.
Many people were surprised by Kraft's offer, as the Foxboro stadium was poorly designed and in terrible condition, and depended on the Patriots for most of its income.

Kraft and his partner were astute enough, however, to spot obscure provisions in the lease that not only stipulated that the team pay a reasonable rent but also required the Patriots to play in the stadium through 2001. Most real-estate investors wouldn't have cared about that latter clause; they would value the lease for its guaranteed rent, regardless of where the team actually played. But Kraft had his eye on eventually buying the team. Enforcing the operating clause would scare off anyone who might wish to buy the Patriots and move the team to another city. It would also deter local buyers who might have hoped to swing a public-private deal to construct a new facility.

For Kraft, it was a double win. With better management in place, the stadium deal was a profitable venture from the start. Several years later, when the Patriots were once again on the market, Kraft had greatly increased his leverage to buy the team by knocking out most of the competition.

The old ownership tried to force Kraft to put a price on the lease, and there were threats of lawsuits on all sides. Two other groups reportedly topped Kraft's bid, but, in the end, the seller reluctantly chose to settle for less rather than get involved in protracted legal battles. Afterwards, Kraft attributed his success to having recognized, years earlier, the advantages gained from controlling the stadium. "If we didn't have that lease," he said, "there's a high probability that the team would have gone to St. Louis."

As Kraft understood, credibility is essential to survival in hardball environments. Sometimes credibility is a matter of expanding what you can bring to the table; in other instances, it allows you to block the moves of potential competitors. Building your bargaining endowment requires accurate identification of key players and then taking visible action that sends the appropriate signals.

As all three stories reveal, deals can be both means and ends. Whether it was Rovell landing a guest, Lucci solving a caller's problem, or Kraft acquiring the stadium, each transaction made sense in its own right. But each one also enhanced the odds of making the next deal—and enhanced each player's bargaining endowment. How you negotiate today can determine what you end up with tomorrow.

Reproduced with permission from "Want to Pull Ahead of the Competition?" Negotiation, Vol. 8, No. 10, October 2005.

See the current issue of Negotiation.

Michael Wheeler is the MBA Class of 1952 Professor of Management Practice at Harvard Business School where he currently teaches Negotiating Complex Deals and Disputes.

The Death of Corporate Permanence

The Death of Corporate Permanence
by Adam Hanft
Fast Company
October 17, 2005

We used to think that big companies would live on forever. Now, the constant tide of bankruptcies has made us view the corporation as disposable.

Is the pandemic of bankruptcies actually changing our national perspective on corporate mortality in some fundamental way? It's an important question to ask, given the frequency of once-iconic brands turning into corporate panhandlers, at the mercy of creditors and the courts.

Clearly, on one level we are becoming bankruptcy-immune. The latest fumble and tumble of Delta and Northwest, long expected, were notable more for the coincidence of their simultaneity than anything else. How is it possible to get worked up about large-scale collapse anymore? It's not like 1970, when the bankruptcy of Penn Central stunned the nation.

In fact, rather than their rarity it is the very frequency of these events that has had a profound effect on the way we think about the enduring versus the ephemeral nature of the corporation. Once, we implicitly believed that big companies would live on forever -- the way young children think of their parents -- somehow destined to survive deep into the future. Yes, we recognized that profound shifts could put some industries out of business -- the buggy whip manufacturer reduced to irrelevance by Henry Ford being the operating cliché -- but those were exceptions to the Gibraltar-like presence of the economic giants.

Of course, these large-footed entities did everything they could to foster this perception. As modern corporations emerged after the Civil War and the successive period of rapid industrialization, they sought to be nation-like in the stability they projected. So they named themselves in an appropriately monumental fashion -- U.S. Steel, General Motors -- and they built headquarters, modeled after the institutions of government, clad in marble and graced by Ionic and Doric statements of immutability.

Today, we really don't expect companies to be around forever; without realizing it, we've become Schumpeterettes, accepting the notion of "creative destruction" as part of the world. (Which explains why our aptly titled magazine is both a harbinger and a herald.) If it can happen to Kmart and Enron (and it once almost happened to Apple, but Bill Gates bailed them out) it can happen to anyone. Sometimes companies disappear all together -- think how many department stores have had going out of business sales over the last two decades -- and sometimes they "emerge" from bankruptcy, a telling term that captures the American faith in rebirth and reinvention.

Of course, all bankruptcies are not created equal. Each represents a specific kind of failure, with a different explanation: crookedness, massive misjudgment, foreign competition, fuel prices. But taken together, they've made us see the corporation as disposable, with some obvious results -- like the death of the job-for-life model -- and some more subtle ones, like the increasingly rapid turnover in the composition of both individual and mutual fund portfolios. Why hang onto anything more than a nanosecond?

Another outcome of our bankruptcy culture is that we're not really seeing companies trying to project permanence. Sometimes it actually seems as if they are embracing a shorter shelf life, cultivating an aura of the transitory; note the proliferation of lower-case logos like jetBlue, a powerful anti-corporate cue. Online companies don't even have a physical presence, yet we accept them as every bit as substantial (or not) as the bricks-and-mortar company around the corner.

You would think that in this environment where sudden corporate cardiac arrest is common, we'd be suspicious of companies that haven't been around. But paradoxically, we aren't. (Perhaps it's Schumpeter again; we've accepted that successes emerge from the rubble of sacked conference rooms). Take a bank like Washington Mutual, which has only appeared on the scene recently, but has succeeded as a species of anti-bank, consciously shunning the trappings of faux historicity. Once upon a time, a new bank would desperately try to create a manufactured provenance; today, when 100-year-old institutions routinely go belly up, legacy itself can be an anchor.

The free market tells us that bankruptcy can be a good thing, in the way that the death of an old tree allows younger ones under its oppressive canopy to grow. There's a lot of truth to that. But beyond the physical, bankruptcy has triggered an emotional change in our expectations. We've experienced what can only be called the Death of Permanence; what remains to be seen is the way the new Economy of the Evanescent will influence our business and even personal interactions. Never before have so many people lived with one finger on the game-reset button.

The Innovation-through-Acquisition Strategy: Why the Pay-off Isn't Always There

The Innovation-through-Acquisition Strategy: Why the Pay-off Isn't Always There
Knowledge@Wharton
Published: November 16, 2005

If you can’t beat them, buy them.



That was the mantra of leading technology companies in the tech boom days of the 1990s, when innovation was moving at such a frantic forward pace that even industry leaders like Cisco couldn’t keep up with the latest advances. Faced with the prospect of falling behind the competition, top companies began buying up smaller firms -- and their promising, if untested, technologies -- to stay on the cutting edge.



For a while, the strategy seemed to be a good one, or at the very least, a popular one. Companies spent $3.5 trillion on acquisitions between 1992 and 2000, making those eight years the most active M&A period in history. Then the tech bubble burst and M&A activity came to a screeching halt. Acquisition leader Cisco, which purchased 70 companies between 1992 and 2000, bought just two in 2001. It became evident that while some purchases helped acquirers reap benefits, many failed to create the intended value. Wharton management professor Saikat Chaudhuri believes he knows why. His research is especially timely given the recent growth in M&A activity in the tech sector and other innovation-driven industries.



Companies who once were acquisition-crazy, says Chaudhuri, soon realized that while buying technologies was easy, making them pay off was not. Indeed, researchers looking at mergers and acquisitions in tech fields have acknowledged for years that the challenges of successful acquisitions are significant, as are the challenges of post-acquisition integration. Yet they have also suggested that the strategy of buying young companies with early-stage technologies in emerging markets is a good way of hedging against the possibility of missing out on major technological advances. Further, they have generally agreed that once a purchasing company finds an integration strategy that works well, this strategy can be applied to almost any acquisition.



But after spending two years studying the M&A activity of three top communications equipment and software firms, Chaudhuri says those assumptions are wrong. “What I did was reframe how we look at acquisitions,” he notes.



Four Major Challenges

By examining the challenges of the innovation-through-acquisition strategy in detail, Chaudhuri’s work offers suggestions to managers on what kinds of target companies are worth pursuing and what strategies should be used to integrate those companies once they have been bought.



Innovation acquisitions, according to Chaudhuri, present four major challenges at the product, organization, and market levels: integrative complexity due to technological incompatibilities, integrative complexity due to the “maturity” of a target company, the unpredictability of a product’s performance trajectory (“technical uncertainty”) and the unpredictability of that product’s market (“market uncertainty”). Different target companies present different degrees of these variables, he says, and so each acquisition presents its own benefits and drawbacks.



For instance, by buying a company whose products are based on a different technological platform, a purchasing company can gain new technological functionalities and capabilities. But such a deal would also pose a significant integration challenge because the platform disparity would have to be resolved. Chaudhuri points to Microsoft’s purchase of Hotmail as an example. At the time of the deal, Microsoft was based on Windows, Hotmail on UNIX. “It took a few years to integrate those functionalities seamlessly,” he says.



Similarly, acquiring an older, more mature firm can offer stocks of proven competencies as well as optimized processes, but poses greater integration challenges due to entrenched work routines and cultures and more cumbersome task reallocations. Microsoft’s acquisition of Great Plains to link front-end applications with enterprise resource planning (ERP) applications is a case in point, Chaudhuri notes. “The idea behind the deal is to have seamless integration between the back-end ERP applications -- like manufacturing planning, supply chain management, HR management and financial accounting -- and front-end Windows and Office applications. But since Great Plains’ relationship-based consulting approach, supporting processes and IT systems are very different from Microsoft’s infrastructure (which is geared towards selling packaged software), these differences are naturally taking time to be reconciled.”



The important takeaway from these deals is not the difficulty Microsoft had in overcoming the integration complexity, says Chaudhuri, but rather the fact that the problems could be, in fact, overcome. Through detailed planning and piecemeal execution, Microsoft has been working through the product and organizational differences.



While “complexity” challenges in innovation acquisitions are real, visible and significant, it is the “uncertainty” variables -- the unpredictability of markets and product success -- that present the larger challenge for purchasing firms. According to Chaudhuri’s research, technical incompatibilities between two merging companies slowed the time it takes to get a product on the market, but did not hurt financial performance; target maturity was positively correlated with performance. Technical and market uncertainty, however, were shown to both slow the time to market and result in diminished financial returns.



In one of two papers that resulted from his research project -- ”The Multilevel Impact of Complexity and Uncertainty on the Performance of Innovation-Motivated Acquisitions” -- Chaudhuri says that while “companies have been able to recognize, and have learned how to manage and even exploit, integrative complexity,” they have been unable “to cope with product and environmental uncertainty in these innovation acquisitions.... The findings suggest that companies tend to give attention to those innovation acquisitions which are complex, but underestimate, or are unsure how to handle, those deals surrounded by uncertainty. Existing acquisition processes appear to be geared towards managing complexity rather than uncertainty.”



When a company buys a target with unfinished products, it brings the possibility of securing promising technologies and the ability to influence their progress, he says. “But there’s also the risk that the technologies just won’t develop as expected, and less knowledge about the technology means that less focused planning can be done upfront in resource allocation and integration.” He cites the example of Nortel’s purchase of the startup Xros, which had pioneered an early prototype of a photonic switch that the acquirer hoped would form the backbone of an all-optical network. “Unfortunately, the micro-mirror system never became stable enough to turn into a fully functional product, even after much engineering effort,” he says.



Chaudhuri observes that “with markets, it’s a similar situation. If you get there early, you might dominate a new area. But it also might be a premature commitment to a market that may not evolve.” He again uses Nortel as an example. “Nortel acquired Qtera, a startup developing an ultra-longhaul optical transport product, intending to sell equipment to the many telecom carriers who were furiously building networks globally. Soon after, however, the telecom service providers realized that the projected growth in demand for bandwidth was grossly optimistic, and stopped spending on next-generation, long-haul transport devices, upgrading their existing platforms instead.”



Flawed Strategy

Among his more important findings is Chaudhuri’s contention that “buying companies with early-stage products and entering uncertain markets had substantially adverse effects.” That’s significant, because it flies in the face of the notion that buying these “uncertain” products and companies is a good strategy simply because it might pay off down the road. “Contrary to what everyone expected -- that doing things early is good -- the uncertainty was actually so high that it had tremendously negative consequences for a firm,” he says, “including fairly established and successful firms.” Even companies that had been making acquisitions for years and could easily handle older firms and those with different technological platforms -- both of which increase integrative complexity -- could not effectively do anything to account for uncertainty.



That’s because “complexity is intrinsically predictable,” Chaudhuri notes. “If one places sufficient resources and project management strategies in the right places, it’s possible to manage the complexity. You can learn how to do it. But uncertainty, by its very nature, requires constant adjustment. This type of flexibility is tough to achieve, especially in the middle of integration activity.”



So the question becomes: Is the entire innovation-through-acquisition strategy flawed? Should companies abandon it entirely?



No, says Chaudhuri. The strategy itself can be a valuable one, if applied correctly. For managers, that means first, targeting and buying only the right companies, and second, using smart strategy to integrate them into their company’s structure. As he writes: “Fundamentally, the challenges in conducting acquisitions surrounded by high levels of product and environmental uncertainty lie in selecting the right technologies and markets, and adjusting to new information as external conditions evolve. The managerial implications are that technical and organizational complexity can be planned for and thereby handled effectively, while it may perhaps be safer to delay acquisitions” to a time when the uncertainty of technologies and markets has lessened.



In other words, purchasing firms can help themselves by only buying those companies that bring along limited uncertainty. Even highly complex deals with low uncertainty may be attractive, Chaudhuri says. “One of the options, and one of the immediate implications of the research, is to delay acquisitions until uncertainty is reduced. The disadvantage, of course, is that [the longer a company waits], other players will likely become interested as well, and the price will go up. There’s a very clear tradeoff there.”



Cisco, once the leader in innovation-through-acquisition, appears to be doing just that. Chaudhuri says the company has adopted a wait-and-see approach to technology acquisitions. “My advice would be to wait as long as possible for uncertainty to be reduced, but to go ahead and engage in these more complex acquisitions.”



After all, there are still valuable targets to be had. And companies should not shy away from pursuing those that fit the profile, Chaudhuri suggests, so long as managers are prepared to craft an integration strategy specific to the deal.



Always a Tradeoff

With few exceptions, companies and researchers have assumed that one integration strategy can be employed for any number of deals, and have tried to find “optimal models to follow,” particularly during the tech boom. But Chaudhuri says his research provides convincing evidence that a rethink is necessary. Instead, companies must be flexible when bringing a new company under their wings. Different acquisitions will demand different approaches. Sometimes, it may be best to blend operations of the two companies immediately; other times, keeping them separate may be preferable.



As Chaudhuri notes in the second paper from his research project, “Managing Innovation-Driven Acquisitions: Contingent Effects of Integration Strategies on Performance,” the findings “suggest that each of the challenges inherent in innovation-targeted acquisitions can be managed with aligned integration strategies, where levels of organizational integration, process adoption, and product knowledge sharing are aligned with the nature of the specific complexity or uncertainty variable.”



For instance, if a large firm buys a small company about to complete development of an exciting new product, it may not be in the best interest of the purchasing company to rush the integration process. Rather, the better move may be to allow the smaller company to continue operations as usual, until the new product is ready. In fact, Chaudhuri found that in such situations where a purchased company brings to its new parent a product with high levels of technical uncertainty, the buyer sees improved financial performance by employing a strategy of low organizational integration, low levels of process adoption from the target and delayed product knowledge sharing.



“In that case, since the technologies are still uncertain and the group is still working on it, lower integration allows the group to keep working … and gives it the flexibility it needs to adjust to evolving requirements,” Chaudhuri says. “Your intent here is just to get [team members] to build the product. They don’t need any distractions, so joint product work and knowledge sharing are also not beneficial.” At the same time, he says, since the larger company likely has a set of processes that have been proven effective in bringing new products to market, simultaneously giving the target team such methodologies and tools is helpful in yielding a positive outcome.



The trick is to find the right integration strategy for the right deal, by understanding the “explicit tradeoffs involved.” Chaudhuri’s research identifies these tradeoffs. “A high degree of integration enables scale and coordination efficiency, but can potentially disrupt routines underlying capabilities and lower flexibility. Adoption of target processes by the acquirer preserves codified knowledge, but sacrifices scale and replicability. Knowledge sharing expands knowledge bases, but distracts resources from operations,” Chaudhuri explains.



The bottom line? Making an acquisition work is just as difficult as finding the right company to buy in the first place. “It’s necessary to figure out what works and under what conditions,” Chaudhuri says. “You have to look at what the inherent challenges are to determine whether to buy the firm, and then design the appropriate strategy to manage it.”