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The Consequences When there is a Mismatch Between the CEO’s Strategy and the Lifecycle the Company is Operating In

On December 10, 2021, Aswath Damodaran published a blog titled Musing on Markets. In this blog he asked what makes for a “great CEO”? What happens when there is a mismatch between the lifecycle the company operates in and the strategy pursued by the CEO? He then answered these questions based (on his experience). He proposed that all companies have lifecycles. They begin as startups and then proceed to evolve from young growth, high growth, mature growth and decline; these phases vary in length. He proposes that each phase of this lifecycle requires a different CEO with an assemblage of knowledge, skills, and experience appropriate for each stage. Within this context he notes when there is a mismatch between the knowledge, skills and experience of the CEO and the company’s current phase in its life cycle, the results can be catastrophic, and that this mismatch is all too common. I take issue with some of Aswath’s position and describe that in this article.

On December 10, 2021, Aswath Damodaran published a blog titled Musing on Markets.[1] In this blog, he asked what makes for a “great CEO”? What happens when there is a mismatch between the lifecycle the company operates in and the strategy pursued by the CEO? He then answered these questions based (on his experience). He proposed that all companies have lifecycles. They begin as startups and then proceed to evolve from young growth, high growth, mature growth, and decline; these phases vary in length. He proposes that each phase of this lifecycle requires a different CEO with an assemblage of knowledge, skills, and experience appropriate for each stage. Within this context he notes when there is a mismatch between the knowledge, skills, and experience of the CEO and the company’s current phase in its lifecycle, the results can be catastrophic, and that this mismatch is all too common. I take issue with some of Aswath’s position and describe that in this article.

He asks, “have you ever read a book or seen a movie about a CEO who shrunk his or her company, where that person is painted as anything but a villain? Well, as it happens, I have written a book that precisely describes Aswath’s life cycle premise titled Steak, Seafood, and Gross Negligence: Lessons Every CEO can Learn from the Collapse of the Sizzler Restaurant Chain[2] where the CEO is painted as a villain.

Aswath cites a Harvard Business School study which notes that almost 30% of founder/CEOs are replaced within a few years of inception. Aswath adds that “in the corporate lifecycle structure, it is a recognition on the part of the founders that the skills needed to take a company forward require a different person at the top of the organization, especially as firm transitions from one stage of the lifecycle to the next.”

In Sizzler’s case, the founders were Del and Helen Johnson who opened the first Sizzler in 1958. Their restaurant was in Los Angeles. Helen told me their initial cash investment was all the money they had—50 dollars. What was unique about their restaurant is that it was the first family budget steak house in the world. From the day they opened for business, their business model met with enormous consumer acceptance and success. They opened four more Sizzlers within a few years and took one more step—they started selling franchises. This was early in the era of selling franchises for an existing business model where John Naisbitt, the author of Megatrends, cited franchising “as the single most successful marketing concept ever.” As Aswath notes, “put simply, it is possible that the quality that binds together successful CEOs the most is luck.”

Sizzler entered both its second phase, young growth and eventually third phase high growth, when the Johnsons sold their company to Jim Collins. Jim Collins’ story is also fascinating. He graduated from UCLA as an engineer. And here again, another story of luck. He abandoned his career as an engineer early on to become a Kentucky Fried Chicken franchisee which he pursued aggressively. Within 10 years of obtaining his first franchise, he grew his company owning more franchises than anyone else in the world—200 franchises in the U.S. and 90 in Australia.

Sizzler then entered the phase of life which Aswath describes one where “the products/services offered by the company scale up, the capacity to build businesses become front and center, as production facilities have to be built, and supply chains put in place, critical for business success.” Jim Collins, with unparallel faith in the concept of franchising and tons of money, focused on growth through expansion. This had previously worked well for him. Collins had started with four company owned Sizzlers and 64 franchisees. Jim led the company to own 128 company stores along with 324 franchisees by 1980 and 209 company stores with another 455 franchisees by 1990. He and the shareholders enjoyed success.

Sizzler entered the mature growth phase in the mid-1980s. Aswath explains that “as companies enter the late phases of middle age, the imperative will shift from finding new markets to defending existing market share, in what I think of the trench warfare phase of the company, where shoring up moats takes priority over new product development.” He goes on to say that “if you buy into my structure of a corporate life cycle, and how the right CEO for a company will change as the company ages, you can already see the potential for mismatches between companies and CEOs for three reasons.” The first and most apropos reason, as evidenced by the Sizzler story, is that the board of directors for a company seeking a new CEO hires someone who is viewed by many as a successful CEO, but whose success came at a company at a very different stage in its lifecycle,” hires a CEO that has a vision or leadership style that is a mismatch between his strategy and the phase the company is in. This happened with Sizzler. The mismatch started in the mid-1980s. At this point, the company was transitioning, it had a successful CEO, so, the error here was not one involving hiring the wrong CEO. While I agree that the skillsets of the CEO need to change over the lifecycle, I disagree with Aswath’s notion that a company needs to hire a different CEO for each phase of its lifecycle. As a practical matter, I believe that is unrealistic. For me, it is hard to imagine a Board of Directors telling a successful CEO, “hey Joe, you have done a magnificent job over the last 10 years doubling the company’s annual sales and profitability but your fired because we are in the next phase of the company’s lifecycle.”  

I believe that a more realistic alternative is for a perceptive, independent, and capable Board of Directors to see the need to further develop its existing senior management team either by hiring support staff or management consultants with the requisite knowledge, skill, and experience that understands that a company’s strategic focus needs to change over time and that as the company matures, so must senior management respond and understand the skillset to manage the next phase of the lifecycle. Unfortunately, as we can surmise from Aswath’s observations, the lack of such capability is common.

In Sizzler’s case, the chain continued to grow in the number of operating units and unit profitability throughout the 1980s; however, by the mid-1980s, the seeds of its ultimate demise were beginning to be sown. This was the time when the strategic focus should have become “shoring up the moats.” As I say in my book, the strategic focus should have changed from offense, i.e., gaining greater market share, to defense, that is protecting its market share.

Aswath describes the last two segments of a company’s life cycle as the mature stage and finally, decline. The wild card in this lifecycle scenario is the mature stage. At any given time, it is reasonable to assume that this is the current stage for the majority of companies, both public and private, and the length of time they linger here varies significantly. For example, the Ford Motor Company was founded in 1906 and is still going strong. Sizzler’s mature stage stretched all the way from 1985 through 1990.

For the first time in Sizzler’s history, sales revenue in 1990 was less than the prior year. This was a year, at least in California, where there was something of a mini-recession and restaurant sales across the board trended down. The way Sizzler leadership reacted to this situation was catastrophic. The corporate culture had become imbued with two debilitating management philosophies. The first believing that the Sizzler business model was invincible and secondly, felt that acceptance of a decline in sales was totally unacceptable under any circumstances. The direction Sizzler took was to reinvigorate sales by expanding market share. The strategy was to expand Sizzler’s wildly successful salad bar into a more wildly successful “buffet bar” or more specifically, a “buffet court”, consisting of several all-you-can-eat bars featuring all kinds of stuff assembled as an island in the middle of the dining room. The idea being to attract a new market niche of customers for whom the all-you-can-eat buffet was appealing—and it worked but not quite the way management expected. The problem was that our mainstay steak-and-salad bar customers left in droves. The salad bar was no longer available. Their only choice became steak and the more expensive all-you-can-eat buffet court. The data revealed that the customer count remained fairly steady, but by 1992, 70 percent of Sizzler’s customers were buying the buffet court. Sales revenue declined and profitability plummeted for the reason best described by Michael Mueller of San Francisco’s Montgomery Securities who said “many of Sizzler’s new diners were there because they just wanted to eat a lot. The gluttons helped change Sizzler in the public’s eye from a casual, mid-price grill to a place for pigging out cheap.”[3]

Jim Collins, in his capacity as Chairman of the Board, was still at the helm. He proceeded to keep long-time employed senior operations management on a short leash. Further, he surrounded himself with a Board Directors that was unable to challenge him and had come to see themselves as outstanding or special, believing themselves to be omniscient. To paraphrase Damodaran, Jim Collins, together with the collective assemblage of knowledge, skill, and experience among the entire senior management team and Board of Directors, had become entirely mismatched for a company generating combined national and international sales revenue of over a billion dollars a year.

A mismatched management team is the reason for Sizzler’s collapse. But the collapse need not have happened. As far back as the mid-1980s, there were many franchisees, including me, shouting from the roof top “go back, go back”, which translates to “defense, defense” as Sizzler steadily began expanding its menu and increasing the pricing markup multiplier on food cost from around 2.5 to around 3.0–3.5. Unfortunately, no one at the helm listened.

On Sunday, June 2, 1996, Sizzler Restaurants International filed for Chapter 11 bankruptcy protection. As part of the reorganization, it closed 130 of its 215 corporate owned stores. As a result of this action, approximately 4,600 people lost their jobs. The notice these individuals received of their termination came from security guards that Sizzler arranged to bar anyone from entering the closed restaurants, as they arrived for work throughout the day on Monday, June 3.

Jim Collins owned the largest block of Sizzler stock that I am told was worth somewhere over 70 million dollars at its peak selling price—and he lost it all.[4]

 

 

[1] https://aswathdamodaran.blogspot.com/2021/12/managing-across-corporate-life-cycle.html

[2] Available on Amazon

[3] Financial World, July 7, 1992, Volume 161, No. 14, p.14

[4] Despite the decline in Jim Collins’ person net worth of approximately 70 million dollars, the impact on his lifestyle was minimal due to the fact that he reputedly received somewhere between 60 and 80 million dollars in Pepsi Cola stock in exchange for all of his KFCs in the U.S. This was a tax-free exchange and this portion of his net worth was not reduced or put at risk by the decline of Sizzler Restaurants International. He also still owned 90 KFCs in Australia.

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Toby Tatum, MBA, CBA, CVA, MAFF, earned his Certified Business Appraiser designation conferred by the Institute of Business Appraisers in 1999. He has published 15 peer reviewed journal articles, has been a guest speaker at nine business appraisal conferences, and presented six webinars including one sponsored by the American Society of Appraisers broadcast internationally.

In 2010, Mr. Tatum’s book, Pricing a Small Business for Sale: A Practical Guide for Business Owners, Business Brokers, Buyers, and their Advisors was awarded Best Publication of the Year by the Institute of Business Appraisers.

In 2016, at the National Association of Certified Valuators and Analysts 25^th anniversary conference held in San Diego, he was cited as one of 59 of the most influential professional financial consultants in the world.

He has served as the Editor in Chief for the Institute of Business Appraisers quarterly journal, Business Appraisal Practice.

Mr. Tatum earned his master’s degree in business administration in 1973 from San Francisco State University. He is also a veteran, having served with the First Air Cavalry Division, United States Army, in Vietnam from March 1969 to March 1970. During his one-year tour of duty in Vietnam, he received a field promotion from private to sergeant and was awarded the Bronze Star. He is a Disabled American Veteran. He is a member of the Northern Nevada Chapter of Mensa, the Virginia City, Nevada Veterans of Foreign Wars Post 8071, and the National Association of Certified Valuators and Analysts.

Mr. Tatum can be contacted at (775) 847-7481 or by e-mail to Tobywt123@gmail.com.