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June 11, 2013

Cost of Chasing Cool

Posted by Sanjay Dalwani (View Profile | View All Posts) at 8:18 AM

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The beanbag and the red-felt billiard table - are two items that so embodied what it meant to be a hip dot-com start-up in the late 1990s. These two objects told the world that one's dot-com was all about tearing down the antiquated bricks-and-mortar business model. It also conveyed the distinct possibility that one was about to have an IPO that could potentially transform the entrepreneur and his dot-com buddies into multimillionaires. (at least on paper for a few weeks).

I'm kidding about the trappings for the most part, but not about chasing the element of cool and how that can often be a costly and futile activity. Simply being perceived as cool in the marketplace can have a low correlation to a firm's actual financial performance. Indeed, when it comes to a company's cool factor, bold, decisive actions in the marketplace tend to speak louder than the presence of beanbags in the reception area. Instead of focusing on long-term core values - to stakeholders, there's nothing cooler than that - companies sometimes get into the habit of chasing cool. When you chase something, you can place too much time and energy on differentiation for the sake of differentiation. Gains from such efforts can be fleeting.

Can companies spend too much time worrying about whether they're cool enough for today's most desirable consumers? They want to keep every youngish, highly educated, and affluent customer they can as well as attract new ones. And sometimes even drop big money to acquire a relatively small start-up in the hopes that it can win the company legitimacy among hipsters. While an acquisition is one of the best ways for a company to grow, it's not a proven method for instantly attaining an audience to make it cool again. Getting accepted by the "in" crowd takes time and effort - such a crowd usually perceives that a big company is trying to "pull a fast one" when it swallows up one of the smaller brands they cherish. So the big company's acquisition plans are quite a testament to the power of branding and reputation in today's fast-paced, data-filled world dominated by social media.

It would seem that companies would do well to develop robust platforms that give them leeway to differentiate themselves without breaking the bank. Consider two different strategies adopted by competing technology companies in this space. One is choosing the path of major acquisitions to become more relevant. The other is developing the capabilities necessary to catch-up in a market with the intent to dominate it. In both instances, having more robust platforms from the outset would have been useful. Another area where the cool factor might emerge is the combination of a company's business model and technology. It's a telling sign that a large company has to make an acquisition simply to get its hands on customer data that a start-up has accumulated over the course of just a few years. That the acquirer couldn't develop an in-house business model to achieve the same results (instead of a billion-dollar acquisition) might be a red flag to the board of directors that management needs to streamline its processes.

Certain CEOs of large, established companies are known for their management prowess because they never allow themselves to rest on their market-dominating laurels. They think and act like start-ups that have nothing to lose and the world to gain. An innovator like Jeff Bezos comes to mind. He's attained a level of cool because he doesn't allow anyone to dictate Amazon's market to him. He instead defines (and constantly evolves) what markets Amazon is in and what lines of businesses it might consider pursuing in the future.

So being cool is more about your management track record and ability to innovate than it is looking the part. If the dot-com meltdown taught us anything, it's that when a company goes bust, it's usually because it couldn't sustain its business model and couldn't even tell shareholders exactly what goods and services it delivered to the marketplace. And when that happens, the red-felt billiard tables and beanbag chairs are usually sold at a steep discount during the liquidation of the company's assets.

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