Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 297 | May 19-25, 2023.
Bed Bath & Bankruptcy: Lessons for Senior Leaders
By Jonathan Knowles et al., | MIT Sloan Management Review | May 18, 2023
Listen to the Extractive Summary of the Article
Bed Bath & Beyond (BB&B) finally filed for bankruptcy on April 23, 2023, after surviving a near-death experience earlier in the year thanks to a last-minute equity infusion from an opportunistic investor. BB&B emerged when its founders spotted the opportunity for a specialty retailer to take market share from department stores by offering a breadth of selection and a shopping experience that the latter could not match. The seeds of BB&B’s woes were sown in its failure to respond to the emerging e-commerce threat from Amazon and other retailers. This oversight overlapped with the competitive response from other brick-and-mortar retailers.
The engine of sustainable business success is customer value creation. A core tenet of leadership is that value must be created before it can be captured. This means it is critical for leaders to understand what is driving its relevance to its customers and what the sources of its distinctiveness are. Fit to purpose as a way to evaluate the size of the market that a business can serve, while relative advantage evaluates the opportunity for pricing power and margin. For sustained success, a business needs both scale and margin — and neither should be pursued without explicit consideration of its impact on the other. Nevertheless, the new leadership team saw its priorities in narrowly financial terms rather than in terms of optimizing the fit to purpose and relative advantage of the business.
Company leadership failed to understand that the real strategic challenge was to restore the relevance of BB&B to the types of customers it was best able to serve (fit to purpose) and find ways to reestablish the opportunity for margin through distinctiveness (relative advantage). They squandered the opportunity for reinvention and, by propping up the share price through stock buybacks, starved the business of the resources required to build on the considerable base of shopper goodwill it had created.
Two significant leadership lessons to be drawn from BB&B’s path to bankruptcy: one, the engine of business success is value creation for customers. Fit to purpose and relative advantage act as leading indicators of, respectively, a business’s ability to expand its addressable market and its ability to develop pricing power based on perceived distinctiveness. Two, business costs must be evaluated relative to the customer benefits they support. Costs are only “bad” when they generate a benefit for which a customer is not prepared to pay the company’s set price. In contrast, costs are “good” when they support a customer benefit for which the volume and margin potential is economically attractive.
2 key takeaways from the article
- Bed Bath & Beyond (BB&B) finally filed for bankruptcy on April 23, 2023, after surviving a near-death experience earlier in the year thanks to a last-minute equity infusion from an opportunistic investor.
- Two significant leadership lessons to be drawn from BB&B’s path to bankruptcy: one, the engine of business success is value creation for customers. Fit to purpose and relative advantage act as leading indicators of, respectively, a business’s ability to expand its addressable market and its ability to develop pricing power based on perceived distinctiveness. Two, business costs must be evaluated relative to the customer benefits they support. Costs are only “bad” when they generate a benefit for which a customer is not prepared to pay the company’s set price. In contrast, costs are “good” when they support a customer benefit for which the volume and margin potential is economically attractive.
(Copyright)
Topics: Strategy, Business Model, Business Failure, Bankruptcy
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