Strategic Management of Technology and InnovationRazorFish This case study is about a company Razorfish which is a web technology and design consultancy firm. This company was founded by two childhood friends Jeff Dachis and Craig Kanarick in 1995. The company started in a small cramped up office in New York but its phenomenal growth in five years due to an aggressive acquisition strategy, strong brand strategy with a unique hip image that attracted the most creative people who loved to think out of the box, led the company to become a multinational in just five years.
The company was never known as a roll-up since they never acquired for only financial purposes. The company considered the acquired companies as family. But the company’s downfall began during 2000 when the stock market made a reassessment of the valuations of the internet related stocks. The once best traded stock on the market began to fall when one of their acquisitions turned out to be a failure due to a “mass exodus” of its employees. The company started to dip into huge losses from this point onwards and eventually when they had either highly risky or distasteful options left, the two founders resigned from Razorfish.
Answers: Problems and Challenges: The major challenge and problem for Razor fish was intense competition from four broad categories of competitors in the market. Secondly, during 2000 they decided to make a secondary stock offering but one of their acquisitions i-Cube started to give them problems. The senior management and CFO from i-Cube who became the CFO of Razorfish resigned stating that they could not adjust with the corporate culture.
Thirdly, the external environment had a major role in the fall of the going-to-be giant in the Internet industry. The stock market began to reassess the valuations of internet-related stocks. Thus all employees in this industry and the shareholders became wary of the internet industry. They decided to not to be involved with any such company. Corporate marketing and IT managers decided to pull out their investments and venture capitalist were wary of this industry as well. This was a recession in the new internet technology industry and people started to fall back to traditional IT consultancies.
The old and established firms were in action now. Fourthly, the buyers started to demand for lower fees, tighter deadlines, they wanted the consultancy firm to bear all the project-cost overages and they wanted fixed prices. This was a problem for Razorfish since they depended on varying prices and deadlines. Fifthly, the company’s high priced real estate was a problem since it was difficult for them to adjust the cost structure in case of a downfall in the industry. Sixthly, their third-quarter expenses increased and they faced a loss in the fourth quarter.
This was the beginning of their ultimate downfall. They had to downsize by cutting down on employees by going against their values. Lastly, they had to start thinking about ways to reduce cost through restructuring. Their revenues continued to decline and they were left with high risk and highly distasteful options. Thus, the two owners resigned. SWOT Analysis: The major strengthsof the company included cutting-edge technology and since they started small and were new they could easily adapt to the latest requirements of the industry unlike the old established firms, their unique and strong brand identity that distinguished them with customers and workers since it gave them a hip image that attracted the most creative and talented people around who were willing to work for the firm and were also loyal to the firm and lastly, they did have an acquisition strategy but they were never considered to be a roll-up (acquisitions for financial purposes only) since they considered those firms as family.
The company’s weaknesses included the industry it was operating within since it faced a downturn mainly because of its intangible properties and its risky acquisition strategy that did create problems when one turned out to be a failure and the company ended up in a lawsuit with its shareholders.
The opportunities for the company were acquisitions that turned them into a multinational, since large corporations did not want to be left behind in the race so they invested or acquired interactive start-ups and Communicade invested in Razorfish that helped them raise funds, lastly their strong brand identity and unique style helped them get small projects from time to time that generated continuous profits.
The threats faced by the company included a downfall in the industry and recession in the internet-related stocks in the stock exchange, acquisitions are risky since its not necessary those workers can adjust and adopt to the new firm and the company’s high priced real estate that made cost restructuring inflexible in case of a downturn. Strategic decisions in creating or acquiring technologies: The company raised funds through the investments made by Communicade in their stocks and Razorfish made its first acquisition of Spray Network which was a Swedish firm and this extended their business to Europe.
Razorfish made its IPO in 1999 and raised funds to launch an acquisition strategy. In order to broaden its capabilities, Razorfish acquired Fuel, an L. A based company dealing in broadcast design and television commercial production so now the firm could explore PC’s and the television technologies. Their largest acquisition was i-Cube a Massachusetts-based system developer and integrator that helped the firm to increase its expertise in the ‘back-end’ operations for corporation websites.
They also acquired in 1998, Avalanche based in New York that dealt in media, and then they proceeded to Plastic based in San Francisco and Media in L. A. Other acquisitions included Sunbather in London, Lee Hunt in New York, TSDesign in New York, QB International in Stockholm, Limage in Rotterdam and Medialab in Munich. Possible Solutions: To cutback costs immensely, do aggressive marketing or maybe do additional funding only if required. The company managed to retain talent, culture and morale until the industry took a downturn. They had a strong balance sheet and they needed additional funding with stock prices declining continuously.
But the general managers of the company wanted to deal with the matter in a modest way and that is through an optimistic approach since they did believe that the company might have a rebound of demand and they can make profits. But this was not a good idea since it was impossible. To drastically downsize the company to its most profitable operations. They had two viable options that were to cut back European operations or get rid of 13-15 subsidiaries.
But many members were against drastic cut backs since every country has laws against downsizing, lay-offs and close downs. Attempt to be acquired. The company had 1300 talented employees and sophisticated web development processes. They had expertise in the field. The company was still an attractive venture for traditional consultancies but the owner Dachis refused to abide with this option since according to him it was the worst option. Close up and distribute the assets with the shareholders. The firm still had $30million in cash and as receivables plus they had no debts so they could close up.
But the employees were against this option since they loved working for the company and it was a religion to them plus in countries like Europe shut downs are not allowed to protect worker rights. My Solution: I would recommend the third option that is an attempt to be acquired. This is because the company’s employees do not want a shut down and the owner’s have resigned so the company needs to be rescued from hot waters at the moment.
The company has 1300 valuable workers and also expertise in web development processes for corporations so Razorfish is still an attractive and viable option for an acquisition. This is their only way to survive sine all the other options of downsizing and cutting costs have been implemented and now the company is on the verge of a close down. To survive the company must make an attempt to be acquired. Although Dachis believed this option was the worst one because it was a blow to the company’s ego and he could not bear to see his company fail so badly.
But this is the only and the most viable option left for the survival of the company. Thus according to me an attempt to be acquired is the best option for the company at this stage.