Strategy of AOL company

A strategy is a collection of goal-oriented actions that a business takes on to achieve and maintain an exceptional performance in comparison to its rivals (Rothaermel 6). A company's strategy-making process is ongoing at all times. Strategic decisions should focus on the internal capabilities that customers value enough to pay for and that competitors find difficult to imitate (Finkelstein 19). A firm's desired goals are continually being developed and innovated upon through the process of strategic management, which takes into account the available resources and environment in which the organization operates (Wheelen). The strategic management process is mostly carried out by the Chief Executive Officer and important management process. Several factors are considered by the management during the strategy formulation phase to ensure the business achieves superior performance. The objective of this paper is to analyze the strategic failure of AOL Company.

Company Background and Success

AOL Company is an American based corporation that deals with online services. The organization’s history dates back to 1983 when Bill Von Meister established it as Control Video Corporation (CVC). The name later changed to America Online (AOL) in 1991 (Ray 39). The company initially offered dial-up services to its customers. AOL diversified its services to include the provision of instant messaging, web portal, email and web browser. The business grew over the years to become pioneers of the internet in the mid-1990s. AOL brand had gained immense success during this period. The main competitors of the company during this time were Netscape and Microsoft. The browser wars between these corporations became headline news in 1996 (Sebenius 43). AOL made an 86% rate of growth per year in profits and 106% in securities value from 1996 to 2000 (Malone and James 104).

The experienced management and effective corporate governance are the main reasons for AOL’s success. The company was initially under the command of James Kimsey and Stephen Case. Case steered the business to its most essential deal. The contract involved managing an online service for Apple Computer called Apple Link (Reed). Steve Case was promoted to the rank of CEO in 1991 due to his achievements. As the CEO, Case was famous for his visionary strategies (Bodie 985). He had an optimistic belief in the future of the company. Steve Case was very passionate about ensuring AOL thrives in all its policies. He introduced new business models that enabled the company to operate with minimal challenges. Case promoted this positivity among his employees. He placed great emphasis on the fact that AOL was not just a company but also a religion (Bodie 986). He regarded himself as a spiritual leader who was motivated to do good things for the organization. In fact, in the early years of his tenure as CEO, Case was obsessed with the long-term vision of AOL to the extent of refusing to take opportunities that he may cash out (Bodie 986). One notable deal was a $ 50 million offer from CompuServe. Even though the former CEO had an interest in this contract, Case refused to sign the agreement. What surprised many is the fact that CompuServe was a market leader in the online industry. As such, the deal was perfect for any company during this period (Bodie 986). According to Case, AOL’s vision and the mission had a more significant magnitude than selling out at a higher price.

Robert Pittman also contributed towards the success of the firm. Pittman – commonly referred as Pitchman – was appointed in 1996 and charged with the responsibility of overseeing the day-to-day operations of the organization. Pitchman was mostly hired by companies to help them overcome short-term problems (Bodie 987). His appointment in AOL resulted in more financial performance and earnings. He formulated aggressive monetary policies that lead to a significant reduction in the company’s expenditures. Pittman is also famous for introducing advertising as a source of earnings for AOL (Bodie 987). Before his employment, the company mainly depended on subscription fees rather than advertisement fees. Pittman increased the organization’s revenues by acquiring new advertising deals. The most notable advertising contract was with Tel-Save Holdings worth $ 100 million (Bodie 987). The transaction resulted in more market capitalization for Tel-Save, as well as more revenues for earnings for AOL. The company established itself as an internet advertising platform throughout the 90s.

Another reason for AOL’s success was due to the large number of people engaging in chats, emails, and the exchange of different files (Bodie 986). Also, unlike its competitors, who were strict, AOL Company allowed its users to exchange explicit contents such as sex documents (Bodie 986). The approach resulted in more users, therefore, exceeding those of the rivals. At the height of its success, the company bought the media conglomerate, Time Warner. The merger made headlines in various news channels, with multiple business leaders terming it as the most prominent merger in U.S. history (Klein 1). In spite of this success story, AOL Company has declined in the recent years due to an unplanned strategic failure.

Strategic Failure of AOL Company

The worst strategic failure of AOL Company was the merger with Time Warner. Most people believe that this strategy was a total disaster (Bodie 975). Mergers and acquisitions are concepts of corporate policy, management, and organizational finance that comprises of the buying, selling, and combination of several businesses (Ray 39). The approach leads to a more significant market share and a competitive advantage relative to the competitors. The AOL-Time Warner merger was initially successful. The objective of this strategy was to reduce costs and to gain more market dominance. After the merger, Steve Case became the chairman, and AOL officials took over top financial positions (The Telegraph). However, the strategy failed due to poor planning and execution. The outcome of this policy did not pan out as it was intended.

At the beginning of 1999, Case and other essential management personnel held several meetings to brainstorm on proposed mergers (Bodie 989). The team had come up with several suggestions on the potential combinations. They included AT & T and e-bay, among others (Bodie 989). After many consultations, the administration decided to settle on merging with a big media corporation. Time Warner was selected as the most suitable company to combine with given that it has a vast business empire. By late 1999, Case had made several visits to Time Warner CEO – Gerald Levin – to try and convince him to merge with AOL (Bodie 989). Steve was able to impress to Levin hence making the deal a success. The most controversial issue in this contract was the ratio of shares and the managerial control (Bodie 989). Time Warner CEO was not willing to lose control over the company. Steve Case was not ready to share the same power since AOL had more market capitalization than Time Warner. AOL was valued at approximately sixty-percent while Time Warner was worth thirty-five percent of the combined share prices.

When both companies declared their anticipated merger in January 2000, the share price of the organizations underwent substantial changes in their value (Malone and James 103). The announcement made headlines in the news channels leading to price adjustments of both securities. When the specifics of the plan became sure to the public, the value of Time Warner Shares dropped significantly but stayed at around 30% above its pre-announcement market rate (Malone and James 103). AOL stocks, on the other hand, reduced to a price around 15% lower than its pre-pronouncement value (Malone and James 103). The costs of both securities were far much below the amount projected by analysts before the merger.

Moreover, the cultural dimensions of both firms led to the downfall of this strategic merger. The culture of any society or organization influences the structure and the management approach to be used. It also affects the relations between employees, co-workers, and customers in an institution (Ray 40). One of the primary reasons that most mergers and acquisitions fail to be successful is the fact that most firms have conflicting organizational cultures. The conflict areas arise when the management of both parties has different opinions on how to execute a strategy. Unlike AOL, with a centrally managed structure, Time Warner mainly used the decentralized system (Ray 40). The approach used by Time Warner resulted in autonomy at the divisional level.

The management of the newly formed corporation often faced challenges due to inflexibility encountered from Time Warner employees, who were not willing to change their old ways of doing business. Before the merger, Time Warner mainly emphasized on divisional performance as a measure of company success (Roberts, Jae and Jun 1). The company also believed in the maintenance of a long-term relationship with its customers. AOL on the other used the share price as a measure of the overall success of the business. The firm mainly focused on making money even if it meant losing relationships with its clientele (Bodie 992). An excellent example of the culture clash was a misunderstanding over the corporation’s relationship with American Airlines. The Airline had for a very long time been a business partner of Time Warner. The employees of the company also enjoyed flights at discounted prices. However, in 2001, American Airlines refused to renew its advertising contract with AOL. The new leadership opted to replace American Airlines with United Airlines, and this did not augur well with the old Time Warner management (Rose, Angwin, and Peers). They saw the move would lead to alienation of a trusted client.

Furthermore, AOL business operations were less diversified as compared to Time Warner. AOL mainly focused on offering internet services while Times Warner had a large media and entertainment empire with interests in film studios, magazine, cable TV and news (Ray 40). Also, the business models used by these firms were different. The model used by AOL Company was relatively outdated. Access to the internet was turning out to be affordable as more providers such as Yahoo and Google popped up (Wade 22). As such, what had seemed like an undisputable monopoly was soon outsmarted. Also, most influential people at Time Warner did not like the idea of merging with AOL. They were of the opinion that AOL would try to take over the entire operations of the newly formed corporation (Kramer). Only a few individuals participated in making the contract, and therefore nobody felt they were obliged to make the strategy work.

The merger also faced pressures from market expectations (Albarran and Gormly 37). The management had projected outrageous profits. The administration had predicted that the company would make more profits and cash flows, but this was not the case. These estimates did not consider the fact that AOL-Time Warner was declining. The company made financial adjustments of $ 54 billion in the first quarter of 2002 (Albarran and Gormly 37). The value reflected a reduction in the revenues following the merger. Both companies were worth above $ 180 billion when the announcement of the planned merger was made public in January 2000. The value dropped to $ 105 billion in 2001 (Albarran and Gormly 37). The downward trend continued in that year resulting in AOL-Time Warner becoming an absolute disaster. The management did not take stringent measures to minimize this problem. They sold vast amounts of securities despite the firm facing drawbacks. A section of the employees was not happy with these turn of events. They sued some of the previous top company officials and executives (Albarran and Gormly 37). In 2003, the corporation recorded a loss of $ 68.9 billion (Benner). AOL Company was facing dormant growth in subscribers of its online services, while the recession was adversely affecting the operations of Time Warner. Furthermore, former shareholders of Time Warner experienced a drop in the value of their investments, with the combined share prices reducing by 90% from the peak value (The Economist).

The merger also faced challenges when the Washington Post began publishing a series of articles highlighting the illegal accounting and advertising practices by AOL from 2000 to 2002. The accusations included doctoring of its advertising income by overstating the advertising contracts and converting legal disputes into ad deals, among others (Klein). The most prominent case was a contract between PurchasePro.com and AOL. PurchasePro.com was a software maker located in Las Vegas. AOL used unscrupulous practices to gain $ 30 million in advertisement earnings (Bodie 993). The deal required PurchasePro.com to give a certain amount of stock warrants to AOL. It later became known that the permits were not supposed to be included in advertising revenues. The expose resulted in the Securities and Exchange Commission filing litigations against former AOL officials who were believed to be the masterminds of the fraudulent activities (Kang). The revelations also led to a severe public image that resulted in a decline in the corporation’s share price. The value of the company’s stocks reduced to $ 8.70, a drop of 85% in just one financial year (Bodie 993). As such, in 2003, the organization was renamed Time Warner, and the symbol of the stock converted from AOL to TWX.

Merger Fallout

These challenges resulted in Time Warner announcing of the plan to split with AOL and be an independent company (Aaron). The news did not come as a surprise given that the merger did not achieve its objectives. Before the breakup, AOL-Time Warner had implemented various policies to try and control the damages of the merger. The measures involved multiple changes in the management of the company (Albarran and Gormly 37). The most prominent adjustment was the resignation of the Gerald Levin and Steve Case. Levin called it quits in December 2002, followed by Case in May 2003. Richard Parsons became the new CEO. Parsons had a hard task of increasing investor confidence in the firm. AOL-Time Warner was performing poorly on Wall Street. The appointment of the new CEO led to the selection of influential Time Warner personnel. AOL officials who initially controlled the merger were relieved of their duties (Albarran and Gormly 378). As such, this led to the reduction of decision-making powers of AOL. The company has tried to regain its previous dominance by rebranding itself several times.

Lessons Learnt From This Strategic Failure

The shareholders of the company suffered much from this merger. They are adversely affected since they get their returns after the fulfillment of everyone else’s claims. The shareholders will make losses if the business does not succeed in its strategies. As such, to minimize strategic failures, companies should come up with a policy whereby employees are encouraged to purchase company shares. It is upon the staff to think like shareholders to ensure the firm’s wealth is maximized. Furthermore, this approach will help minimize the principal-agent problem, therefore, enabling the organization to function efficiently. The principal-agent problem arises when the company officials are not carrying out their duties as required by the shareholder. Lack of proper supervision may result in the management engaging in fraudulent activities as was witnessed by AOL executives. By encouraging employees to buy shares, they will be vocal in ensuring the company is taking part in ethical business practices since their investment is also at stake.

Another lesson learned is that it is vital to ensure that companies entering into a contract have no cultural conflicts. AOL and Time Warner had different administrative and corporate cultures. Both institutions were successful in their respective industries by using different business approaches. AOL-Time Warner should have implemented an organizational culture that was common and favorable to all employees. The staff of any company must be involved in the implementation of a business strategy for it to be successful (Wheelen). The personnel of Time Warner was not pleased by how AOL administration handled the company’s operations hence resulting in more resistance.

Conclusion

AOL and Time Warner merger was an innovative strategy and could produce an empire that would have a dynamic impact in the media industry. Nevertheless, this approach was not successful due to poor planning and execution. Case and Levin were exceptional leaders in their professions but failed to make the merger a success.

Both companies had different cultural and managerial practices making it hard for them to coexist. Furthermore, the unethical business practices by AOL resulted in more challenges for the merger. The accusations created a bad public image for the corporation. These problems led to the Time Warner splitting with AOL to become an independent firm in 2009. The collapse of AOL-Time Warner has made many businesses to reconsider the idea of merging with a company from a different industry.

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