Creative Destruction is not inevitable – Kodak, Hostess, Microsoft

A lot of excitement was generated this week when Mitt Romney said the words "I like to fire people."  I'm sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words.  Nonetheless, the aftermath turned to a discussion of job losses, and why Bain Capital has eliminated jobs while simultaneously creating some. 

Surprisingly, a number of economists suddenly started saying that firms like Bain Capital are justified in their job eliminations because they are merely implementing "creative destruction."  Although the leap is not obvious, the argument goes that some businesses are made inefficient and unprofitable by new technologies or business processes – so buyers (like Bain Capital) of hurting businesses often cannot "fix" the situation and have no choice but to close them.  Bain Capital inevitably will be stuck with losers it has no choice but to shutter – eliminating the jobs with the company.

Unfortunately, that argument is simply not true. The only thing that allows "creative destruction" to kill a company is a lack of good leadership.  Any company can find a growth path if its leaders are willing to learn from trends and steer in the growing direction.

Start by looking at recent events surrounding Kodak and Hostess, both quickly heading for Chapter 11.  Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure. 

Kodak watched the market for amateur photography shrink for 30 years – drying up profits for film and paper.  Yet, management consistently – quarter after quarter and year after year – made the decision to try defending and extending the historical market rather than move the company into faster growing, more profitable opportunities.  Kodak even invented much of the technology for digital photography, but chose to license it to others rather than develop the market because Kodak feared cannibalizing existing sales – as they became increasingly at risk! 

Hostess is making a return trip to Chapter 11 this decade.  But it's not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new.  While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread "helping grow bodies 12 ways" the trend toward fresher, and healthier, staples has been happening for 40 years.  In the 1980s when the company was known as Continental Baking profits were problematic, and it was clear that to keep what was then the nation's largest truck fleet profitable required new products as consumers were shifting to fresher "bake off" goods in the grocery store as well as brands promising more fiber and taste.  But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it.

These stories weren't "creative destruction."  They were simply bad leadership.  Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states "the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results."  Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!

In the 1980s Singer realized that the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made.  Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense industry contractor!  Rather than letting itself be "creatively destroyed" Singer identified the market trends and moved from decline to growth!

Similarly, IBM almost failed as the computer market shifted from mainframes to PCs, but before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive. 

The failure of Digital Equipment (DEC) at the same time was not "creative destruction" but company leadership unwillingness to shift from declining mini-computer and high priced workstation sales into new businesses.

More recently, over the last decade a nearly dead Apple resurrected itself by tying into the large trend for mobility, rather than focusing on its niche Mac product sales.  Company leaders took the company into consumer electronics (ipod, ipod touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.)  Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses "creative destruction" was avoided.

There are many businesses today that are in trouble because leaders simply won't pay attention to trends.  Avon, Sears and Barnes & Noble are three companies with limited futures simply because leaders seem unable to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.

My favorite target is, of course, Microsoft.  Nobody thinks we will be carrying laptop PCs around in 5 years.  Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective.  Its efforts in music (Zune) and mobile handsets have been indifferent, insufficiently supported and mostly dropped.  Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner.  Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output.  Really.

We'll learn soon enough just how many jobs Bain Capital created, and killed.  But those lost were not due to "creative destruction."  They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets.  Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in them which will create winning businesses.

Fire the Status Quo Police! – Forbes, AT&T, Microsoft, DEC, P&G, Sears, Motorola

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Leadership

Fire The Status Quo Police

Adam Hartung, 09.08.10, 06:00 PM EDT

Their power to prevent innovation can devastate your business.

“That’s not how we do things around here.” How often have you heard that? And what does it really mean? It is said to stop someone from doing something new. It is no way to promote innovation, is it?”

That’s the lead paragraph to my latest column on Forbes.com, published yesterday evening.  Forbes launched a new editorial page covering Change Management, and gave my column’s link the premier placement!  

All companies want to grow.  But early in the lifecycle they Lock-in on what works, and then implement Status Quo Police that intentionally do not allow anything to change.  Their belief is that if nothing changes, the business will always grow.  So conformance to historical norms is more important than results to them.  To Status Quo Police results will return when conformance to old norms is returned!

Of course, this completely ignores the marketplace.  Market shifts, created by competitors launching new technologies, new pricing models, new delivery models or other new solutions cause the value of old solutions to decline.  No matter how well you do what you always did, you can’t achieve historical results.  The market has shifted! 

To keep any company growing you must know who the Status Quo Police are in your organization.  They can be in HR, controlling hiring, promotions and pay.  In Finance controlling what projects receive resources.  In Marketing, tightly controlling branding, product development or distribution.  The Status Quo Police are committed to keeping things tightly controlled, and saving the organization from change that could send the company in the wrong direction!  No matter what the marketplace may require.

But it’s not enough to know who the Status Quo Police are, its up to leaders to eliminate them!  If you want to have a vibrant, profitably growing organization you have to constantly adjust to market shifts.  You have to sense what the market wants, and move to deliver it.  You have to be very wary of the Status Quo, and instead be open to making changes in order to grow.  To do that, you have to hold those who would be the Status Quo Police in check.  Otherwise, you’ll find the obstacles to innovation and growth overwhelming!

Please read the article at Forbes, review it and comment!  Let me know what you think!

Live or Die on Transitions – Tivo, Blockbuster, SGI, DEC, Palm, Cisco

Recently SeekingAlpha.com ran the article "Time for Tivo to say Ta Ta."  The author (a professor) took the point of view that Tivo had filled a need, but now there were ample new options – such as on-line downloads – making Tivo obsolete.  As a result, the company should fold up its tent and let the employees move on.

I was struck, because the good professor did not seem to think it might be possible for Tivo to change its business model and move into the other growing opportunities while simultaneously maintaining the traditional Tivo set-top business until the market figures out what customers really want.  That sort of predicting future markets is dangerous for 2 reasons:

1. the inherent assumption that Tivo can be in only one market is flawed.  There is nothing stopping Tivo from participating in the marketplace robustly with mutliple solution offerings.  It can even cannibalize its own "base" revenues if the market shifts into other solutions.  Tivo could remain top of the market – regardless of what solution dominates
2. predicting future markets is a fools game.  The good professor may guess some of these futurist positions right, but he's sure to get many wrong.  Any business that bets its product development or investments on future predictions is destined to eventually get it wrong – and possibly destroy itself.  Good leaders use scenarios to realize there are multiple possibilities, and then participate in several of them in order to be assured of growth.

Fast Company points out in "Avoiding Corporate Death Spirals in a Sea of Change" that all companies hoping to remain long-lived MUST learn to transition with shifting markets.  The article parallels this blog in discussing failures at Blockbuster Video, Silicon Graphics, Digital Equipment – and more recently dramatic share declines in Palm.  All are attributed to management Lock-in on early wins, then trying to Defend & Extend the early Success Formula too long.  Market transitions killed them.  The article goes on to point out that Cisco Systems, a company held up as an example of Phoenix Principle Management here, has succeeded and grown principally because it has learned how to adjust to market shifts.

No company needs to give up.  But all companies that want to survive HAVE to learn to manage market transitions.  There is no other choice.  Shift happens.

10 Ways to Stay Ahead of the Competition – Guy Kawasaki

Guy Kawasaki contacted me a couple of weeks ago, asking me to write a short piece for him.  I was happy to do so, and he published it at the BusinessInsider.com War Room as "10 Ways to Stay Ahead of the Competition."  Fortunately for me, the article was also picked up at IBMOpenForum.com with the alternate title "How to Stay Ahead of the Competition."  Full explanations of each bullet are at both locations (although the graphics are outstanding at Business Insider so I prefer it.)

1. Develop future scenarios
2. Obsess about competitors
3. Study fringe competitors
4. Attack your Lock-ins
5. Seek Disruptions
6. Don't ask customers for insight
7. Avoid Cost Cutting
8. Do lots of testing
9. Acquire outside input
10. Target competitors

Blog followers know that this program has now worked for many companies who want to grow in this recession.  The reason it works is because

• You focus on the market, not yourself
• You avoid Lock-in blindness by avoiding an over-focus on existing products, services and customers
• You use outside input, from advisers and competitors to identify market shifts that can really hurt you
• You put a competitive edge into everything you do.  Competitors kill your returns, not yourself.
• You use market feedback rather than internal analysis guide resource allocation

Of course this works.  How can it not?  When you are obsessed about markets and competitors and you let it direct your flow of money and talent you'll constantly be positioned to do what the market values.  You'll have your eyes on the horizon, and not the rear view mirror.

The biggest objection is always my comment about "don't ask customers for insight."  So many people have been indoctrinated into "always ask the customer" and "the customer is always right" that they can't imagine not asking customers what you ought to do.  Even though the evidence is overwhelming that customer feedback is usually wrong, and more likely destructive than beneficial. 

Just remember, IBMs best customers (data center managers) told them the PC was a stupid product, and IBM dropped the product line 6 years after inventing the PC business.  DEC's customers kept asking for more bells and whistles on their CAD/CAM systems, then dropped DEC altogether for AutoCad ending the company.  GM customers kept asking for bigger, faster more comfortable cars – improvements on previous models – then moved to imports with different designs, better gas mileage and better fit/finish.  Circuit City customers asked for more in-store assistance, then took the assistance across the street to buy from cheaper Best Buy stores.  The stories are legend of failed companies who delivered what the customer wanted, and ended up out of business.

Enjoy the links, and thanks to Guy for publishing this short piece.  Follow these 10 steps and any business can stay ahead of the competition.

Look beyond numbers to grow – Chief Marketing Officers

"The Evolving CMO" is the Brandweek headline.  According to this article, increasingly CMOs (that's Chief Marketing Officers) are becoming quite nerdly.  Whereas top marketing folks were once seen as "big idea" folks, now recruiters like Heidrick & Struggles (quoted in the article) are looking for top marketers to be analytical types who pour through on-line data to discern ad effectiveness and response rates.

It's not at all clear this is a good trend. 

Ever since marketing has been around it's been an easily derided function.  Unlike Sales, which has hands on daily contact with customers, marketers were considered more staff-like.  And much more easily let go.  Especially in companies that aren't consumer goods oriented, the first people let go in a downsizing are usually marketers.  Some companies, like Computer Sciences Corporation in services and many manufacturers of industrial products, don't have any marketers at all!  There are a lot of executives that believe marketing is a waste of money – you just need to focus on Sales.

So how should marketers deal with this lack of respect?  Increasingly, they are turning to numbers.  It appears that marketers want to overcome their Rodney Dangerfield position by being more like other parts of the company.  Product Development and engineering tend to be loaded with engineers, who like to push around numbers.  Operations folks like to analyze the plant output and quality numbers to death.  And everybody in finance tends to use numbers to make their argument.  Strategists and planners obsess over trend numbers.  Even salespeople talk about salescalls, orders, total revenues, margins – numbers.  So it seem marketers are starting to think that to gain respect they need to adopt personal, or role, Success Formulas much like others in the organization.

The problem is that numbers tend to focus you on the past, not the future.  Yes, on-line ads and click-throughs offer us a bounty of new numbers on the efficacy of ads, placements, messages, hits – all kinds of things we can run through the same analytical tools used by the rest of the company.  But does studying the recent behavior, upon which we have numbers – such as ad clicks – or of links to facebook pages – or the volume of tweets – or the respondents to a Linked-in group query — do these things tell you what big trends are emerging?  Do they tell you whether your product line could be made obsolete by a new competitor?  That is far less likely to happen. 

All this number crunching may make marketing look more scientific, but the important question is whether it helps the company grow.  Unfortunately, most trend numbers tell us what worked well in the past.  Yet knowing that still doesn't tell you what will work in the future.  Number crunching is great for execution of a designed plan.  Midway through an ad program, analysis can help you tweak it in order to catch more viewers and grab a few more sales.  Midway through a promotion, analysis can help you understand the impact of a price change, or a product pairing, or a sales blitz so you can tweak it for maximum results.  Analysis is great for understanding what to do right now.  But we have to run our business not just for right now.  We have to run businesses to position the company where the market will be in a year, two years, five years and beyond.

There's a tendency to think that the person who has the most numbers, or does the most analysis, is the better businessperson.  I don't know how this proclivity developed, but it did.  The desire to "engineer" a business so that it has no risk, and will generate ongoing growth and profits is a powerful desire.  But reality is that we live in a highly dynamic world.  We cannot predict the future.  Most 3 to 5 year forecasts aren't off by 2% or 5% – they are off by 50%!   Having all the numbers imaginable about the past won't give you much help for dealing with a market shift.  And that's the big problem in business today – dealing with these radically shifting markets and the changes they bring so quickly.  Analysis depends too much on the future being like the past, and that just isn't so.  The world keeps changing.

Lehman Brothers, Merrill Lynch, Bank of America, Chrysler and GM were/are full of peoples deeply skilled in how to "run the numbers."  Business training the last 30 years has given us thousands of skilled analysts, deeply ingrained in how to dig up and analyze vast amounts of data – using newer and more powerful computer tools every year.  Yet, for all this analytical skill we aren't producing more revenue growth, nor more profits.  Throughout the last 30 years growth rates have declined, and profit rates have dropped.  And recently we fell off a business cliff into an amazingly deep recession.  Yet, we're drowning in a sea of data and Powerpoint slides full of analysis.  The link between running numbers and improving performance appears broken – if it ever existed at all.

Marketers should be all about growth.  And growth comes from moving beyond executing static promotional programs on existing products.  To grow you have to be flexible to enter new markets, pioneer innovation and generate new solutions.  Somebody has to lead the charge to do scenario planning that opens the collective vision to doing new things – things not visible in the numbers.  Somebody has to understand the behavior of competition to recognize the holes they are unable to address because of their Lock-in to past practices.  Somebody has to reach beyond the numbers to offer Disruptions which allow the company to move from making computers to making consumer electronics (like Apple), or from making cars to making airplanes (like Honda).  Somebody has to be willing to manage market tests that teach you how to create new markets where you have fewer competitors and higher profits as growth takes off.  And all of this work is well beyond analyzing the numbers.

I advocate that all executives pull their heads out of the numbers to undertake these tasks for growth.  Many CEOs of now defunct companies  could memorize pages and pages of financial and market numbers.  They could recite market shares, product margins, product variable costs, plant fixed costs, employee costs and segment profits from the top of their heads.  Yet, the businesses are now gone (Multigraphics, AB Dick, Wang, Digital Equipment, Western Auto and TG&Y are just a few that no longer exist).  Having a deep understanding of the numbers means you know the past.  But unless you use that to be adaptive, to prepare for and launch Disruptions, all those numbers simply get in the way of being successful.  You can know all the trees, but end up unable to save the forest.

Marketers are not given their due.  Usually they see market shifts before anyone else.  They are able to generate scenarios that are possible, but often ignored because they require change.  They know the limits of a product, and they realize when the variations and derivatives are getting long in the tooth – causing margins to
slip as the cost of sales and new launches keeps rising.  They also know the company weaknesses and how they must be addressed if the company is not to become irrelevant.  They shouldn't retreat to the bastion of numbers to try and make themselves more likable.  Rather, they should lead the charge to make sure planning is about the future, not the past.  They need to keep executives paranoid about competitors.  They need to constantly bring up company shortcomings left vulnerable due to Lock-in.  And they need to champion test after test after test to keep the company growing.  In these roles, they are more important than anyone else in the company.  And vital to growth and viability.  Without marketers and the application of their skills all companies become out of step with shifting markets and inevitably fail.

So many good die young – SGI, Sun Micro, DEC, Wang, Univac, etc.

How many of these company names do you remember — Sperry Rand? Burroughs? Univac? NCR? Control Data? Wang? Lanier?  DataPoint?  Data General? Digital Equipment/DEC? Gateway? Cray? Novell?  Banyan? Netscape?

I'm only 50, yet most of these companies were originated, became major successes, and failed within my lifetime.  Now, prepare to add a couple more.  In the 1980s Silicon Graphics set the standard for high-speed computing, using their breakthrough technology to open the door on graphics.  There never would have been a PS3 or Wii were it not for the pioneering work at SGI. The company invented high speed graphics calculating methods that allowed for "real-time" animation on a computer, as well as "color fill" and "texture mapping" – all capabilities we take for granted on our computer screen today but that were merely dreams to early GUI users.  But now SGI has disappeared according to the Cnet.com article "First GM, Now Silicon Graphics.  Lessons Learned?"  The company that expanded the high-speed computing market most on SGI's early lead was Sun Microsystems, building the boxes upon which the first all-computer animated movie was made – Toy Story.  But 2 weeks ago we learned Sun will most likely soon disappear into the bowels of IBM ("Final Chapter for Sun Micro Could be Written by IBM" at WSJ.com)

When Clayton Christensen wrote The Innovator's Dilemma he said academics like to talk about the tech industry because the product life cycles are so short.  Actually, he would have been equally accurate to say their company life cycles were so short.  For business academics, looking at tech companies is like cancer researchers looking at white lab mice.  Their lifespan is so short you can rapidly see the impact of business decisions – almost like having a business lab.

What we see at these companies was an inability to shift with changes in their markets.  They all Locked-in on some assumptions, and when the market shifted these companies stayed with their old assumptions – not shifting with market needs.  Like Jim Collins' proverbial "hedgehog" they claimed to be the world's best at something, only to learn that the world put less and less value in what they claimed as #1.  Either the technology shifted, or the application, or the user requirements.  In the end, we can look back and their lives are like a short roller coaster – up and then crashing down.  Lots of money put in, lots spent, not much left for investors, vendors or employees at the end.  They were #1, very good (in fact, exceptional), and met a market need.  Yet they were unable to thrive and even survive – because a market shift emerged which they did not follow, did not meet and eventually made them obsolete.

Today we can see the same problem emerging in some of the even larger tech companies we've grown to admire.  Dell taught everyone how to operate the world's best supply chain.  Yet, they've been copied and are seeing their market weaken to new products supplied by different channels.  Microsoft monopolized the "desktop", but today less and less computing is done on desktops.  Computing today is moving from the extremes of your hand (in your telephone) to "clouds" accessed so serrendipituously that you aren't even sure where the computing cycles are, much less how they are supplied.  And software is provided in distributed ways between devices and servers such that an internet search engine provider (Google) is beginning to provide operating systems (Android) for new platforms where there is no "desktop."  As behemoth as these two companies became, as invincible as they looked, they are equally vulnerable to the fate of those mentioned at the beginning of this blog. 

Of course, their fate is not sealed.  Apple and IBM both are tech companies that came perilously close to the Whirlpool before finding their way back into the Rapids.  When businesses decide their best future is to Defend & Extend past strengths they get themselves into trouble.  To break out of this rut they have to spend less time thinking about their strengths, and more about market needs.  Instead of looking at similar competitors and figuring out how to be better, they have to look at fringe competitors and figure out how to change with emerging market requirements.  And just like they disrupted the marketplace once with their excellence, they must be willing to disrupt their internal processes in order to find White Space where they can create new market disruptions. 

Today, with change affecting all companies, it is important that leaders look at the "lab results" from tech.  It's important to recognize past Lock-ins, and assumptions about continuation (or return to) past markets.  Markets are changing, and only those that take the lead with customers will quickly return to profitability and emerge market leaders.  It's those new leading companies that will get the economy growing again, so waiting is really not an option.