Listen to this story
Attend just about any business conference today and you’ll hear a familiar tale of woe. A once great corporation, which had dominated its industry, fails to adapt and descends into irrelevance. The protagonists of these stories always come out looking more than a little silly, failing to recognize seemingly obvious business trends.
The problem with these stories is that they are rarely true. It takes a considerable amount of intelligence, ambition, and drive to manage a large organization. The notion that these people overlooked what was obvious to everyone else is overly facile and simplistic. It’s also misleading.
Great companies do not fail because of a single decision or trend. The roots of disruption are always more complex. By imagining CEOs of failed companies as morons, we neglect to look more closely at their demise and learn valuable lessons from their mistakes.
In truth, every business model fails eventually. We need to discover the real sources of failure in order to overcome it.
What they don’t tell you about Blockbuster
A favorite pundit punching bag is Blockbuster. The story, as they tell it, is that Blockbuster was blind to the threat Netflix represented. It subjected customers to predatory late fees and failed to formulate a strategy that would help it adapt to the digital world. Not surprisingly, the once-mighty company descended into chaos, then bankruptcy.
The truth is much more complex, interesting, and troubling. As former CEO John Antioco explains in the Harvard Business Review, after initially dismissing Netflix as a niche player, his team soon saw the writing on the wall and moved to discontinue late fees and invest in an online platform.
Senior leadership came up with a viable strategy but couldn’t manage the internal forces that derailed it.
Eventually, the team came up with a strategy that began to beat Netflix at its own game. It was called Total Access and allowed customers to rent videos online and return them in stores. It immediately gained traction, and before long Blockbuster was adding subscribers faster than Netflix.
So what happened? Investors didn’t like the costs associated with the program (about $400 million), and franchisees were wary about the threat to their businesses. Things came to a head when, in 2007, Antioco stepped down after a compensation dispute with Carl Icahn, Blockbuster’s Chairman of the Board. His replacement, Jim Keyes, reversed the strategy to focus on the retail operation and the company went bankrupt three years later.
Notice the difference. The way the pundits tell it, if the silly fat-cat executives had been paying attention all would have been well. The less convenient reality is that senior leadership came up with a viable strategy but couldn’t manage the internal forces that derailed it.
Did Kodak really ignore digital photography?
In 1975, a young engineer at Kodak named Steve Sasson invented the digital camera. At first, it wasn’t much to look at, weighing eight pounds and able to produce pictures of only 0.01 megapixels. (Today’s iPhones produce 12-megapixel images.) He estimated at the time that it would take 15 to 20 years for the technology to become viable.
The pundits’ version of what happened next is predictable. Being a silly big company with its head in the sand, the firm failed to pursue digital photography. New upstarts took over the market and prospered, while Kodak vanished into irrelevance. The company filed for bankruptcy in 2011.
Once again, the truth is more complex. The company did, in fact, pursue the digital photography business in a serious way. Its EasyShare line of cameras was among the era’s top sellers. It also invested in quality printing for digital photos. The problem was that it continued to make most of its money on developing film, a business that completely disappeared.
It’s tough to say what Kodak could have done. The only company that really seems to have profited from digital photography is Facebook, and it’s hard to see how Kodak could have had a competitive advantage in building social networks. The only real solution would have been to invent an entirely new business to replace its cash cow. That’s easier said than done.
Today Kodak still exists. Its business focuses on imaging services for the corporate market, where I’ve heard it’s gaining traction.
How Xerox lost the future
One of the most legendary stories in the history of technology is that of Steve Jobs and Xerox. After the copier giant made an investment in Apple, which was then a fledgling company, it gave Jobs access to its Palo Alto Research Center (PARC). He then used the technology he saw there to create the Macintosh. Jobs got an empire, Xerox got nothing.
Yet again, pundits’ version of the story shows a big, stupid company outsmarted by a wily young entrepreneur. The truth is that by the late 1960s, Xerox found itself in a situation very much like Kodak. Its platform, built on top of highly profitable large copiers, was burning. In order to survive, it sought to invent “the office of the future.”
Pundits like to tell simple stories because they supply easy answers. If you believe that Blockbuster, Kodak, and Xerox were run by stupid, silly people, then you can avoid their fate simply by not being so silly and stupid.
Its answer to the problem was the Xerox Star, a system that was far ahead of its time. Unfortunately, it was much too expensive for a product that did little more than automate secretarial work. It would take another decade for hardware costs to decline enough and for the software application ecosystem to become developed enough to make Xerox’s vision possible.
What’s missing from the story is that PARC delivered on its mission. In fact, it saved Xerox from the fate of Kodak. While its copier business was disrupted by smaller Japanese competitors like Canon and Ricoh, one component of the Star system, the laser printer, replaced the revenues lost from its cash cow and Xerox continued to grow. It also earned millions from licensing technology it invented and, it should be noted, from its investment in Apple.
We can learn from mistakes, not fairy tales
Pundits like to tell simple stories because they supply easy answers. If you believe that Blockbuster, Kodak, and Xerox were run by stupid, silly people, then you can avoid their fate simply by not being so silly and stupid. Once you start mucking up the story with the subtle complexities of reality, those simple, easy lessons no longer ring true.
Yet the reality is that each one of these stories has important lessons to teach us. Blockbuster shows that a strategy isn’t enough, you have to effectively manage internal networks so that the strategy doesn’t get derailed. Kodak shows us that it’s more important to prepare than adapt. Digital photography could have never replaced the photo developing business. It had 20 years to invent a new market but never did.
In many ways, the most interesting case is Xerox. It really did invent the future, but it failed to realize the full potential of its technology because it pursued the wrong market. When you have something truly new and different, you need to look for new and different customers. In this case, it was mostly kids and enthusiasts, not corporations, that provided the initial market for personal computers.
Most importantly, these stories show that running an organization of any significance is incredibly complex and difficult. There are no easy answers. So whenever anybody tells you they could have saved a multibillion-dollar enterprise with a simple, easy fix, you should have some questions. Reality is messy.
An earlier version of this article first appeared at Inc.com.