On Failure
I’m fascinated by the stories of company failures. For me (as I’d hope it is for most) it’s not professional jealousy but rather a opportunity to learn. Another plus — learning from the mistakes of others is a lot less painful than learning from your own.
Companies succeed through a combination of hard work, good luck and timing, but how does a well-established company at the top of its game manage to lose its way?
Survivorship Bias is the theory that we tend to focus on success stories and not examine enough the ones that ended in failure. Alistair Croll brought up a great example at a LeanUX talk I recently attended. As the story goes, during the Second World War the Allies studied the bullet hole patterns in returning bombers with the intent of adding additional armour to those areas. Then someone pointed out that these were the planes that made it back, and in fact what they should be doing is adding protection to the undamaged areas. Planes that suffered damage in these areas were the ones that didn’t come home, so their vulnerabilities weren’t studied.
So, to extend the analogy to business, let’s look at some former high fliers and see where they took the heaviest fire.
When I was cutting my teeth in print design in the mid-’90s QuarkXpress claimed to have 95% market share of the graphic design/layout market. Quark and Photoshop were pretty much all we used. But through a series of compounding strategic mistakes, Quark opened the door for InDesign to completely take over the market. This excellent post by former Vice Magazine art director Dave Girard spells out Quarks downfall in great detail. It’s a great story.
Every so often Daring Fireball’s John Gruber digs into a topic with a feature-length post. In Microsoft, Past and Future Gruber suggests that ‘Peak Microsoft’ occurred sometime around the year 2000, when Windows, like Quark, had 95% of the market for desktop operating systems. But signs that Microsoft has been unable to evolve to the new computing landscape, claims Gruber, are everywhere. 15 months after launching Windows 8, sales were a third lower than Windows 7 during the same period. Chief architect of Windows 8 Steven Sinofsky, fired. Ballmer stepped down.
“It is difficult to get a man to understand something, when his salary depends on his not understanding it” — Upton Sinclair
Gruber suggests Ballmer was guilty of Sinclair’s folly by not accepting how fundamentally the iPhone changed the landscape, how iPads and smartphones would impact the PC market, and later, his inability to effectively lead Microsoft through that change.
The open hostility of the various decisions at Microsoft is widely known. How this has affected Microsoft’s ability to innovate and respond to the market has never been better illustrated than a 2010 NYTimes Op-Ed by former Microsoft VP Dick Brass. (read the whole thing here: Microsoft’s Creative Destruction)
“When we were building the tablet PC in 2001, the vice president in charge of Office at the time decided he didn’t like the concept. The tablet required a stylus, and he much preferred keyboards to pens and thought our efforts doomed. To guarantee they were, he refused to modify the popular Office applications to work properly with the tablet. So once again, even though our tablet had the enthusiastic support of top management and had cost hundreds of millions to develop, it was essentially allowed to be sabotaged. To this day, you still can’t use Office directly on a Tablet PC. And despite the certainty that an Apple tablet was coming this year, the tablet group at Microsoft was eliminated.”
Consider that. Microsoft had a 10-year jump on Apple in building a tablet computer, and spent hundreds of millions of dollars doing so. And yet Microsoft’s top executives failed to address internal — INTERNAL — conflicts that doomed a project costing hundreds of millions of dollars. Not only did they fail to manage the internal conflicts, they failed to grasp — or ignored — what these conflicts meant to the success of their project.
Here is one of my personal favourite stories on this theme. Think of how absurd it is that Sony, dominant in electronics in the 70’s, and inventors of the ubiquitous Walkman cassette player in the 80’s, somehow missed the market for personal MP3 players. While Sony hardly qualifies as a failed empire, the story of how they fell from such a dominant position in the consumer electronics sector is fascinating, and it goes all the way back to the loss of Sony’s Betamax format to the VHS standard.
Sony’s strategic mistake was to bet that Betamax’s superior picture quality would win the day, standing pat while the competing VHS consortium invested heavily in exclusive or first-rights content deals. Consumers voted for the more tangible benefit — better access to content — over the less tangible picture quality. Eventually Sony effectively exited the consumer VCR market (though the Beta technology continued to have a good run as a commercial format, where quality was an issue and pre-recorded content wasn’t).
Believing they had made a strategic mistake in not having control over a significant content library, Sony’s US division spent over $5B in 1987 and 1989 to purchase CBS records and Columbia Pictures. Sony’s goal was to use content as the carrot to encourage consumers to adopt new recording formats they had developed, including consumer DAT and MiniDisc.
But neither format caught on with western consumers, and the significant library of content Sony had amassed became a millstone in the company’s ability to adapt to the rise of file sharing and the MP3 format. Despite clear evidence that there was a huge market for a Walkman-like MP3 player to hold the billions of music files being shared by music fans, Sony muddled along with other manufactures developing MP3 players that held a couple of dozen songs at best. Sony was no longer an innovative electronics company — they couldn’t be. They had the financial interests of a huge content division to think about. This led to Sony’s DRM requirements — any songs you put on the device had to be re-encoded in Sony’s proprietary format, a terrible user experience that ensured their MP3 players wouldn’t grow beyond niche status (and let’s not forget Sony’s infamous rootkit scandal).
Sony as a company was hamstrung by it’s unwillingness to allow its separate divisions to compete openly against each other. In fact, at one point during the Napster era, an association of major record labels (including Sony Music) launched a suit against multiple electronic manufacturers (including Sony Electronics). Sony was, in effect, suing itself.
“We own the market.”
Undoubtedly Quark, Microsoft and Sony made that statement repeatedly during the good times — and they were always wrong. A company does not control a market. A company with 95% share of a given market is only there by the grace of its customers. Should a better or cheaper competitor be successful at communicating its benefits to new customers, market share shifts, sometimes dramatically so.
The folly of these business empires is mistaking dominance for power. The automotive Big Three failing to respond to the superior quality of Asian imports. Blackberry for chasing new markets while failing to aggressively innovate to deliver new value to its existing customers. The music industry, for attempting to litigate out of existence a technology that customers clearly loved. Customers hold the power. They always have. A company that is not organized from the top down at ensuring they are responding to the market is an empire ripe for a fall.
- posted April 7, 2016
Originally published at https://www.linkedin.com.
