Killing Your Business While It’s Still Working: That (Kodak) Moment
“There is at least one point in the history of any company when you have to change dramatically to rise to the next performance level. Miss the moment, and you start to decline.” Andy Grove
When organisations are disrupted, leaders sometimes claim they did not see it coming, but most were aware of the noticeable trends. In many cases of disruption, organisations had explored disruptive innovations but decided not to act. They sometimes even invented the same technologies that ultimately disrupted them.
Many organisations invite trend analysts, authors, consultants and futurists to their offsites to expand the minds of the senior teams. These speakers do a great job, and the teams are left enlightened and open to future possibilities. Very few senior teams take significant action. The gravitational pull of the present prevents them from reallocating adequate resources to the future. Time and time again, even the best-managed companies fall behind, either because of missed strategic opportunities or a failure to implement significant change.
One of McKinsey’s most widely read pieces of research established that companies that rapidly re-allocate capital to new growth businesses outperform those that take an incremental approach. Despite the clear benefits of proactive change, only a tiny minority of farsighted firms initiate such change before performance declines. When confronted by a crisis, most companies act decisively, but when it comes to the faint signals of a potential threat, they struggle. The problem for most businesses is that most trends emerge so slowly that companies generally fail to respond until it’s too late, but there was a point when they could have acted. This is what Andy Grove’s advice means, “There is at least one point in the history of any company when you have to change dramatically to rise to the next performance level. Miss the moment, and you start to decline.”
Another reason many businesses fail to reinvent is an understandable reluctance to sacrifice today’s certain revenue (even if it is shrinking) for tomorrow’s uncertain one. Even still, some brave leaders are willing to take the bold step. In this Thursday Thought, I share an example of those who seized the moment and others who did not.
That Kodak Moment
Kodak’s failure to adapt to digital photography has made them a poster child of failed strategy. Kodak leadership was not only aware that significant change awaited the company but couldn’t make the difficult decisions required to navigate that change. In their case, Kodak held an early advantage. Heck, they even invented it. Our previous guest on The Innovation Show, Steven Sasson, created the world’s first digital camera while a young employee at Kodak. Yes, like many inventions, it was expensive to replicate, clunky, and the pictures were grainy, but it was a clear signal from the future, one that Kodak chose to ignore.
Kodak could not bring themselves to let go of their hard-fought heritage, film, chemicals, and paper. In addition, that heritage had been generating gross margins of more than 60% for a long time. A significant transformation would mean a period of shrinking revenues, a challenging winter before a new spring. It would also mean a cull of life-long colleagues, friends, perks and positions, a difficult decision for leaders.
“If you find yourself with a favourable industry trend, then you should ride that trend as hard as you can. If, however, you find yourself with an unfavourable industry trend, you might need to consider changing your industry or changing industries.” — Sven Smit, The Innovation Show.
If you face a disruption of the scale that Kodak did with digital photography, you have only two options: Transform your industry or vacate it to furrow new pastures elsewhere. Neither is easy.
The PolyGram Playbook: Kill It While It’s Still Working
“We have to be willing to cannibalize what we’re doing today to ensure our leadership in the future. It’s counter to human nature, but you have to kill your business while it is still working.” — Former Hewlett-Packard CEO Lou Platt
Many of our guests on the Innovation show laud the permanent reinvention mindset of Philips, Michael Tushman and Charles O’Reilly, Paul Nunes and Sven Smit. In our recent series with Paul Nunes, he tells us that in 2006, Philips (ahem) dimmed out its incandescent lighting business while it was still profitable. Philips recognised that LEDs would eventually surpass incandescents in cost-effectiveness. The company acquired smaller LED-focused companies, growing the LED business to nearly $7 billion. In 2016, they spun off their new lighting businesses into Philips Lighting (now Signify).
When faced with that Kodak moment, Philips expanded into the healthcare industry, focusing on diagnosis and treatment equipment. By 2017, most of their revenue came from this sector, particularly high-end medical equipment. Philips made this transition smoothly due to careful planning and early adoption of a balanced portfolio strategy.
In the early 1990s, former CEO of Philips, Cor Boonstra, identified another crucial moment for his PolyGram business unit. Boonstra and his team acted decisively. Polygram Records was one of the world’s top record labels at the time, with a roster boasting Bob Marley, U2, and top classical artists. Like Kodak, Polygram was part of Philips’ heritage. The record label was founded in 1962 as the Grammophon-Philips Group by Philips and Siemens, renamed “PolyGram” in 1972.
But Boonstra knew evolution doesn’t much care for heritage and flew to New York in 1998 to meet with Goldman Sachs. This meeting led to the sale of PolyGram to Seagram for $10.6 billion. Surely Philips could have milked some more profits out of the business? Why sell so early?
Boonstra and Co. paid attention to those early signals. Like many organisations, they had paid for proprietary research, but this team took action. In this case, it was research conducted by Philips’ optical storage business, showing that consumers mainly used the new recordable CD-ROM technology, which Philips co-invented, for one purpose: to copy music. This was before Napster, MP3s and digital music, and PolyGram was still at the top of its game. How did it play out? US CD and DVD sales dropped by over 80% within a decade.
Philips seem to have this foresight in their DNA, but their successful shifts to rising tides are because they paid attention to bubbling trends. Many leaders are time-constrained, overworked and overwhelmed to see the forest for the trees. These leaders see trends, and they are interested in them, but understanding them is not the same as acting on them. It is not easy, but it is essential.
THANKS FOR READING
That Sven Smit episode:
Our latest episode, the finale of our series with Yossi Sheffi::
