Wednesday, May 02, 2012

On the death of great companies

On the 1st May, 1840 a revolution in industry was started by the introduction of the Penny Black. This simple postage stamp caused a dramatic explosion in communication from 76 million letters sent in 1839 to 350 million by 1850. It wasn't a case that postal services didn't exist before but the Penny Black turned the act of posting a letter into a more standard, well defined and ultimately ubiquitous activity.

The introduction caused a spate of copy cat services through the world, with the US introducing their first stamps in 1847. The 125 million pieces of post sent through their system in that year mushroomed to 4 billion by 1890. From stamps to street letter boxes (1858) to the pony express, railway deliveries (1862), money order and even international money orders by 1869.

The humble stamp changed communication forever. But it wasn't alone. Telegraph lines which later enabled the telephone which later enabled the internet have all led to corresponding explosions of communication.

In all cases it wasn't the invention of the system (the first stamp for example being created by William Dockwra in 1680) but instead the system becoming more standard, well defined and more of a commodity which created the explosion. Each time, we've experienced one of these communication changes we've also experienced significant industrial change. The growth in postal services and telegraph lines coincides with the Railway and Steam Engine era where diffusion of new machine concepts became rampant.

Of course, the origin of industrial steam engines started in the earlier first industrial revolution which itself arguably started with Maudslay's screw cutting lathe and the introduction of interchangeable mechanical components. By providing mechanical components as more of a commodity, we saw a growth in new machine industries and new manufacturing processes. From the Plymouth system for manufacturing which later became the Armory system in the US, an entirely new method of manufacturing was started by the humble nut and bolt.

The point of this tale, is there is a simple pattern to change. It is when an activity becomes ubiquitous and well defined (whether postage stamps, mechanical components, electricity, currency or mass communication mechanisms such as the internet) then as a consequence we see an explosion of new industry and new management practices. Often many of these changes overlap because of interdependencies for example the age of electricity was really the age of steel, electricity and engineering. Today's internet age is really the age of internet, cloud and most likely 3D printing.

Our economy is governed by waves of change which are regular in impact but irregular in terms of time i.e. we cannot predict when they occur just what the impact will be. Their effect can be local to an industry or at a macro-economic level. Each wave in turn is driven by a standard process of evolution which itself is driven by competition between users and suppliers.

The effect is always the same.

A once innovative activity become more of a commodity and a component that enables new higher order industries to develop. Interchangeable mechanical components beget steam engines beget utility electricity beget modern electronics beget the internet. With each cycle, new management practices appear from the Armory System to Fordism to Web 2.0.

Each wave also involves three distinct phases. Beginning with a time of war when disruptive change exceeds sustaining and new entrants commoditise an industry precisely because they're not encumbered by an existing business model. This is followed by rapid growth in new industries built upon the components produced by these new players. This is followed by a time of peace, where sustaining change exceeds disruptive change and those new industries that formed settle down until the next wave starts.

What controls these stages is inertia, both user and vendor, to the change. Those companies that developed in the growth phase to become dominant players in the peace phase also build up huge inertia barriers to change because of their past success. It's why those companies tend to be disrupted in the next phase of war and why we all gasp - "But [Kodak / Blockbuster / add your favourite] was such a successful company once".

Of course, our gasping in amazement of failure is overtaken by our gasping in amazement of wonder as the growth phase enables new industries to form. Whether it's in the electricity age and Hawkin's comment on how it brought about the dream of magic (electric lights, radio, telephone) or the internet age and the growth of companies like Google, Apple and Amazon or even to today with the commoditisation of IT through cloud and the rapid changes we are experiencing.

Competition begets evolution begets past history begets inertia begets disruption begets another wave of change.

The consequences of this, the changing nature of work and disruption of past skills such as the gas lamp lighters disrupted by electricity, the fears over what people will do such as Hawkins concerns that electricity would lead to mass unemployment and strife for the average worker to the arguments over classification of the abundant data that the change creates from Cutter vs Dewey to NoSQL vs SQL, are all part of the same cycle.

Change and reoccurring consequences of change are a constant in life.

In business, one thing we have to always be mindful of is our inertia to such change. The attempts to recreate the past rather than adapt to the future is almost always behind the death of great companies. For example, when your business revenue is stagnating or falling, a "peace" time mentality is to reduce costs to regain profitability. That's fine if you're industry is in a “peace” stage of the cycle, however if instead the activities you provide have evolved to more of a commodity and a war phase has been initiated then such cost reduction strategies are often fatal. That's the tricky thing about management strategies, what works well in one phase is often fatal in another.

This is why many in the hosting industry will not survive the onslaught that Amazon, Google and others are creating in the cloud computing space. For those in that space it is a time of war and as any general will tell you, if your lines of red coats are being outgunned by a smaller guerrilla force then cutting down the size of the army won't make things better, you'll just lose the war faster. The problem is your strategy and techniques - those lines of red coats may have worked in the past but no more. You must adapt.

Even great companies like Microsoft struggle with inertia and past success. I would suspect it is a testing time for their CEO because on one hand the company has a successful past that their culture celebrates but on the other hand their past business models are in danger of demise. Adapting to the new techniques of growing ecosystems based around commodity services and exploiting open source as a tactical weapon are not options but a necessity for survival. In our modern world, even the old stalwarts such as Porter's three strategies seem long gone with companies such as Amazon using ecosystems to become simultaneously innovative, customer focused and efficient.

Whilst parts of Microsoft are clearly adapting with the recent creation of an open source entity and its steps into the cloud, other parts still fall back on old techniques such as the recent exposure of lobbying efforts in the UK open standards consultation. Open source is not the real enemy of Microsoft instead 'old' Microsoft is.

The past unfortunately rarely goes quietly because it has all the evidence to show you how good it was and the future, well that hasn't happened yet and so it's dismissed as gut feel. Failing to deal with this past is lethal, ask Kodak. Despite its early leadership in digital still cameras, it was a combination of catastrophically poor management, inertia from past success, an absence of a good strategy and weak execution that dragged the company down. You can blame markets, culture or anything else which makes it more palatable but the problem was a failure of the CEO to see the storm that was coming and to lead that company to new pastures despite the company's insistence to stay put.

Adapting to an environment basically boils down to a judgement call of a CEO and a willingness to drive that change through, however execution is also critical. Whilst the biggest enemy to a company's future survival is often its own past success, this can be reinforced by external markets and analysts. Even if your strategy is close to perfect any flaw in execution can be seized upon. As in the case of HP, its CEO Leo Apotheker was ousted because of poor execution combined with external pressure and a board that buckled too quickly. This doesn't bode well for HP, they have weak positioning.

Equally you can push it too fast. No-one should be in any doubt over the necessity of NetFlix to divide into an online and traditional media delivery business as a precursor to focusing solely online. However, a couple of poor moves and customer inertia to the change was whipped up into a storm by analysts. NetFlix's Reed Hastings had to pull back from that strategy … well, at least for the time being.

From the postage stamp to electricity to the internet, there's a long long list of great companies that failed to adapt to the new world that was created around them. So, will Microsoft be among that list? At this stage of the cycle it all depends upon the CEO. If the culture isn't dealt with, if Microsoft fails to adapt, if the board buckles to external pressure, if Steve Ballmer continues on the existing path ... well lots can go wrong. If it didn't then great companies would never die.
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