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.

Winners and Losers from Shifts – Apple, Amazon, Microsoft

One of the biggest business news items this week was the launch of Apple's iPad for $499.  Although perhaps overlooked by many big companies, and several IT departments.  To some businesspeople, the iPad seems another consumer toy, thus not terribly noteworthy.  Some see it as a small-market share sort of oversized iPhone for mobile telephony/data use.  One executive commented to me this week "I don't understand why anyone cares, I don't own an iPhone and cannot imagine why I would ever want to download an app,"  He has a huge investment in Microsoft technology, has never used an iPhone or Palm Treo or even a Blackberry.  Hes' never seen an iPhone app, and was amazed when I told him 1 billion had been downloaded.  He's comfortable in his traditional IT solution, and doesn't see the importance of iPad.

But the iPad is another step demonstrating a big market shift is happening.  With Apple's announcement, Amazon announced that it's sales of Kindle are about twice what most analysts had expected – see "During Apple Week Google and Amazon try to Remind You They Exist" at Fast Company.  Further, it appears now that for every 10 books Amazon sells, it sells 6 Kindle books — a substantial number and indications of serious market change.  The iPad is half the price most people expected, and now rumors are Kindle's will drop to $100 as competition heats up.  It rapidly appears that while there is an emerging battle between Amazon and Apple, the biggest insight is that the market for BOTH is growing a whole lot faster than anyone expected.  As are iPhone sales.  These devices, and the technology solution embedded within them, are grabbing a lot of buyers, and quickly.  The sales, in units and dollars, are growing much faster than anticipated.  And new users are flocking toward this technology platform.

Thus, the iPad is likely to be a big winner for Amazon and Kindle – as well as Google.  It is expanding the application base, and use patterns, for mobile devices.  It is expanding the product breadth and price points.  Quite simply, it is helping people do new things they couldn't do before – especially when mobile – that they could not do before.  As a result, apps will grow and sales of both hardware and software will grow.  And early adopters will gain an advantage as they use this new technology to create advantages for their customers.  Apple and Amazon are both "winners" who are driving revenue and profit growth.

And Microsoft loses.  Microsoft has never changed its Success Formula.  Its Identity, Strategy and Tactics remain as they've been for three decades – to provide a one-stop near monopolistic, integrated (mainframe style – and certainly monolithic) solution.  As the market has been shifting, however, this has been less and less successful.

Chart-of-the-day-microsoft-stock-during-steve-ballmers-leadership
Source:  Silicon Alley Insider

As the chart shows, Microsoft's product strategies, product introductions, acquisitions and management changes have done nothing for growth – or valuation.  Microsoft keeps trying to do what made it great in the late 80s and early 90s.  But since then, the market has shifted dramatically and the sustaining innovations Microsoft has offered, while meeting customer requests for improvement, haven't really helped growth. 

The cost of this Lock-in has been horrific.

Chart-of-the-day-microsoft-operating-income
Source:  Silican Alley Insider

Microsoft has poured billions of dollars into a failed approach intended to Defend & Extend its Success Formula – but to no avail.  The market is going a different direction – toward cloud computing with its distributed data, extremely small apps at very low (disposable) prices, easy to use interfaces and greatly lower device cost.

Even as large and cash rich as Microsoft was in 2000, it cannot stop a market shift.  And even though this shift has been predictable, with competitors from the fringe like Google, Amazon and Apple bringing to market new products, Microsoft has chosen to try Defending & Extending its Success Formula rather than Disrupt and use White Space to develop new solutions.  What can we expect from Microsoft in the future?  Unfortunately, more of the same and most likely a dramatically deteriorating value.  When the market's shift to these thin devices with a different architecture becomes clear, the inability of System 7 and Bing to make any difference in Microsoft results will be clear.  And investors are likely to run for the proverbial hills – letting the stock price drop along with new users.  Microsoft will increasingly be dependent upon legacy applications and maintenance – markets with little/no growth.  Microsoft could soon be the next Unisys (remember that company?)

So, what is your company doing?  Are you moving forward with new apps which will grow your revenues and profits?  Are you looking for ways to use these devices, and the underlying mobile computing architectures, to offer your customers better solutions?  Are you bringing out new approaches that are potential game changers, bringing new customers to you and accelerating growth?  Or are you trying to Defend & Extend your old processes, approaches and products?  Are you planning a future that will be PC/laptop centric, and delivering traditional web pages?  Are you following the laggard, Microsoft, or are you Disrupting your business, and market, with White Space projects that will change market behaviors using these new technologies and positioning you as the market leader?  In 2015, will you look like Microsoft – frozen in place as the market shifts – or will you look more like Google, Amazon and Apple with new solutions that create excitement and new sales?

Have you tried a Kindle yet?  iPad?  iPhone?  Do you have any White Space wher
e you are trying these new things?  Have you Disrupted any of your organization and challenged them to apply this technology?  Exactly what are you waiting on?

Recognizing Lock-in – Be worried about Dell

In "Why Apple Can't Sell Business Laptops" Forbes gives the case to be pro-Dell.  The author points out that Dell has 32% of the computer market within companies that have more than 500 employees.  He then explains this happens because Dell makes machines that are constantly the next generation beyond the previous laptop – a little better, a little faster, a little cheaper.  Comparing the new Lenovo Z to the Mac Air, the author concludes that anyone who sits in a corporate office, with a lot of corporate IT requirements, who wants the next small laptop would find it easiest to fit the Dell product into their work.

He's right.  Which is why investors, employees, suppliers and customers should worry.

Everything described is Lock-in.  Dell has focused on big IT departments, and sells products which cater to them.  Dell is listening to its dominant customers.  Each quarter Dell gets more dependent upon these customers – and walks further out on the PC gangplank when servicing their needs. 

But, large corporations are laying off more workers than any other part of the economy.  Both in absolute numbers and as a percentage of employment.  They are not the "growth engine" or the companies that will lead us out of this recession.  And while Dell caters to these customers, Dell is missing major shifts that are happening in how people use computers.  Shifts that are already demonstrating the market for traditional laptop technology is waning.

In PC technology, people are moving away from laptops and toward netbooks.  By far, netbooks have overtaken laptops as users shift how they access the web and get work done.  Additionally, people are moving away from traditional computing platforms for lots of things, like email and web browsing (to name 2 big ones), and using instead mobile devices like Blackberry and iPhoneApple appears to be very careful to not chase the netbook curve, instead appearing to advance the mobile device curve with future iPhones and a possible Tablet product. 

As Dell keeps getting closer and closer to its "core" customers, its customer and technology (traditional PC) Lock-ins are making it increasingly vulnerable.  When users simply stop carrying laptops, what will Dell sell them?  When corporations move applications to cloud computing, and users no longer need their "heavy" laptop, where will that leave Dell?  

The Forbes writer made the big mistake of measuring Dell by looking at its past – and glorifying its focus.  But this points out that Dell is really very vulnerable.  Technology is shifting, as are a lot of users.  The author, and Dell, should spend more time looking at the competition — including solutions that aren't laptops.  And they should spend more time building scenarios for 2015 to 2020 — which would surely show that having a better "corporate laptop" today is not a good predictor of future competitiveness for changing user needs.

Apple keeps looking better and smarter.  Instead of going "head-to-head" with the PC makers, Apple is helping users migrate to mobile computing via different sorts of devices with better connectivity (the mobile network) and lighter interfaces.  They are providing applications that support a wider variety of user needs, like GPS as a simple example, which make their devices addictive.  They are pulling people toward the future, rather than trying to hold on to historical computing structures.  As the shift continues, eventually we'll see corporate IT departments make this shift – just as they shifted to PCs from mainframes and minicomputers throwing IBM and DEC into the lurch.  As this shift progresses, the winners will be those with the solutions for where customers are headed.  And Dell doesn't have anything out there today.