Creative Destruction is not inevitable – Kodak, Hostess, Microsoft

by | Jan 14, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership

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.

Recognizing Lock-in – Be worried about Dell

by | Oct 1, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech

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 iPhone.  Apple 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.