WILL KODAK SUCCESSFULLY PIVOT INTO PHARMACEUTICALS? I DOUBT IT.

WILL KODAK SUCCESSFULLY PIVOT INTO PHARMACEUTICALS? I DOUBT IT.

Yesterday (7/28/20), President Trump surprised a LOT of people announcing that via the Defense Production Act (DPA) the US government is going to give Kodak $765 million to make pharmaceuticals. The tie to current COVID-19 pandemic issues, for which the Act was invoked, is at best tenuous. Somehow the announcement seems to be more about moving pharma production back to the USA. Which is why it left me, and a lot of others, asking “why would you pick Kodak?”

Everyone knows the Kodak story. Great innovator, makes the Brownie and creates an entirely new market called “amateur photography.” From an era when almost nobody had a picture of themselves, Kodak made pictures commonplace. And the company was a wild success. The US Department of Defense asked Kodak to help them develop a way to send photos digitally from satellites to earth, and after spending a lot of taxpayer money Kodak invents digital photography. A very happy DOD allowed Kodak to keep the civilian rights to digital photography. Locked into the profits from film sales, Kodak never develops the products or market and licensed away the technology. Which doomed Kodak to the world of business history books as one of the classic business screw-ups of all time, riding film sales to death and missing the next big market wave.

Over the last 20 years there’s been nothing new to excite anyone about Kodak. They tried launching a blockchain technology-based business for photographers to manage picture rights. Way too late and poorly conceived, and lacking any demand, that went nowhere. Lacking any new ideas leadership grabbed the lightest “shiny new thing” and launched Kodak’s own cryptocurrency “KodakCoin.” Missed it? So did everyone else. In a word, Kodak was going nowhere.

I always recommend watching trends, and then pivoting your strategy to be on trend. So why didn’t the blockchain and cryptocurrency “pivots” work? Simply, Kodak brought nothing to the marketplace. They didn’t identify an un-met or under-met need and try to fill it with a better solution. Kotak just tried to jump into some shiny technology and throw it onto the marketplace hoping someone would think they needed it. They didn’t. So those pivots failed.

Big companies can pivot. IBM pivoted from a mainframe hardware company into a software and services company. And that worked because IBM understood customers had un-met and under-met needs for enterprise applications and Software-As-A-Service (SAAS) use. IBM moved from making expensive, over-developed hardware to meeting a very real customer need, and the pivot revitalized a nearly obsolete company.

Even before IBM, Singer was once a manufacturer of sewing machines. As the 1960s ended home sewing was in a tailspin, and commercial sewing was all going to Asia. Singer had nothing new to offer, while it’s primary competition (Brother) was innovating gobs of new features to make sewing better, faster, easier and cheaper. So Singer sold (all its products, manufacturing, brand name, etc) to Brother. Leadership studied the marketplace and identified a very big, growing and under-met need for defense electronics suppliers. Leadership carefully acquired leading companies with new technologies in forward looking infrared, heads up displays and others to build a leading-edge defense contractor. Note, they first identified an under-met need. Second, (via acquisition) they brought to market a lot of product innovation to improve customer performance in ways not previously utilized. The pivot was built on under-met needs and innovation.

So what is the plan for Kodak? Kodak knows nothing about pharmaceuticals, and their understanding of “chemistry” (to the extent it still exists) has NO application in pharma. (Ever heard of a joint venture called DuPont/Merck designed to apply DuPont chemistry expertise to pharma? I didn’t think so. It didn’t survive.) The plan is to build a company to make the most generic “pharmaceutical ingredients.” Not blockbuster pharmaceuticals. Literally, the very most generic ingredients. Not better ingredients. Not cheaper ingredients. Just make what already exists – and almost assuredly at a higher cost.

These Kodak ingredients are not innovative. Making them is not innovative. The reason “big pharma” doesn’t make these is because they are GENERIC products of low value, and production has moved to China and India where costs are lower. There is no innovation in these products. And Kodak has NO PLAN to add any innovation. None. Not in products, not in manufacturing process, not in markets served or customer service. Nope. Kodak plans to take 3 to 4 YEARS (any idea how fast markets move these days) to develop a plant to make a generic product that is sold on the basis of cost.

The only way this works, at all, is if the government forces, by regulation, U.S. pharma companies to buy from Kodak (in 3 to 4 years when they supposedly can make the stuff.) Otherwise, why pay the higher price? Today, American politicians constantly decry the high U.S. drug prices. So we are to expect that $765 million of taxpayer money will be spent on a plant, to make a generic compound, readily available in the world today, at a higher price, that will then be forced into American pharma products making them EVEN MORE EXPENSIVE! This is exactly how America ended up with the Bath Iron Works to make Navy ships which are the MOST expensive in the world – and thus wholly non-competitive in commercial ship production.

Does this not sound …… problematic? If we need U.S. based manufacturing for these products every single pharma company in the USA could open a plant faster, manufacturing at lower cost than Kodak, and with no quality or other regulatory concerns. There literally is no need for Kodak to become a supplier in this supply chain. And – absolutely no reason the U.S. taxpayer should be expected to teach Kodak how to “pivot” into becoming a new company. If the White House wants to use the D.P.A. to make more generic pharma compounds then it can push [insert any pharma company name you like here] to do it like they pushed G.M. to make ventilators!

Net/net – this is a pivot, and Kodak desperately needs to pivot. But this will not be a successful pivot. Because it is not targeting an unmet or under-met need. It is not utilizing innovation to create a better solution for meeting customer needs. This is making a generic product, that is readily available, at a higher cost than it is available today. Who wants this?

I’m sure Kodak shareholders are happy. Today. But this is a train wreck. Don’t expect this plant to ever make it to fruition, as the pharma companies will unwind this deal long before Kodak makes anything. And if we’re lucky, taxpayers will get some of their money back. But who knows, because this is a really stupid idea.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)

Give us a call or send an email.  Adam@sparkpartners.com

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.

Sour Lemons, or Lemonade? – Playboy, Singer


Playboy’s Circulation drops 34%” is the Chicago Tribune headline.  Is anyone surprised?  If ever there was a brand, and business, that was out of step with current markets it has to be Playboy.  That the business still exists is a wonder.  But let’s spend a few minutes to see why Playboy has fallen on hard times, and what the alternative might have been – and could still be.

The Playboy Success Formula is really clear.  Since founded by Hugh Hefner, the company has focused on titillating the male libido with a magazine that focused on pictures of naked women, videos of same (physical videos, on-line videos and television), radio talk shows about sex, and alternative lifestyle issues such as recreational drug use.  At one time this was unique, and in a male dominated 1960s it was even tolerated. Although never mainstream, the business was very profitable early in its lifecycle.  Thus the founder kept doing more of the same, building a small empire and eventually taking the company public.

But the market shifted.  Larry Flint and others ushered in a new era of pornography altering the market for prurient, sexually oriented material.  Women in the workforce – and I’d like to think a heavy dose of decency – made public toleration of such material unacceptable.  You couldn’t read a Playboy at work, or on the airplane, and you wouldn’t have a business lunch at their clubs.  Other magazines sprung up to deal with men’s interests in automobiles, clothing, music, sports, etc. in a more acceptable – and for most people more significant and intelligent – manner.  Other lifestyle publications were developed that discussed illicit drug use and non-traditional ways of life more directly, explicitly and with greater advocacy.  The advent of cable TV and then the internet increasingly made access to the key features of Playboy’s product readily available, very inexpensive (often free) and targeted at niche audiences. 

Yet, despite these many market changes, Playboy’s founder and his daughter, the company CEOs for 40+ years, steadfastly stuck to their old Success Formula.  They kept thinking that people wanted those “bunny eared” products.  They talked a lot about the heritage of Playboy, how it broke ground in so many markets, and opened the door for lots of new competitors.  But they kept doing what the company always did – including foisting upon us the ever aging founder as a “role model” for male menopause and the anti-family aged entrepreneur.   Playboy today is what it always was – and there simply aren’t a whole lot of people with much interest in those products any more.  Nobody mismanaged the brand, the market just walked away from it.  Sort of like the demand for Geritol.

Playboy focused on its core.  And now its on the edge of bankruptcy.  The company keeps outsourcing more and more of the work, as the staff has dropped to nearly nothing, cutting costs everywhere possible.  Sales continue to decline, and the brand looks like it will soon join Polaroid and Woolworths on the heap of once famous but floundered companies.  Playboy’s fatal mistake wasn’t that it was started as a prurient men’s magazine – but rather that for 40 years its leadership kept Defending & Extending that original Success Formula despite rather dramatic market shifts.  Now, today, Playboy is a sour lemon that not many a marketer would want to be stuck promoting.

But – it didn’t have to be that way.  Just imagine if you’d been given control of Playboy 30 years ago.  What could you have done?

As soon as Hustler hit the newsstands, and the first women’s right protests developed – including the early push for the Equal Rights Amendment – it was clear that the future of the magazine was in jeopardy.  Instead of doing “more of the same” could you have considered something else?

The growth of women in the workforce meant a lot of new opportunities.  Why not jump onto that bandwagon?  If you’re really at the forefront of “lifestyle” issues, as the leadership claimed, then you would have identified that women in the workforce meant something new was brewing – a group of consumers that would have more cash, and more influence.  And not only would that be an appealing market, but so would the men who would be adjusting to new lifestyle issues as homes became dominated by 2-worker leadership.

Playboy was well positioned to be Victoria’s Secret. At a time before anybody else was really thinking about a significant market for attractive and comfortable lingerie Playboy certainly had the leading edge.  Or, even more likely, the water carrying publication for Dr. Ruth-style discussions about sexuality.  There was an emerging market for information targeted at increasingly affluent women about automobiles, stereos, apartments, resume writing, job hunting and even at-work etiquette — all topics that had been the dominant discussion areas for Playboy’s historically male readership.  Had the leadership at Playboy opened its eyes, and scanned the horizon for growth markets being developed as a result of the trends which were negatively impacting it, these leaders would have been able to create a bevy of scenarios that were filled with opportunities for growth.

It’s hard to imagine today Playboy being anything else.  But all that stopped stopped Playboy’s evolution was a commitment to its “core” – to its old Success Formula.  That the CEO for over 20 years was a well educated woman is testament to the power of “core” philosophy versus a willingness to look at market opportunities.  By keeping Playboy’s Success Formula tightly aligned with her father’s founding ideas she quite literally led the company into smaller and smaller sales with less and less profit.  The big loser was, of course, investors.  Playboy is worth very little today as Mr. Hefner hints at making a bid to take the company private once again. 

Singer was once a sewing machine company.  But when Japanese products surpassed Singer’s product capabilities and achieved a cost advantage in the 1970s, Singer leadership converted Singer into a defense contractor.  And Singer went on to multiply its value before being acquired by General Dynamics.  

IBM was an office machine company famous for mechanical typewriters and adding machines.  The founder said he would never enter computers.  Fortunately for employees and shareholders the founder’s son took the company into computers and the company flourished as competitive typewriter companies such as Smith Corona – stuck on the core business – disappeared.

There’s a time for lemons – in your tea or on a salad.  But when markets shift, lemons just turn sour.  If you want to succeed long-term you have to shift with markets.  And that might well mean making significant change.  Adding water and sugar to the lemons is a good start – as lemonade is less about lemons than what you’ve added to it.  After you open that lemonade stand, see where the market leads you

No matter where you start, every day offers the opportunity to head toward new, emerging markets.  No matter what your historical “core” you can literally become any business you want to become.  Coke was founded by a pharmacist who wanted to boost counter sales in his store – and it was worth a lot more than the pills he was constructing.  Those who develop scenarios about the future prepare for market shifts, understand the competitive changes and use them to identify the opportunities for a new future.  Then they use White Space teams to move the business into a new Success Formula.  Anybody can do it.  You could even have remade Playboy.  So what’s the plan for the future of your business?  More of the same …. or …..

Innovate to Grow – Amazon, Apple, Google, Shell

I was struck to learn that most people with a growth plan simply think they will sell more to customers in existing markets.  About 2/3 of respondents to a Harvard study.

Growth plans 7.09

Chart from Harvard Business School Publishing

But we know that not only you, but your competitors are all hoping to sell more to the existing market!  This is the fodder for price wars, and declining returns.  When we think we can somehow eke more out of existing customers – even if we think we'll take them a new product – we are ignoring competitors.  As a result, we rarely get the growth.  The results are pre-ordained, when everyone is trying to do the same thing all you get is a war to Defend your existing business!

The encouraging sign is that about 40% of respondents are considering new markets.  And that's a good thing.  A GREAT Wall Street Journal article "The New, Faster Face of Innovation" tells us that everyone has the opportunity to apply more innovation today At length this article explains how today's computer deep, networked world allows for testing of almost everything, almost anywhere, pretty nearly continuously, for very small cost.  The biggest obstacle to testing more options, trying more innovation, is the self-imposed limits management puts on the tests!

Now, more than ever, businesses need to be oriented on growth.  But that doesn't mean entering gladiator style battles to see who can win, usually coming out the bloodiest, battling in existing markets.    Quite to the contrary, now is the perfect time for trying new things to connect with shifted marketsPeople are looking for new solutions to their problems, and willing to evaluate more options than ever.  But management Lock-in to traditional notions about the market – set at an earlier time, under different conditions – will often keep a company from trying new things, entering new markets, testing new solutions.  Too often management wants to remain "focused" on its "core offerings" and "core strengths" creating the gladiator-style environment!

Use innovation to test!  Leaders need to let lower level managers test new optionsThe most important thing leaders can do today is give PERMISSION to the organization to create new options, and the RESOURCES (now smaller commitments than ever) for testing those options.  These become White Space projects where we can forget the conditions which initially created the old Success Formula and find out what works NOW.  Those companies that are willing to Disrupt Locked-in notions about how markets should behave will use these market tests to create the most desirable solutions in the future.  And these companies will come out the winners.

Just think like these folks:

  • Amazon retailer creating the Kindle e-reader
  • Apple computer creating iTunes and the iPod
  • Google search engine creating AdWords for on-line advertising placement
  • Singer Sewing Machines becoming a defense contractor
  • Royal Dutch Shell Petroleum building wind farms

[And, like I wrote in my latest Forbes article, this will work for health care as well

http://tinyurl.com/pkupxv]

The One thing Sun Micro Did Wrong – and why it can’t survive

$193billion dollars.  An amount that seems only viable for governments to discuss.  But that is how much the value of Sun Microsystems declined in less than one decade (see chart here).  At the height of its dominance as a supplier to telecom companies in the 1990s Sun was worth over $200billion.  Recently IBM made an offer at just under $8billion.  But Sun has rejected the IBM bid, which was more than double its recent market value, and Sun is now worth only about 60% of the bid.  An amazing loss of value for a company that never paid a dividend.  And the failure can be tied to a single problem.

Forbes magazine is having a field day with the leadership at Sun these days. "Sun May Be Pulling a Yahoo!" the magazine exclamed on Monday when Sun said it was turning down the IBM offer.  The similarity is that both companies turned down values at above market price, but both probably won't receive offers from anyone else.  The difference, however, is that Yahoo! has a chance to compete with Google, and Microsoft would have suffocated those chances.  Sun, on the other hand, won't survive and the only way investors will get any value is if Sun agrees to the buyout.

Reinforcing the thinking that Sun won't make it on its own, Forbes today led with "Sun's Six Biggest Mistakes" which decries recent (last 4 years) tactical failings of the company.  But in truth, Sun was destined to fail 8 years ago – as I argued clearly in my book Create Marketplace Disruption (buy a copy from my blog or at Amazon.com.)  The company never overcame Lock-in to its initial Success Formula, and when its market shifted in 2000 the company went into a nosedive from which no tactical changes could save it.

Scott McNealy was the patriarch of Sun Microsystems.  Son of an auto executive, he had a love for "big iron" as he called the large, robust American cars of the 50s, 60s and 70s.  And when he started Sun Microsystems he imbued it with an identity for "big iron."  Mr. McNealy wasn't interested in creating a software company, he wanted to sell hardware – like the days when computing was all about big mainframe machines.  His might be smaller and cheaper than mainframes, but the identity of Sun was clearly tied to selling boxes that were powerful, and expensive.

Everything about the company's development linked to this identity (see the book for details).  The company strategy was tied to being a leader in selling hardware systems.  First powerful desktop systems but increasingly powerful network servers.  Iron that would replace mainframes and extend computing power to challenge supercomputers.  All tactics, from R&D to manufacturing and sales tied to this Identity.  And because the products were good, and met a market need in the 80s and 90s, this Success Formula flourished and reinforced the Identity

A lot of new products came out of Sun Microsystems.  They were an early leader in RISC chips to drive faster processing.  And faster memory schemes and disk array technology.  These reinforced the sale of hardware systems.  The company also extended the capabilities of Unix software, but of course you could only buy this enhanced system if you bought one of their computers.  Sun even invented Java, a major advancement for internet applications.  But then they gave away this software because it didn't reinforce the sale of their hardware.  Sun felt that if everyone used Java it would generally grow internet ue, which would grow server demand, which would help them sell more server hardware – so don't even bother trying to build a software sales capability.  That did not reinforce the Identity, so it wasn't part of the Success Formula.  Everything leadership and the company did was focused on its core – Defending and Extending the sales of Unix Workstations and Servers.  It's hedgehog concept was to be the world's best at this, and it was.  Sun intended to Defend & Extend that Identity and its Success Formula at all costs.

But then the market shifted.  The telecom companies over-invested in infrastructure, and their demand for Sun hardware fell dramatically.  Workstations based on PC technology caught up with Sun hardware for many applications, rendering the Sun workstations overpriced.  Makers of PC servers developed advancements making their servers faster, and considerably cheaper, meaning Sun servers weren't required or were overpriced for company applications.  Within 2 years, the market had shifted away from needing all those Sun boxes, causing Sun sales and market value to collapse

Sun made one mistake.  It never addressed the potential for a market shift that could obsolete its Success Formula.  Sun never challenged its Identity.  Sun leaders never developed scenarios that envisioned solutions other than an extended Sun leadership position.  They only looked at competitors they met originally (such as DEC and SGI) and when they beat those competitors leadership quit obsessing about new comers, causing them to miss the shift to lower price platforms.  Although Scott McNealy was an outrageous sort of character, he created lots of disturbance in Sun without creating any Disruption.  People felt the heat of his presence, but there was no tolerance for anyone who would shed light on market changes (especially after Ed Zander was installed as COO).  Nobody challenged the Success Formula.  Nobody in leadership was allowed to consider Sun doing something different – like selling software profitably.  And thus, there was no White Space in Sun.  No place to with permission to do new things, and no resources to do anything but promote "big iron."

When any company remains tied to its Identity and its Lock-in failure will eventually happenMarkets shiftThen, all the tactical efforts in the world are insufficient.  It takes a new Success Formula – maybe even an entirely new identity.  Like Virgin becoming an airline rather than a record company.  Or Singer a defense contractor rather than a sewing machine company.  Or maybe something as simple as GE becoming something besides a light bulb and electric generation company – getting into locomotives and jet engines.  The one big mistake made by Sun can be made by anyone.  To remain Locked-in too long and let market shifts destroy your value.