by Adam Hartung | May 21, 2007 | General, In the Rapids, Leadership, Openness
In January of this year I blogged about the White Space prevalent in the highly Disruptive Virgin culture. Sir Richard Branson has built an empire from small beginnings by constantly Disrupting his organization and creating White Space. Many high paying jobs have been created, and lots of money made for investors, due to this Phoenix Principle culture.
But there can be a definite downside if a Phoenix Principle culture is not managed well. Disruptions and White Space can be opportunities to overspend, and overinvest, leading to losses and failure. White Space is not child’s play. It is where new Success Formulas are formed via the crucible of competition. It is critical that managers in these environments have their "feet held to the fire" to produce results. Otherwise, cash flow is negative and profits never materialize. That’s bad news.
All businesses need a mix of Explorers and Stabilizers. Explorers usually become in short supply in Locked-in cultures, because optimization of the old Success Formula says that these kinds of managers are unnecessary. So Locked-in companies have to recruit Explorers to identify and create Disruptions, and then to have the skills for managing the creation of a new Success Formula.
White Space companies, and projects, need Stabilizers as well. Activities need to be disciplined and directed toward managing for cash flow and profit in the Rapids. As we saw all too well in the 1990s internet boom, too many Explorers make short shrift of these requirements, and their businesses simply flame out.
And that risk is now at Virgin Media. Using clever planning and intense hard work, Virgin Media has built itself into a large and powerful company that delivers mobile phone service, land-line service, internet service and satellite television service across Europe and other parts of the world. The company has made several growth-oriented acquisitions in the process, and those acquisitions have saddled the company with a huge debt load (see article here). This is big trouble for a business in the media game, because assets are not long-lived. So the debt payments go on after the technology needs to change – sucking up cash that should be used for changes and growth. Virgin Media is now losing money, and forced to make debt payments, while its primary competitors (the Murdoch-controlled Sky and British Telecom) are in far healthier financial shape. This is a risky situation, that may require someone buy out Virgin Media or it risks a precipitous decline that will be bad for Virgin as well as its investors, suppliers, employees and customers.
In the headlong rush to grow at Virgin Media, the managers may have been short a sufficient number of Stabilizers. The Explorers, which are sure to be popular in the Virgin culture, have been allowed to push the company growth. But now the entire Virgin Media organization is at risk. If there had been a more balanced management, with more Stabilizers, it is very likely the company would be in better financial shape and more competitive.
Everyone loves a party. And we all want to have a good time. But, if someone gets drunk the party can come to a crashing, unpleasant end. White Space can not be run like a party. It is a business. And if there aren’t Stabilizers around to control the consumption of resources, then the White Space business can find itself crashing.
by Adam Hartung | Apr 26, 2007 | Disruptions, In the Rapids, Leadership, Openness
Lately I’ve been pretty hard on companies in this blog, so today I’m taking time to highlight two examples of companies following The Phoenix Principle on the road to long-term evergreen success.
Firstly is Motorola (see chart here). As previously blogged, Motorola is under attack by corporate raider Carl Icahn who would like to borrow a lot of money and pay it, as well as existing cash, out in a special dividend to investors. In other words, do to Motorola what Sam Zell is doing to Tribune Company. In the face of this effort, Motorola announced Tuesday it is buying Terayon Communications Systems to gain more capability (specifically software for delivering video) to it’s television set-top box business (see article here). Keep in mind, in 2009 the television system switches from analog to digital and the demand for set-top boxes to go with all the existing analog TVs is sure to grow – possibly exponentially. This acquisition is a great example of continuing to fund the White Space in a market that is in the early stages of the Rapids. Now that’s a great use of corporate cash – and will provide a real return to Motorola investors. If Motorola leadership and investors can keep the shark away.
Secondly is J.P. Morgan Chase (see chart here.) J.P. Morgan Chase is run by Jamie Dimon. Mr. Dimon is a very colorful character well known for short patience. When Jack Welch institutionalized White Space he was nicknamed Neutron Jack. Mr. Dimon may someday get a similar monicker for his willingness to Disrupt his own people and organization. And this week J.P. Morgan announced the acquisition of technology company Xign (see article here). Xign has been a pioneering company in developing the e-payments system for automated commercial (or busineess-to-business) transactions. This is projected to become a $1.7 billion market by 2010, even though you may never have heard of Dynamic Discount Management (DDM for short). Here we see a Disruptive leader investing in a new business opportunity at the front end of very high growth – exactly the kind of White Space that should excite investors. Compare this with the actions taken by J.P. Morgan’s primary competitor – Citigroup – last week when they laid off 5% of their work force and starting shutting offices and centralizing decision-making in order to protect their faltering old Success Formula.
Far too many leaders use Defend & Extend Management and kill the growth of their company. They manage for protection of the old Success Formula and wipe out all capabilities to Disrupt. They refuse to invest in White Space in favor of trying to prop up the old Success Formula. But there are reasons to be optimistic. There are companies using The Phoenix Principle and positioning themselves to migrate their Success Formulas forward to meet new Market Challenges. You just have to keep your eyes open and look.
by Adam Hartung | Mar 26, 2007 | General, In the Rapids, Leadership, Lifecycle, Openness
You probably never heard of Glunz. Profiled recently in The Chicago Tribune (see article here), Glunz is a beer distributor. What makes the company interesting is how this 120 year old family owned-and-operated business has succeeded despite severe market Challenges. And it’s due to keeping White Space alive continuously, not just looking for solutions when problems develop.
Founded in 1888, Glunz has overcome a series of market Challenges. Just imagine facing these:
– in 1930 their business was outlawed by the passage of prohibition in the 13th ammendment to the Constitution. Rather than giving up, the company found opportunities in medicinal alcohol, sacramental wine and home brewing kits.
– After building a business as the national distributor of Schlitz, that brand collapsed in the 1970s due to a raft of articles on production errors and bad quality. But the company had already started distributing Stroh’s – a local beer out of Wisconsin – and they expanded Stroh’s in Schlitz place.
– But then Stroh’s was bought out, and disappeared. Yet again, years of effort had already been put in place to develop a relationship with Coors to distribute their beer and Glunz was ready to move when the Challenge came.
– But then Coors, being a big company, decided one day to drop Glunz and predicted the company would be dead within 6 months. Only Louis Glunz had already begun preparing for such a scenario and he had developed a relationship with Rolling Rock, a Pennsylvania beer with east coast cache but no market in the midwest. And so Glunz rolled out Rolling Rock to great success in stores and bars.
– Only to have Rolling Rock acquired by Annheuser-Busch last year – yet another Challenge. But again, Glunz had already started looking at beer imports they could grow as a replacement for Rolling Rock. Now Glunz distributes Stiegl, Stella Artois, Becks and Tecate.
2007 sales are expected to reach $30M, more than double sales of $13M in 1992 when Coors yanked their beer from Glunz distribution.
Any one of these market Challenges could have been a compeny-ending act. But Glunz has thrived because the leadership constantly maintains White Space. Instead of putting all their "focus" on the business at hand, and putting everything at risk on that one business, Glunz constantly maintains openness to new opportunities. Each of these might have grown Glunz into a much bigger business had the setbacks not occurred. But instead, they allowed Glunz to thrive very nicely despite horrific Challenges.
Business of all sizes and ages get Locked-in to their Success Formula. The Lock-in creates blinders have them moving too late when Challenges develop. Glunz is an example that even very old companies with tremendous heritage, and small companies that aren’t sitting on billions in resources, can be open to new opportunities. These small and older companies can, in fact, seek out new opportunites on a constant basis so as to be prepared no matter how the market shifts and turns. By keeping White Space constantly alive your chances for success greatly improve.
by Adam Hartung | Mar 24, 2007 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Readers of this blog know I’ve been a real fan of Motorola. I’ve waxed eloquently about the Disruptions implemented by the new CEO when he came to the company in 2004. And likewise I’ve been an endorser of the multiple White Space projects he implemented (see previous blogs on Motorola for details.) But this week, lots went the wrong direction at Motorola.
Motorola reported that it would have a loss for the first quarter of 2007 (see article here.) That means the clock is now ticking on what might be a growth stall. As previously written here, companies that hit growth stalls have only a 7% chance of really ever growing again. Motorola stalled badly in the late 1990s and early 2000s, and they were rebounding when this loss hit. The risks are great here – and there should be no doubt about it. If the company posts another down quarter next, the odds are getting slim on success.
What went wrong at MOT (see chart here)? Firstly, White Space must be managed toward success. While the company implemented a lot of White Space, and the impact showed in a dramatic turnaround from the situation in 1999, management did not hold White Space accountable for results. White Space is not an excuse to let results falter. Rather, management should have been aware of the precarious predicament in the large mobile phone business and PUSHING White Space to produce rapid results. As recently as this week, the very week that the bad results were reported, Motorola was expected to be announcing plans to buy PALM in yet another expansion of White Space to grow the company. But this looks much less likely now, because leadership opened White Space but did not manage it effectively.
Secondly, Ed Zander failed to Disrupt himself while Disrupting Motorola. When arriving at Motorola he moved fast to Disrupt. Of course, Disruption was "normal" at Sun Micrososystems where he used to work. Chronic Disruptions were part of the Success Formula at Sun, and became part of his Success Formula. But Sun got into big trouble when it became overly committed to a single market in network servers. Unfortunately, Motorola was allowed to be too committed to a dependence on mobile phones. What we now see is that while Mr. Zander was OK with Disrupting and opening White Space, he did not actually Disrupt his personal Success Formula and change the way he believed a business should be managed.
Once confronted with the threat posed by Mr. Icahn, Mr. Zander approved a quick $4.5billion stock buyback. And now he’s agreed to an even larger $7.5 billion buyback (see article here) – representing 75% of Motorola’s cash reserves. And he’s put in place a President and COO from inside the company – a sign of creating distance from the Disruptions and White Space he implemented (see article here) .
These are not good signs. I’ve had high hopes for the White Space at Motorola. If we recognize where the company was just 3 years ago, it has traveled a very successful road. The question now will be does leadership have the will to continue its road of Disruption and White Space to create a more successful Motorola? Will it follow through on the acquisition of PALM, given the current Challenges? If it does, and management holds the White Space leaders to business demands for results, Motorola can become again a great company. If it keeps following its recent trends – retrenching to Defending and Extending its mobile phone business and acting to protect management – then recent gains will be quickly unwound.
by Adam Hartung | Mar 4, 2007 | In the Rapids, Innovation, Leadership, Lifecycle, Openness
About 6 months ago I blogged on White Space at Anheuser-Busch (see Surprising Juxtaposition here.) This last American-owned large brewer has had its stock go nowhere for the last few years (see chart here) as it has battled fierce competition in a consolidating and changing marketplace. Anheuser-Busch found it had slipped into a price war for volume. But more recently the compaqny has turned toward White Space to improve performance.
Anheuser-Busch has just taken another stepped up its White Space efforts by deciding to enter the beer market in India (see article here.) An important White Space project for several reasons:
- Moving offshore gives Anheuser-Busch more diversity of competition. The company will learn from new competitors about everything from product options to distribution and pricing alternatives.
- India, in particular is a great markt to learn. Competition is FIERCE. Prices are universally low, the currency is low (giving no break to mistakes), distribution is highly fragmented and much of the demand comes from poor people who have severe limits on what they can spend. Ninety percent of shampoo sales are made in single service sachetes which sell for less than $.01 each at thousands of small retailers. In consumer goods it’s been said "if you can sell at a profit in India you can make a profit anywhere." Now that’s a great place to learn.
- India is the fastest growign middle class in the world. While the American middle class is growing at 2-3%/year, rising economic prosperity in India is creating a growth rate exceeding 10%/year. And this is augmented by the fact that over half the population is under 30 years old, creating an expanding market for Anheuser-Busch products.
- In India beer = Kingfisher. Many of us who travel to India avoid all drinks with ice or from a fountain because of sanitary concerns and poor water quality. So the universal call for fluid refreshment, in a country that is constantly hot, is "give me a Kingfisher." Thus, India provides a great market in need of competition against a dominant product.
I’m sure the path to succes won’t be easy. In addition to the daunting distribution and competitive challenges mentioned earlier, Anheuser-Busch must learn to deal with terrible infrastructure (intermittent electric power, bad water treatment, terrible roadways, poor refrigeration), complex government bureaucracy overseeing business, hierarchical government entities that too often have corruption, strong Communist and Socialist government participants and districts, distrust of American interlopers, a vast array of advertising channels to a highly heterogenous media environment, 30+ languages in a single country, a propensity for unending negotiation as a culture and a completely dysfunctional legal system.
But the important thing is that none of this stopped Anheuser-Busch. And that’s what White Space is all about. Phoenix Principle companies identify a market opportunity and then jump in to learn. Not just for what can happen in that new market, but what it can teach the company overall. Possibly even how to develop a new and better returning Success Formula.
by Adam Hartung | Jan 28, 2007 | Disruptions, General, In the Rapids, Leadership, Openness
How can we recognize a Phoenix company? One that will sustain its success for a prolonged period? We can start by looking at the one and only company which has been on the Dow Jones Industrial Average ever since it was created. The one company that has overcome Schumpeter’s dire predictions of individual company failure, and demonstrated it is possible to earn above average rates of return for extended time and simultaneously grow. That company is General Electric.
A recent article on GE’s Medical Devices business (see article here) highlights key characteristics of how to overcome Lock-in to an existing Success Formula by internally Disrupting and using White Space. Mark Morita is the Manager for Disruptive Technologies within this GE business. Mark is not an engineer, nor is he in product development. GE recognizes that it must maintain a powerful group always focused on making incremental improvements in their products and markets. But, they simultaneously must have a Disruptive focus that can produce breakthrough results.
And that is where Mark comes in. Mark Disrupts the engineers by introducing technologies from entirely other fields. While they attend medical equipment conferences, Mark attends gaming and consumer electronics conferences. While they try to make sonogram machines that are 10% lighter or 10% cheaper, Mark looks for ways to make them the size of a GameBoy at less than half current cost. His role is not only tolerated in GE – it is mandated. All across the many GE businesses they maintain roles which are dedicated to attacking Lock-In and Disrupting the existing Success Formula. Mark and his counterparts constantly keep the GE businesses operating White Space to create new Success Formulas leading to growth.
Jack Welch, the famed former CEO of GE, had the nickname "Neutron Jack." This referred to his willingness to Disrupt GE in order to seek above average results and growth. No business was sacred in GE, and no market was beyond their reach. Welch constantly Disrupted GE from within, and kept Lock-in from leading to deteriorating performance. It wasn’t mere goal-setting that kept GE dynamic, it was an institutionalized practice of internal Disruption and extensive use of White Space. New CEO Jeffrey Immelt is now continuing that practice, with dramaticly large recent acquisitions of about 2/3 of Abbott Labs (medical diagnostic equipment) and Smiths Group (aerospace) while indicating he plans to sell the $10B plastics business (see article here).
Even a huge company, such as GE, can operate according to The Phoenix Principle and sustain success. The Phoenix Principle does not apply only to small companies, nor those in high-tech markets. Any company can achieve and sustain success if they are willing to identify their Success Formula and Lock-ins, attack those Lock-ins with programs designed to generate internal Disruptions, then fund White Space in which permission is given to develop new Success Formulas. These steps may seem mundane, but those who follow them can become the next GE – and that would not be a bad thing.
by Adam Hartung | Jan 21, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Walgreen’s is the kind of company that can make an investor very worried. It’s an "old fashioned" retailer, and the company has certainly seen dramatica changes in its markets. Over the last decade, we have changed how we purchase licensed pharmaceuticals, as well as how we think about "drug stores" as many competitors have begun offering to fill prescriptions. The "corner pharmacists" has practically disappeared. Is Walgreen’s a company on the brink of disaster?
As I’ve written before, look for a growth stall. Any time a company sees declining revenue or profits for 2 or more consecutive quarters, or two or more quarters of declining year-over-year sales or profits, the company enters a growth stall. When this happens, there is a less than 7% chance the company will ever again sustain growth of a meager 2% per year. Interestingly, Walgreen’s has not stalled. This despite all the changes in insurance rules about drug payments, the advent of on-line and mail-order pharmacies, corporate moves to drastically cut employee drug costs, the entry of new competitors such as discount retailers (WalMart and Target) and just about every grocer, and competitor moves to offer generic drugs at extremely low prices.
At its recent annual meeting (see article here), the new CEO very clearly identified many of these influences as Challenges the company must face. He followed this up by listing all the actions Walgreens had taken to set up White Space projects to maintain company growth, which include but are not limited to: digital photo processing, refilling printer ink cartridges, introducing exclusive department store type cosmetics, and now even opening in-store health care clinics for walk-in customers. As the CEO, Jeffrey Rein said, "We’re testing everything we possibly can to see what happens, to see what does work. We don’t know until we put it out there." After a very clear statement that the company faces many market shifting Challenges, similarly clear statements about using White Space to drive new growth.
This new CEO is not an outsider by the way. He’s a 25 year company veteran. So it’s clear that companies can internally develop leaders who can recognize Challenges, Disrupt and establish White Space. Whether Walgreens can maintain its 32 years of ongoing growth is no sure thing. The fact that the company has not stalled however is a great testament to identifying Challenges and reacting. As a company that is facing tremendous Challenges, Walgreen’s leadership is a model of how to keep up the growth by using White Space.
by Adam Hartung | Jan 12, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
My last blog led to a reader comment "Can there be White Space without Innovation?" (click here to read full comment) Quite simply, I don’t see how. Of course, innovation is a term open to wide interpretation. Some think that innovation requires a huge breakthrough invention, a new product, or a never-before-seen business model. Maybe a patent or a copyright. In fact, innovation simply means introducing a new way of operating for yourself or your customers. Defined this way, we can innovate in all parts of our business model, and innovations can be "small" or "large". What’s important about White Space is that we use innovation processes to attack old Lock-ins and develop a new Success Formula.
Take for example Foulds, a 121 year old $25million revenue company that makes pasta in Libertyville, IL (see full article here.) Pasta is far from a "high-tech" business. And the distribution channels are extremely stable and well known. Suppliers are HUGE agribusinesss competitors like Cargill, and customers are HUGE supermarket chains like Jewel, Dominick’s, Safeway and Kroger. Many competitors are extremely well funded such as New World Pasta that spend millions of dollars on ad campaigns for Prince and Creamette brands. In this competitive situation, the world changed in the late 1990s when the Atkins diet craze swept across America and many people stopped eating pasta entirely. Suddently, Foulds was facing a stagnant market, surrounded by industry forces much, much better resourced than they were.
The easy answer for Foulds would have been to drop into a price war to drive volume. Or to have dumped money into advertising – largely to no avail. Or possibly closing shop, or looking for a buyer to "consolidate" the industry. Doing "more of the same" to Defend & Extend the 121 year old business model would have led to loss of share to the big players and possibly failure. So, company CEO Chris Bradley opened White Space in the company he ran. He allowed his employees to face the Market Challenge, and atack the Lock-ins so prevalent. In their effort, the team overcame commitment to a century-old recipe for pasta. They experimented with different ingredients and then different manufacturing processes (literally adjusting the time-proven work of generations). In the end they developed a pasta with 6 times the normal fiber of regular pasta and a taste and texture that is considered better than what dry pasta was like before.
This new pasta is not a patentable product. And it doesn’t open some new "food category." But it does allow people who seek a high-fiber, high-protein and healthy product for their diet to eat pasta – something not allowed on some diets at all and heavily restricted on others. And this innovation has helped the company to not only deal with the Market Challenge, but actually to thrive. Foulds recognized a Market Challenge, Disrupted its Lock-in to old recipes and hand-made manufacturing processes, and then gave permission to the team to innovate a new Success Formula which could appeal to a shifting market. The value of White Space is that it gives innovation a place to flourish, a place to succeed, by intentionally acquiring permission to break old Lock-ins and thereby develop a new Success Formula that incorporates innovation – of any type or scale that addresses Market Challenges.
by Adam Hartung | Jan 5, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle
Boy, Motorola‘s stock had a rough day today. The company announced lower than expected earnings, and the price dropped 7.8%! A recent chart (see here) shows this has been the extension of a slide that started back in October, with the latest decline bringing the free fall to over 25%! Wow. Meanwhile the DJIA and NASDAQ 100 have all gone up substantially. This is ugly. Should you sell the stock if you’re an investor?
If you’ve read this blog a while, you probably know that I’m recommending you don’t sell Motorola. In fact, consider buying more. Why would I say that – and what do I see that all these other investors don’t? Well, just take for example the MarketWatch article on Motorola (see here). It’s all about mobile phone handsets. Although volume is up, and Motorola is taking share from competitors, it’s prices have gone down and thus revenue and profit have been hurt. The companion article on new products at Motorola (see here) also talked only about handsets. Merrill Lynch issued a report on Motorola, cutting its rating to Neutral from Buy, and through several pages of analysis the only discussion was about sales of mobile handsets. All of these would lead you to believe that all Motorola does is make and sell mobile handsets. But we know that’s not true.
Why, just before Christmas (12/21/06) Motorola announced its acquisition of Tut (see here), a company that helps Motorola’s Network and Enterprise unit expand its market in IPTV and the "connected home" marketplace. Tut helps telephone companies get into the TV business, and enriches the communications at the home. Tut built upon Motorola’s earlier acquisition of Symbol Technologies (9/20/06 see here.) And that, of course, had expanded the acquisition of General Instruments in 2000 that made Motorola a major player in the DVR business (see here). Don’t forget, Motorola also bought Good Technology (11/11/06 see here) which gave them a boost in the mobile communicatinos business we think of now as "blackberry." Now Motorola is not only in the network, data and video technology for businesses, but home use as well. Both growing at double digit rates annually.
Simultaneously, Motorola has been expanding its R&D in new ways. They have expanded development operations in Brazil (see here) as well as India (see here.) And don’t forget their 2006 partnerships with Kodak and Google to develop and launch new products (see here.)
And the company has expanded other very large and growing businesses. Have we forgotten that Motorola makes the infrastructure equipment for mobile phones (and all other mobile devices) and they recently won the deal to rebuild the Sprint network (8/9/06 see here.) Have we forgotten that Motorola is #1 (by a huge amount) in the radio systems for Police, Fire, Ambulance and other safety services? And that business got a shot in the arm after 9/11/01 when the government asked to connect these systems – leading to Motorola’s launch of MotoVision as a product which can link these emergency services and is now rolling out across the U.S. (see here.)
Motorola is much more than a handset business. And even that is growing – and gaining share on all competitors. Motorola isn’t a story of a company stalling. It’s a company that has been investing in multiple White Space projects simultaneously as it expands into new businesses and finds new opportunities. Yes, these need to produce higher revenues and higher profits. And it is important Motorola learn how to forecast its sales dollars and earnings to help investors know what to expect. But we must not lose sight of the fact that Motorola is a company that is growing, at double digit rates, and earning above market average rates of return on its sales. It has put in place a new management team (new CEO and new Marketing head – see articles on Zander as 2006 CEO of the year here and on Keller here ) who are willing to bring Challenges to the fore and use Disruptions to drive new innovation.
Motorola has attacked old Lock-ins head on. It has established White Space, and is developing new markets to expand its sales. Now, and in the future, mobile handset sales are only a part of the business. It’s time Wall Street analysts, news reporters and investors take a broader view of Motorola. Anyone who does should see "a future so bright they need to wear shades."
by Adam Hartung | Jan 3, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle, Lock-in
Did you buy any CDs this Christmas? If you did, the odds re you didn’t buy as many as you did in previous years. A freefall in sales of physical music products (CDs and music DVDs) has been going on since 2000. (For more data see Chicago Tribune article here.) That year CD sales peaked at 942 million units. By 2005, the volume was down to 705 million – a full 25% decline! And sales were off an additional 15.7% in the first six months of 2006.
Meanwhile, according to the Recording Industry Assocition of America, Sales of digital singles increased 71.3% in the first half of 2006. Since inception in 2003, sales of iTunes have reached a staggering 1.5BILLION songs – making Apple Computer Company the 4th largest music seller in the U.S. According to ComScore networks (see more data here), sales at iTunes increased a whopping 84% in the first 3 quarters of 2006. According to the V.P. of communications at RIAA, Jonathan Lamy, "This is a markeptlace that went from nothing 3 years ago to this year surpassing a billion dollars in retail revenue" (quote from Tribune.)
You have to wonder, why is Apple capturing all these sales and all this value? After all, they didn’t invent MP3 technology – the format that made digital music possible had been around for several years before Apple created its iPod version of the music storage and playback device. Likewise, Napster had gone on to great infamy demonstrating the huge demand for a digital music site years before iTunes was launched. Obviously it wasn’t a technology breakthrough that gave Apple this big success.
Furthermore, before Apple launched either iPod or iTunes Sony had already been a long-term leader in consumer electronics. Sony’s famous Walkman, Discman and other products had pioneered portable music. Sony had a global distribution for its products in stores of all types, including its own. And Sony was a brand synonymous with quality in consumer electronic devices and music playback. Sony even owned its own music label, and a huge archive of popular songs as well as contracts with several popular artists. Sony had all the pieces to create and dominate the digital music business. But it didn’t.
Sony was, and is, trapped in its Lock-in. The company had two separate division for hardware and software (music), and the two didn’t talk to each other. Worse, both divisions committed to the old music industry Success Formula, and had Locked-in on the physical distribution method for selling music (CDs). [For White Paper on music industry Success Formula and Lock-in visit here.] Both feared cannibalization more than they sought breakthrough solutions, as Sony joined EMI, RCA and others in suing Napster into oblivion during 2000, hoping it would stop digital music sales and help them regain sales and profits.
Today the traditional music companies are still Locked-in, and Apple is making enormous profits. Like Southwest in the airline industry, Apple is simply doing what the market wants and is reaping huge benefit because the most likely, and most powerful, competitors are more interested in preserving Lock-in than succeeding. Just because competitors are large, and well funded, and full of good product development does not mean you can’t effectively compete against them. When markets shift Lock-in often means that the most logical activity – that of existing competitors reaping the benefit – is often NOT what occurs. And it makes enormous markets available for new competitors to develop new Success Formulas that create above average returns.
