The annals of business history are replete with the names of once great companies that dominated an industry, only to lose pre-eminence and become shadows of their former selves or even disappear. Understanding why powerful companies fail and how to avoid such failure is one of the holy grails of business and management research, not to mention having spawned an enormous and lucrative consulting industry. Yet, the very fact that successful companies continue to fail is testament to an incomplete understanding of the drivers of corporate demise.
Examples of failed giants are abound. Nokia in mobile telephony, Yahoo in internet search, Sanyo and Sharp in consumer electronics are some popular examples.
“Ringtone: Exploring the Rise and Fall of Nokia in Mobile Phones”, a recent book which won the 2018 Academy of Management’s prestigious Terry Book Award, charts and analyses Nokia’s journey. With a perspective with over 20 years of research at Nokia Mobile Phones; a business that shaped an industry it came to dominate with one of the strongest brands in the world, only to all but disappear in a fire sale to Microsoft.
The researchers found that found that what leads a company down a competitive dead-end is a combination of management decisions, organisation adaptation and industry evolution, with each playing a more or less prominent role over time, and the inter-dependencies between them becoming lethal.
1. Management Choices
Management choices obviously contribute to a company’s decline, but it isn’t just the decisions of the incumbent management team that play a role. The seeds of strategic stagnation are usually sown by management choices made a decade or so earlier. It is these decisions that lead to the problem-solving techniques that utilize self-educating techniques (heuristics), commitments which were made earlier and unchangeable and excessive overconfidence due to their previous successes that create a context in which future action is taken.
Strong heuristics, particularly from the unconscious or unintended learning a company experiences as it grows and overcomes crisis situations, become implicit ‘principles’ in decision-making. So, for example, in its early days, having invested huge sums in technology development, Polaroid found there was a very limited market for its expensive instant cameras and certainly not one large enough to sustain the company.
In the face of this crisis, Polaroid adopted a film-first, ‘razor blade’ model whereby it sold cameras at cost but made a huge margin (around 70 percent) on the film for its cameras. This simple heuristic, that only film makes money, became entrenched and shaped future management decisions for the next 30 years. Even though Polaroid recognized the need to invest in digital technologies as early as 1985, successive management teams framed the challenge too narrowly in terms of ‘printing’ digital images rather than producing affordable cameras to capture images (as Japanese competitors Sony and Canon were doing). After numerous CEOs, restructurings and ‘new strategic directions’, Polaroid filed for bankruptcy.
Poor and inadequate cognitive framing can also result from ‘creeping commitments’ – past decisions to which a company becomes hostage and which sets them on a direction from which it is difficult to deviate.
Here, Nokia’s Symbian operating system provides a good example. Initially adopted by a consortium of mobile phone producers in 1998 in a bid to stave off the threat of Microsoft entering the industry, over time Nokia’s commitment to and continued investment in this device-centric operating system had a profoundly negative impact on its ability to adapt to a platform and ecosystem approach.
Success tends to breed hubris and this, in combination with the voracious appetites of certain classes of shareholder, can lead to managers focusing on the operational issues which will drive greater efficiency for the benefit of short-term results and not long-term sustainability and growth.
This is what happened at IBM under the leadership of Sam Palmisano, who was so focused on doubling shareholder returns every five years he failed to see, or acknowledge, that the competitive environment was changing. With no response to this shift, IBM was in serious trouble – although this wouldn’t become apparent to the outside world until a few years later.
2. Organisation Adaptation (Business models, structures & processes)
Management choices lead to the implementation of structures, processes and business models which if left unchallenged can result in dysfunctional rigidity and become a formidable constraint to much needed adaptation further down the line.
Business Models
Business Models
At IBM, it wasn’t long after Ginni Rometty succeeded Palmisano as CEO that the depth of problems began to show.
The IBM business model of selling expensive hardware AND software AND expertise to use those systems were getting outdated with new business models. For years, this business model had stifled growth initiatives at IBM and made change extremely difficult. Fewer corporate customers were buying hardware in favour of cloud solutions and ‘software as a service’ (SaaS) and this had a significant impact on the firm’s performance.
IBM had to abandon hardware and software sales and reinvent itself as a IT consulting and technology company. IBM sold off printer manufacturer Lexmark in 1991 and selling off its personal computer (ThinkPad/ThinkCentre) and x86-based server businesses to Lenovo (2005 and 2014, respectively) and shifted its business mix by focusing on higher-value, more profitable markets.
It acquired companies such as PwC Consulting (2002), SPSS (2009), and The Weather Company (2016). Also in 2014, IBM announced that it would go "fabless", continuing to design semiconductors, but offloading manufacturing to GlobalFoundries.
Organisation structures
It acquired companies such as PwC Consulting (2002), SPSS (2009), and The Weather Company (2016). Also in 2014, IBM announced that it would go "fabless", continuing to design semiconductors, but offloading manufacturing to GlobalFoundries.
Organisation structures
Organisation structures can prove just as big an impediment to much needed change as out-of-date business models. Nokia found itself mired in infighting and intense internal competition due to matrix structures which proved difficult (and ultimately impossible) to manage as different groups with vested interests sought to protect their corners.
In this scenario, under performance pressure, misinformation from business groups tends to filter upwards giving senior management a false impression of how a company is faring. Combined with a lack of internal collaboration that prevents people from ‘connecting the dots’ which point to changes in the external environment, it becomes clear how structure can play a large part in pushing a company towards failure.
In this scenario, under performance pressure, misinformation from business groups tends to filter upwards giving senior management a false impression of how a company is faring. Combined with a lack of internal collaboration that prevents people from ‘connecting the dots’ which point to changes in the external environment, it becomes clear how structure can play a large part in pushing a company towards failure.
3. Industry Evolution / Changing Environment
When the very nature of an industry changes, this is bound to result in casualties and successful incumbent companies are perhaps the most vulnerable as they are more likely to be locked into a co-evolution with existing partners, suppliers and major customers when it comes to a vision for the future.
In addition, both management choices and the level of organisational adaptation will make it more or less difficult for a firm to step out of its current business model and recognise the environment around them is radically changing.
Neither the board nor the management of Kodak understood how fast the environment was changing from film to digital photography, and so management choices fatally reinforced the importance of the core film business.
With the support of IBM’s board, Palmisano was so focused on increasing shareholder returns that he failed to see the locus of competition was shifting to the cloud and on-demand. They stayed focused on selling expensive bundles of hardware and software until it was almost too late.
Nokia was so locked into its product-centric view of the industry, and focused too much of the perceived threat of Microsoft, its management couldn’t conceive of the ecosystem-based future Apple and Google were creating.
When the very nature of an industry changes, this is bound to result in casualties and successful incumbent companies are perhaps the most vulnerable as they are more likely to be locked into a co-evolution with existing partners, suppliers and major customers when it comes to a vision for the future.
In addition, both management choices and the level of organisational adaptation will make it more or less difficult for a firm to step out of its current business model and recognise the environment around them is radically changing.
Neither the board nor the management of Kodak understood how fast the environment was changing from film to digital photography, and so management choices fatally reinforced the importance of the core film business.
With the support of IBM’s board, Palmisano was so focused on increasing shareholder returns that he failed to see the locus of competition was shifting to the cloud and on-demand. They stayed focused on selling expensive bundles of hardware and software until it was almost too late.
Nokia was so locked into its product-centric view of the industry, and focused too much of the perceived threat of Microsoft, its management couldn’t conceive of the ecosystem-based future Apple and Google were creating.
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