The world of business is a reactive and volatile place in the twenty first century; led by immediate consumer demand and driven by the adoption of technology. To play a significant role within these markets, companies must either lead through investment, or be flexible enough to quickly adapt their strategy to move with the market.
Examples of companies who have not been able to adapt quickly enough; believing their place in a particular market to be stable, only to fail because consumer demands have radically changed, are becoming more and more common. A simple example may be Kodak, who for many decades dominated the camera industry, with a 90% market share of photographic film sales and 85% of camera sales throughout the 1970’s and 80’s.
In the 1990’s, however, they were caught unprepared for the digital revolution; they were unwilling to shift focus from their core business, making their strategy inflexible. Without a good understanding of the challenges in the new the market, they were unable to initiate their later devised model of aggressive patent litigation, even with a huge investment. They lost significant market share with their new cameras seeing negative public response, citing them as too expensive and unreliable. They were forced to file for Chapter 11 bankruptcy protection in 2012, leading them to shed all of their legacy liabilities, including their wide-ranging patents.
In contrast, Fujifilm, their closest rivals, decided in the 1980’s to pre-empt the shift towards digital cameras and adjust their strategy accordingly. They also reduced their risk factors by diversifying into a range of fields rather than relying on one stream of revenue, such as the emerging medical and magnetic resonance imaging markets, as well as the chemical and printing industries. Since then, their strategy has revolved around the understanding of developments in their markets and the formation of agile subsidiary companies to quickly meet investment opportunities. Fuji Xerox, one of these subsidiaries, was a joint venture launched in 2005 between Fuji Photo Film Co. and Xerox. To date it stands as the longest running venture between an American and Japanese company and in 2009 Black Book, who rank outsourcing companies worldwide based on the responses of over 24,000 executives, ranked Fuji Xerox 3rd best of 4,839 competing vendors.
This simple example of multi-faceted, new-business focused strategy succeeding where size and predictability fail, is simply one of a huge number of examples in modern times. Ironically in the same year as Kodak was filing for bankruptcy protection, a two-year-old company in the same market was being sold for $US 1 Billion; Instagram.
Looking at Industry Giants and how Small Players are beating them
“Power is spreading, and long-established, big players are increasingly being challenged by newer and smaller ones. And those who have power are more constrained in the ways they can use it.”
– Moisés Naím, “The End of Power”, 2013
This is far from a quiet or unpredicted shift; a huge number of reports have looked to the stability of the businesses at the top, ie. The fortune 500 list of companies. The results of these reports show significant patterns that underwrite the sentiment that new and more innovative companies are securing higher growth, and inflexible larger companies with less diverse revenue streams are losing their profitability.
I should note, however, that not all large businesses that stay within older markets are doomed to fail. There are many businesses who dominate large segments of industry, and continue to do so after decades, or even centuries; seemingly invincible giants. However, looking more closely at these businesses shows that this is because they were are able to adapt to change, shake off the parts of the business that are losing value and re-invent themselves to stay ahead of the competition.
Clayton Christensen, world renowned professor of Business Administration at Harvard Business School, examines this topic in more detail in his books “The Innovators dilemma” and “The Innovators Solution”.
He notes that huge businesses fight to exert control over markets once they reach critical mass, choosing to focus on their relational growth, efficiency or the higher sustainability of the current model, rather than investing in real innovation and market leading change.
“When people encounter a significant threat, a response called “threat rigidity” sets in. The instinct of threat rigidity is to cease being flexible and to become “command and control” oriented—to focus everything on countering the threat in order to survive.”
― Clayton M. Christensen, “The Innovator’s Solution: Creating and Sustaining Successful Growth”
Bucking the trend. Making Innovation work.
There are large organisations that have been able to buck this trend, shifting their focus and meeting current demands, then finding innovative ways to drive growth. How? Through understanding their market requirements, creating separate divisions to meet focus their strategy, and above all, providing a product or service that their end user actually wants.
IBM are a good example of a company that responded to market change; from almost the day the company was formed in 1924, until the late 1970’s, IBM led the way in technology with a diverse portfolio of businesses interests. However with the rise of the PC era and facing increasing competition in separate vertical markets from Intel, Microsoft, Novelli, HP, Seagate and Oracle, they saw that their spread was too large and business plan too inflexible.
They took steps to split the organisation into autonomous business units (eg. Processors, storage, software, services, printers, etc.) to increase their agility and meet the competition head-on. This, however, came too late and in 1992 IBM posted losses of US$8.10 Billion, which was then the largest single-year corporate loss in American history.
However once the business sections were agile and given autonomy, the company began to change its fate; each part of the business was able to evaluate and enhance their processes, then understand how best to serve their specific end users. By 1994, IBM posted profits of US$3 Billion. This was primarily due to the appointment of Louis Gerstner as CEO, who created a strategy of shedding commodity business and maximising the potential of high margin opportunities. In 2011, IBM’s closing value of $214 Billion surpassed Microsoft and made it the fifth largest business in the world.
“Transformation means that you’re really fundamentally changing the way the organization thinks, the way it responds, the way it leads.”
Louis Gerstner – CEO of IBM, 1993-2002
Many businesses, especially in America, understand the significance of case studies like these, and have begun to focus on three key initiatives, originally outlined by Richard Foster in his book “Innovation: The Attacker’s Advantage”, first published in 1986.
- Running your operations effectively, and maximising any potential for efficiency
- Creating new businesses that meet customer demands
- Shedding business that once might have been core but now no longer meet company standards for growth and return
Looking to make a Change?
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