Tech Powers And A Harsh Lesson In Survival

31 Jan, 2012

From troubled BlackBerry maker Research In Motion to fading internet power Yahoo! and the bankrupt Eastman Kodak, the business headlines this year have told a familiar story: the fortunes of once-dominant technology powers can fade with unnerving severity.

Disruptive shifts in technology platforms and business models have become an unpleasant fact of life for tech companies and their investors alike. As Facebook gears up to make its regulatory filing as early as Wednesday that will set its initial public offering in train, the latest batch of troubles is a sombre reminder that the longevity of a seemingly entrenched business is far from assured.

Yet the shortening life cycles of tech powers are not inevitable. As companies as different as Apple and IBM have shown, it is possible to come back from the brink of irrelevance. Microsoft, frequently written off as a relic of the fading PC age, has also been laying the groundwork for a broader repositioning of its business, though its success is still unproven.

Given the sort of rapid shifts that can afflict technology companies, being alert to the danger is the first and most important quality needed for survival. That makes RIM, once comfortable in its role as the pioneer of mobile email, Exhibit A in corporate denial.

Asked about the threat to BlackBerry from the launch of the iPhone, the Canadian company's leaders brushed aside any danger, points out Rita McGrath, an associate professor at Columbia Business School. By the time they saw the need to overhaul their own product line up – a move that eventually forced them into an acquisition to purchase a suitable new mobile software platform – it was too late.

RIM has fallen foul of some of the biggest forces to shape technology markets. One is the "consumerisation" that has turned parts of the once slow-moving corporate technology business into fashion-driven markets demanding new skills. RIM hardly believed that its BlackBerry users, tied to their corporate email systems, would so quickly cut the tie.

Another is the winner-takes-all nature of technology platform shifts that can quickly leave former industry leaders out in the cold. With software developers switching their attention to the new Apple and Google mobile software platforms, RIM now faces an uphill battle in putting itself back at the centre of the mobile technology ecosystem.

Even when they do succeed in identifying the mortal threat posed by a future technological disruption, however, it has proved remarkably hard for many tech concerns to adapt.

"The evolving digital technologies had been obvious to us since the late 70s," says Larry Matteson, a former Kodak executive who was once in charge of 23,000 people in the company's manufacturing division. That foresight didn't prevent a long slide that resulted in a filing for bankruptcy protection earlier this month.

Kodak played it by the management text book: it identified its sustainable competitive advantages and sought to use these as a basis for diversification into new markets that would make up for an expected erosion of its film business.

Those strengths, according to Mr Matteson, now a professor at the Simon Graduate School of Business at the University of Rochester, included a powerful research and development base, particularly a world-leading position in organic chemistry; a specialist manufacturing capability learnt in the film business; and one of the top global consumer brands.

Kodak followed the logic of this analysis into markets as diverse as blood tests, photocopying and pharmaceuticals, with the acquisition of drug company Sterling. None proved to be the foundation for a big new business and all were later spun off.

This sequence of failures points to two of the main lessons from failed attempts by tech companies to adapt.

One is that it is not enough to dabble in new technologies. "Innovation needs to be treated as material and systematic, not an on-again-off-again process," says Columbia Business School's Ms McGrath. The vested interests inside corporations arrayed against disruptive change can be powerful.

Sony, for instance, has struggled to overcome the entrenched interests of its powerful product divisions, leaving it vulnerable to the sort of disruptive new products that often cross internal corporate boundaries, like the combination of Apple's iPod and iTunes store.

Despite often being the product of recent innovative thinking, tech companies may be worse suited to the challenge than other types of company, Ms McGrath adds. The hubris from their success is still strong, and they often lack broad management skills. "When the engineers are in power, it's easy to find that non-engineering suitable problems are not addressed," she says.

The other lesson is that strategic choices still count. Simply trying to change course and copy a disruptive new technology is often the wrong path to take. IBM, seeing the threat to its mainframe computing business from the rise of the "client-server" era, threw its full corporate weight behind the PC business in the early-1980s. Yet it was only IBM's eventual decision to retreat from PCs that signalled it had learnt the strategic lesson: to stick to its high-margin IT business with the addition of software and services.

Kodak made a similar strategic mistake. Two decades ago, seeking a new direction, it brought in a rising star from Motorola, George Fisher, to help lead a move into digital cameras.

"They were thinking about taking a business with 60-80 per cent [profit] margins and going into consumer electronics, where 5 per cent is pretty good," says University of Rochester's Mr Matteson.

Failing to make a go of it in digital photography, Kodak compounded its error by switching course into another challenging market: ink-jet printers. That has left it struggling against the likes of Hewlett-Packard, Lexmark and Canon, which dominates the consumer market.

IBM and Xerox, by contrast, turned in their moment of crisis to their core businesses, looking for ways to reinforce their value to their customers by enhancing what they had always done best.

"Too many companies focus on their products and not what the products are solving for the customer," says Ms McGrath. "Xerox finally figured out that customers don't want copies, they want workflows that allow them to get the right information to the right place for the right reasons, cost-effectively."

As Steve Jobs proved after returning to a near-bankrupt Apple in 1997, stripping away failed product strategies of the past and finding new ways to excite customers is the surest way to revival.

For other executives struggling against the apparent inevitability of tech-company decline, it is a high mark to match.

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