When the Organization Is in the Way

There are times when organizations are performing excellently but, despite their confidence, their futures are not bright.  Kodak and Polaroid dominated the film and instant photography industries, respectively.  My mother inherited a quantity of Kodak stock in the 1930s.  It provided generous returns for several decades.  People would always seek “Kodak moments” and needed a stock of film.  Wouldn’t they?  Well, no.

These companies knew that digital photography would eventually prevail.  Indeed, they invested in R&D that created the technologies that could displace film, instant or otherwise.  However, despite their dominance in their markets, they just couldn’t “pull the trigger” and cannibalize their existing cash flows.  Instead, they let competitors do this, catalyzing their eventual demise.

Why?  Their organizations were totally focused on selling film.  The metrics in their incentive and reward systems were driven by film sales and decreasing costs of production.  They, in effect, provided free cameras to sell film, as Gillette provided free razors to sell blades.  What if consumers wanted pictures, but not prints?  This future was easy to imagine but difficult to accept if your paycheck depended on prints.

What happened to Digital and Xerox?  Digital dominated the minicomputer market and Xerox basically invented personal computing.  I worked extensively with Digital, less so but significantly with Xerox.  I used the 50th PDP-8, of 300,000 sold, to conduct my PhD research at MIT.  Digital “owned” the academic research market.  The DEC System 10 was next, followed by the VAX series, selling 400,000 units.

The rapid rise of the microcomputer, or personal computer, in the late 1980s, and especially the introduction of powerful 32-bit systems in the 1990s, quickly eroded the value of DEC’s systems. DEC’s last major attempt to find a space in the rapidly changing market was the 64-bit Alpha. DEC saw the Alpha as a way to re-implement their VAX series, but also employed it in a range of high-performance workstations. The Alpha processor family, for most of its lifetime, was the fastest processor family on the market. However, high Alpha prices could not compete with lower priced x86 chips from Intel and AMD.

I was heavily involved with DEC in the 1990s helping them plan several new generations of Alpha chip using our product planning toolkit.  One strongly stated objective for each generation was that it retain its Guinness Book of Records status as the fastest processor in the world. This objective dominated even when processing speed provided users minimal benefits.  Technical excellence was highly valued at DEC.  There was a sense that DEC knew what people needed even if they did not.

The Apple II arrived in 1977, followed by the PC in 1981, and the Apple MAC in 1984 with its classic Super Bowl ad.  Many of the appealing features of the MAC were pirated from Xerox.  The document company, Xerox, was still trying to figure out how personal computing would sell more paper.  Between this perspective and unacceptable market pricing, Xerox fumbled the future.

Back at Digital, CEO Ken Olsen discounted the possibility that anyone would want their own computer.  Their DEC Rainbow was clearly too little, too late.  IBM, in contrast, realized the era of developing everything yourself was over and outsourced most everything to strategic suppliers, e.g., Microsoft.  This was too much of a leap for DEC, presaging their disappearance in 1998.

This brings us to communications and cellphones.  I worked extensively with Motorola throughout the 1990s.  Their analog technology dominated the market.  They had invested in digital technology and knew this was the future, but did not want to cannibalize their analog market position.  Other players, such as Nokia and Qualcomm, did not hesitate.  Their digital phones decimated Motorola’s market leadership.

Motorola was still innovating, however. A great example is an R&D investment by Motorola in magnetoresistive random access memory, where data is not stored as electric charge, but by magnetic storage.  The research team developing this technology was requesting $20 million.  Our technology investment analysis tools indicated the net value was $546 million.  After carefully listening to a presentation on the basis of this estimate, the Motorola CEO was sufficiently impressed to commit $40 million with the request that the additional funds be used to reduce risk and accelerate transitioning this technology into their semiconductor business.

The success of this technology contributed to the formation of Freescale Semiconductor, Inc., which was spun off from Motorola in 2004. In 2015, NXP Semiconductors completed its acquisition of Freescale for about $11.8 billion in cash and stock. Including the assumption of Freescale’s debt, the purchase price was about $16.7 billion.  Despite such successes, Motorola’s core communications business was struggling and was sold to Google in 2012 for $12.5 billion, less than the value generated by one significant R&D investment.

Nokia focused on increasingly inexpensive phones and came to dominate the global market.  They could not imagine that their $50 phones could be displaced by Apple’s $500 iPhone.  They were wrong.  Consumers did not realize it, but they wanted versatile digital devices that also included a phone.  Nokia faded and was sold to Microsoft for $7.2 billion.  Microsoft did not fare much better.

Both Motorola and Nokia suffered from being hardware companies that also provided software.  Their technical expertise in hardware was superb.  However, they tended to develop new operating systems for each generation of devices, which was both expensive and slow.  In contrast, Apple’s OS and Samsung’s Android, courtesy of Goggle, provided regular updates to all users, including those using past generations of phones.  The cultures of Motorola and Nokia, as well as Digital, never embraced this approach.

How does the organization get in the way of change?  For all of these cases, organizations had well-developed processes and metrics, which everyone had learned and came to excel in their execution, resulting in bonuses, promotions, and other accolades.  These practices had become embedded in their organizational cultures.  Everyone “knew” how to act and how to succeed.

However, key elements of this organizational system were premised on assumptions that were no longer true.  Many people recognized this.  However, it was not socially acceptable to articulate these perceptions.  People felt that they needed to maintain focus on keeping the predominant business model functioning and producing.  That’s what they did until this no longer worked.

All six of these companies were founded with excellent core technology competencies and compelling value propositions.  They each led their markets at some point, in some cases for many years.  The designs of their organizations, indeed their organizational values and norms, were driven by how they achieved this success.  Over time, their markets evolved, typically driven by competitors’ offerings.  These companies did not evolve in step with their markets.  Their value propositions become obsolete.

Joseph Schumpeter has termed this process “creative destruction.”  New value propositions are embraced by markets and incumbent competitors fade.  This is great for consumers and the economy.  However, as these examples illustrate, creative destruction is terrible for the incumbents that cannot adapt.  Consequently, the average number of years a successful company remains in the Fortune 500 continually decreases – from over 60 years in the 1950s to less than 20 years today.

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