In our work as management consultants, we help clients improve their businesses by working with them on strategy, operations, and financial matters.  Unfortunately, we’ve also seen things go horribly wrong.

One enterprise-threatening pitfall we’ve seen companies make is failing to act when the competitive game is changing.  Companies in this situation are playing last year’s game when they should be focused on the future.  This situation is distressingly common—Motorola, Schwinn, and Polaroid are three well-known examples—but also avoidable.  In this paper we discuss why some companies fail to respond effectively to changes in their business environment and what other companies can do to avoid the same fate.

Schwinn Falls off Its Bike

Founded in 1895 in Chicago, Arnold, Schwinn & Company became the dominant manufacturer of bicycles in the United States within a few years.  Its pioneering use of exclusive, specialized dealers, the durability of its products, and its lifetime guarantee were among the reasons for its success.

Schwinn’s banana seat, high-rise handlebar Sting-Ray was a huge hit in the 1960s, but soon afterward the company began to falter.  In the early 1970s an increasing number of American adults started looking for road racing or touring bicycles, and Schwinn’s offerings were generally outdated and heavy compared with those from European and Japanese manufacturers, who had honed their technology through participation in professional bicycle racing.  Schwinn also stumbled in the off-road BMX market and largely ignored the 1980s mountain biking craze even though it originated with people modifying Schwinn’s balloon-tired Excelsior.[1]

Having missed these trends, Schwinn found itself unable to invest enough in new product development or manufacturing.  Its market share declined from 25% in the 1950s to 12% in the late 70s to only 5% by its bankruptcy in 1992.[2]^,[3]

Polaroid Snaps a Blank with Digital

Founded in 1937 by Edwin H. Land, Polaroid would go on to become one of the world’s most iconic brands.  Its instant photography products, first launched in 1948, were a tremendous success.  For thirty years between 1948 and 1978 profits increased at a compounded annual rate of 17%.[4]  Over this period Polaroid introduced faster film, improved development time, introduced color, and improved acuity.

In the early 1980s the company considered digital to be a serious threat.  Sony had introduced one of the first commercial digital cameras in 1981, the 0.3 megapixel Mavica.  CEO Bill McCune invested more than $30M in a microelectronics laboratory in 1986.  By 1989 Polaroid spent more than 40% of its R&D funds on digital technology. The company also produced a 1.9 megapixel digital sensor prototype that year.[5]

However, by the middle 1980s the spread of one-hour photo processing centers had caused Polaroid’s profit growth to stagnate, and digital products started to make real inroads in the middle 1990s.  Unable to see how digital products would improve its financials given the money it made on instant film, management directed more money to marketing and less to R&D.  The result was a series of products that were profitable in the short run, including iZone, Barbie Cam, and the JoyCam, but that didn’t address the long term threat to the core business.   Although some financial industry analysts were bullish on the company as late as 2000, by October 2001 the company was forced to declare bankruptcy.[6]

Motorola Misses after RAZR

For several decades leading up to 2007, Motorola enjoyed significant success in the cellular telephone industry, including in telephone handsets.  From the first hand-held mobile phone (in 1973), to the first commercial portable phone (DynaTAC, in 1983), to the first portable “flip” phone (MicroTAC, in 1989), to the first clamshell phone (StarTAC, in 1996), to the iconic RAZR (in 2004), the firm was known as an innovative competitor.

With the advent of the RAZR Motorola’s Mobile Devices unit saw operating earnings increase from $511M in 2003 (the year before the RAZR) to nearly $2.7B in 2006.  It also gained significant market share.  As most readers know, however, Motorola subsequently failed to deliver equally compelling products.  In 2008, Mobile Devices lost more than $2B.

The winners over this period were smartphone makers such as Apple, HTC, and Research in Motion (which makes BlackBerry devices).  Motorola failed to see that the factors that had made its previous devices successful—mechanical, electrical, and radio engineering and, with RAZR, fashion—were no longer sufficient.  Software had become more important than continued improvements in the hardware alone.

Playing Last Year’s Game:  Why it Happens

Schwinn, Polaroid, and Motorola got into trouble primarily because they focused on their historical strengths too long and didn’t adapt to the market changing around them.  They are far from the only examples, however.  Consider General Motors, Kodak, Sony, and many others.

In our view, there are three main explanations for lack of action from historically able competitors.  First, their mental models become outdated and they become complacent.  Second, their organizational architecture and culture prevent effective action.  Finally, they get paralyzed when challenger businesses have different economics.

Complacency Resulting from Incorrect Mental Models

A mental model is a cognitive construct explaining how something works in the real world.  They are often implicit and based on incomplete or ambiguous information.  In the realm of business a mental model would describe which factors are most competitively important, where threats are likely to come from, and how profits are earned.  When mental models are correct, they allow companies to react quickly to the market and to make the right “judgment calls.”  Unfortunately, such models can become liabilities when technology advances, competitors introduce dramatically new offers, or consumer tastes change.

Regrettably, as human beings we are subject to a number of cognitive biases that make adjusting mental models difficult.  We are subject to confirmation bias, which is a tendency to accept information that confirms previously held beliefs and reject or ignore information that contradicts them.[7]  We also have a tendency to accept the first information that potentially answers a question, even though there may be other possible explanations.[8]  Third, we tend to get anchored to the status quo and see the future as a mild variant of the present.[9]  Finally, managers’ past successes reinforce in their minds the correctness of past actions and increase the probability they will stick with the same general pattern of action in the future.  The effect of all these biases is that the more experience people have, the worse they perform in new, complex situations.[10]

If the success of RAZR taught Motorola executives anything, it was that cool hardware would sell.  Shortly after the RAZR they launched the SLVR (pronounced “sliver”), a candybar phone resembling the RAZR, and KRZR (pronounced “craze-r”), narrower and shinier than the RAZR, and even suggested in earnings calls there might someday be a PAPR (“paper”).   Management directed the supply chain to gear up to produce millions of these phones.  Unfortunately, none of them had the same appeal as RAZR at launch and they did not command the prices Motorola’s executives expected.

Industry financial analysts may also contribute to management’s focus on maintaining or extending a company’s old business model.  Mary J. Benner of Wharton has shown that over several years during the substitution of digital for traditional photography, industry financial analysts were consistently and enthusiastically positive about Polaroid’s new film and hybrid products.  They often used these products as justifications for upgrading their recommendations for the stock.  By contrast, the analysts rarely mentioned digital products or Polaroid’s efforts to transition to the digital space, which is surprising given the risk digital posed to the company’s core business model.[11]

Organizational Architecture and Culture

Even if a company recognizes a threat, its organizational architecture or culture may prevent an effective response.[12]  Business intelligence, IT, and accounting systems developed for the previous competitive environment may collect and disseminate increasingly irrelevant information.  The company’s strategic planning process may be more focused on sales projections than on developing a deeply challenging view of the situation.  Its organization, hierarchy, or rewards structure may be inappropriate for the new business or may subtly influence people to take decisions that bias against effective action.

In addition, new, small initiatives may find it difficult to compete for internal resources with much larger traditional businesses.  The leaders of new initiatives may be more junior than those leading large, traditional business lines.  Moreover, the new business might require a different type of engineering talent, sales channel, or manufacturing than the traditional business.

The culture of an organization can also make it difficult for it to react to changes in the marketplace.  One of the reasons for Schwinn’s success through the 1960s was its recognition, earlier and more deeply than most of its competition, that the market in the U.S. was primarily for suburban kids’ bikes.  In the 1970s and 80s, however, that began to change.  Increasingly, adults were looking for bikes for fitness, recreation, or environmental reasons.  But Judith Crown and Glenn Coleman, writing in Crain’s Chicago Business shortly after Schwinn’s bankruptcy, noted that in pictures taken of executives at company retreats, it seemed “…it had been a long time since some of these guys had been on a bike.”[13]  It’s certainly easy to imagine Edwin Schwinn—fourth-generation family CEO of the bicycle maker, German-American, and raised on Chicago’s patrician North Shore—would find it hard to relate to BMX racing or the hippie-infused mountain biking culture of Marin County, California in the early 1980s.

Finally, many organizations maintain that putting “customers first” is an important part of their culture.  Unfortunately, customers often don’t know they want an alternative until they see it or experience it.  In this case, a culture of listening to customers can be deadly.

Different Economics

Incumbents also tend to be dismissive of small challenger businesses with different economics than the current business, even if that challenger business might ultimately kill the current business model.[14]

In Polaroid’s case, the camera and film business was organized in a very profitable “razor & razorblades” fashion.  The company made relatively little money on cameras but had gross margins of over 65% on its film business.  It saw little way to replicate those economics with digital.

“…Instant film was the core of the financial model of this company.  It drove all the economics—not instant cameras and not hardware or any other product;  it was instant film.”
Former Polaroid CEO Gary DiCamillo, in a 2008 interview[15]

In Motorola’s case, many decisions were driven off the company’s vision of becoming the largest mobile phone company in the world, measured by market share.  The internal slogan circa 2006 was “Number One in 1000 Days.”  Unfortunately, vision was conflated with strategy and the company passed on opportunities that might have been profitable or wise but that wouldn’t have lifted market share significantly in the short run.  In 2005 a Motorola executive told this author the company wouldn’t consider acquiring Research in Motion (then the relatively small maker of BlackBerry smartphones) because Motorola was “interested in making millions of phones.”

Playing This Year’s Game:  Avoiding the Pitfall

Ensuring a company undertakes thoughtful debate about potential threats and takes appropriate actions is among the most important roles of a company’s CEO, management committee, and board of directors.  To do this, they may want to consider several actions:

First, scenario planning—long a part of the strategist’s toolkit—is powerful.  By encouraging management to think through all of the key uncertainties impacting their business and how those might interact and combine in different ways, scenario planning can make different possible outcomes both discrete and tangible.  This divergent thinking allows a company to ensure its bets are placed appropriately, to push the industry towards the desired scenarios, and to interpret events quickly.

Second, Paul Carroll and Chunka Mui describe a conceptually similar technique they call “Be Your Own Worst Competitor.”[16]  Managers are encouraged to write serious business plans for businesses that would put the current company out of business.  This can help managers put themselves in others’ shoes and see the industry from another perspective.  It can highlight the areas with the greatest potential, the most vulnerable parts of the business, or the customers most likely to be poached.

Third, when facing potentially disruptive threats, we recommend keeping the unit responsible for the company’s response separate from the rest of the business, where it can grow without being attacked by corporate antibodies.[17]  The leaders of the unit can then be free to organize the effort optimally, whether that requires using existing or new engineering resources, sales channels, or manufacturing.  It’s also worth considering placing one of the company’s most experienced, highest-ranked, and effective executives in charge of this effort to signal its importance and to help break down internal barriers, though it is also important to have a leader passionate about the opportunity.

In the photography market, Canon is one example of a company that has successfully made the transition from analog to digital.  One of the keys to their success was the formation of a digital imaging business unit with completely separate funding.  This unit also went outside the firm to hire the electronics expertise that was otherwise rather thin at Canon prior to the advent of digital.[18]

Fourth, companies need to ensure outcomes are not being shaped by an overly domineering leader or insular decision making team.  We recommend fostering skip-level relationships and dialog as a first step.  Executives should also ask whether there are people who should be included in the discussion about new opportunities or threats who are not otherwise part of the executive team.

Fifth, companies can undertake or commission independent market scans and re-investment theses.  A market scan can give a fresh perspective on competitors and their strengths and weaknesses, the threats and opportunities in the industry, and a summary of where new (venture) capital is being invested.  A re-investment thesis would ask whether the author(s), if given a clean slate, would invest in the company’s business today, and under what terms.  It can also highlight what strategic actions are needed to create value over the next three to five years.

Finally, we recommend managers study business failures as well as successes.  We believe understanding why past organizations failed is a good way to avoid making the same mistakes.  Often, however, these stories are harder to find.  Nevertheless, consider some of these titles:

• Billion Dollar Lessons (Paul B. Carroll and Chunka Mui)
• The Innovator’s Dilemma (Clayton M. Christensen)
• How the Mighty Fall (Jim Collins)
• The Logic of Failure (Dietrich Dörner)
• Creative Destruction (Richard Foster and Sarah Kaplan)
• Only the Paranoid Survive (Andy Grove)

Woodlawn Associates has a great deal of experience with scenario planning, market scans, and corporate strategy. Please contact us for help with any of the above activities.