One of the great puzzles of business is why some companies, even entire industries, suffer decline over decades without ever finding a way to pull themselves out of the death spiral. In a discussion of this conundrum, Knowledge@Emory spoke with Robert Kazanjian, a professor of organization and management at Emory University's Goizueta Business School and an expert in strategy and change in large enterprises. Kazanjian specializes in the study of why so many companies fail to adapt to changing times. He shares this knowledge with executives through customized Emory Executive Education programs, in addition to Goizueta MBA programs.
Knowledge@Emory: From the auto industry to the newspaper industry, many American businesses are struggling with huge challenges that, frankly, some analysts saw coming years ago. Is this a result of unwillingness on the part of executives to change, or just bad strategy?
Kazanjian: Often people feel companies will last forever. They don't. One reason for this mistaken belief is that our knowledge base of large industrial firms is not that old. We have had what we would think of as large complex institutions, in the form of steel companies and railroads and some kinds of multifunctional capabilities of national scope, only since 1900. If you look at the firms in the Dow Jones industrial average, there are maybe only five or fewer original listings from when it was created decades ago.
Companies disappear all the time for a variety of reasons. Sometimes it's a technological discontinuity. Look at what Kodak has gone through. Kodak had dominated the film industry since its inception. In 1976, Kodak had 90% of the U.S. film market and 85% of the camera market. By the mid 1990s, digital cameras were firmly established in the market, and now we buy much less film. Today, Kodak holds much less market share in a very differently structured industry. Kodak will probably endure, but the company is not the dominant force it once was in the film business. Technological change transformed the film industry into digital imaging, and effectively the old industry has disappeared.
Newspapers today are facing both a technological challenge as well as a business model challenge. Now we have access to electronic media in our house, which is updated continuously, via the Internet. First, anyone 25 years of age or younger is unlikely to read a [printed] newspaper. They might read online blogs or even online sites run by newspapers, but they don't actually subscribe to the papers. Second, the business model of newspapers is being directly challenged. Advertising, the major source of revenue for newspapers, has gravitated away from newspapers to the Internet in a significant way. Newspaper executives need to redefine how they think about funding what they do at their core, which is newsgathering and reporting. Unfortunately, it is by no means clear what that will be.
Knowledge@Emory: Is technological innovation the usual reason companies die?
Kazanjian: No, a non-technological example can be found in retail. Starting early in the 20th century, the retail scene was dominated by large, locally-based department storesâ€”Macy's and Gimbles in New York, Wannamaker's in Philadelphia, or Rich's in Atlanta. With the advent of malls in the 1960s, department stores moved with them to serve as anchor outlets. In the 1980s, however, discount specialty retailers developed new retail business models. As chains such as Marshall's, TJ Maxx, and later Kohl's, among many others, began to offer similar products at lower prices, department stores began to disappear. Today, Macy's (Federated) is one of the few remaining department stores, and they have survived primarily by acquiring their competition.
Knowledge@Emory: Why is it so difficult for companies to adapt to changes resulting from innovation?
Kazanjian: Organizations build up resources and capabilities that are suited not just to their general strategy but also to the demands of the industry. If something new comes along, a company may not have the internal resources and capabilities to actually do what is required in that new environment. For example, Kodak had a large number of factories that made film through a chemical process. Their technical core was dominated by chemical engineers. The advent of digital imaging required a completely different set of skills and assets. Chemical engineers aren't well positioned to developing digital products.
Timing is also critical. Say you go off and invest aggressively in resources and capabilities to respond to that new demand. You could do it too early, building high overheads and operating expenses based upon significant up-front investments, but if the demand isn't there, then losses result. So, if you're too early, you can destroy all kinds of economic value. On the other hand, if you wait to enter the market until demand is clearly demonstrated, you may lag behind other firms who have pre-empted your entry. It's a very difficult thing to pull off, even for the best managers. One study notes that in 30 or 40 different industries, the outcome of changing technologies or changing business models led to the demise of incumbents. More often than not, the incumbents go out of business just because it is so challenging.
Knowledge@Emory: Do companies ever admit they can't make the necessary transitions and bow out gracefully?
Kazanjian: Usually the end tends to be a bit ignominious. There's bankruptcy, and the company goes out of business, but they go down fighting. It's rare that a company says, well, we just figured out it's not worth it anymore. More often, what you see is a concentration of firms in an industry over time. The weaker players face reality and either go bankrupt or get acquired by somebody else. At some point, one or two players are left and they go out when the industry goes out.
Knowledge@Emory: Still it's unclear why executives fail to act when there is still time to change. GM, for instance, arguably had more than a few warning signs over the past 30 years that dramatic changes were necessary.
Kazanjian: In my view, the problem with GM was that the company was overly wed to its original strategy, formulated by Alfred P. Sloan in the 1920s, which was to develop a car for every conceivable segment of the market. GM succeeded by combining Chevrolet, Pontiac, Buick, Oldsmobile and Cadillac into a collection of brands spanning every price point in the market. I think that led the company to prioritize market share over profitability. Of course, as we entered the 1980s, and as new competitors from Japan and Europe entered the market, the traditional nameplates no longer dominated their segments. Over time, the product lines overlapped considerably, and GM's own brands competed not only with those of competitors, but also with each other.
In the pursuit of market share, GM also created new brands (GMC, Saturn) and purchased additional ones (Saab), and thus built the most complicated organization of all of the players. This has had implications for everything that drives the cost and quality of their product offerings. For example, Toyota, with two brands (Toyota and Lexus) might have three designs of car seats or various sub-systems that are used in several of their products. In contrast, GM might have 10 times the number of the same part. By not having a smaller collection of brands or fewer platforms, GM had a cost structure that was clearly much more inflated compared to almost all its competitors. In the end, the company was maintaining its larger worldwide market share by selling lots of different platforms to many dealers with all kinds of variety internally. That put them at a cost disadvantage. They were structurally at a clear disadvantage. And the recent precipitous drop in demand just pushed them over the edge into bankruptcy.
Knowledge@Emory: What was the turning point?
Kazanjian: GM was able to be successful that first 50 years in part because their competition consisted of other U.S. car companies trying to sell cars to U.S. citizens. That led them to design cars the same way and to the same quality standards year after year. I think the world started to change for the auto industry around 1980. The oil embargos gave a real entree to Japanese companies, who at that time primarily offered product for the low end of the market. Their products lacked distinctive styling, but Toyota, Honda and Datsun (Nissan) built low-cost, fuel efficient, high-quality cars. GM never really recovered from their entree. Over time, the Japanese developed product for the full range of the market, and US product was perceived by many consumers as inferior. GM did manage to close the quality gap significantly over the years, and more recently designed several models to positive market response, but their reputation in quality and design still lags behind that of leading competitors.
GM (as well as Ford and Chrysler) were saved in the late 80s and 90s when the price of gas plummeted, and all of a sudden hunger returned for large, fuel-inefficient vehicles, which played exactly to their previous strategy, but the underlying forces never really disappeared, and GM never addressed their structural misalignment with the market. Finally, labor rates and restrictive work rules also put GM at a disadvantage. Negotiated by the UAW when profitability was high, these rates and rules proved very difficult to reduce in subsequent contracts over the years.
Knowledge@Emory: Given that Chrysler is also in trouble, is a similar trajectory inevitable?
Kazanjian: Not necessarily. For example, Ford did figure this out. President and CEO Alan Mulally, who came over from Boeing, started Ford's transformation several years before GM's. Before this downturn, he had already sold their high-end brandsâ€”Jaguar, Land Rover, and Volvoâ€”and basically decided to concentrate on the company's core. They've started to develop some interesting cars, including some hybrids, which are very competitive with the Prius. Ford hasn't needed government help, and I think the company will be a long-term player.