Companies like human beings have a limited lifespan. Professor Richard Foster of the Yale University estimates that the average lifespan of a company listed in the S&P 500 in the United States is only around 15 years now. This has fallen from around 67 years in the 1920s.
Why has the lifespan of companies shortened so dramatically in the last 100 years? Marketing guru Al Ries and his daughter Laura have an explanation in their book War In the Boardroom. As they write “The biggest mistake of logical management types is their failure to see the rise of a new category. They seem to believe that categories are firmly fixed and a new one seldom arises.”
The most recent example of this phenomenon is Nokia. The company was the largest seller of mobile phones in the world until Samsung overtook it in 2012. Even now it sells nearly 15% of the world’s mobile phones, but has only 3% share in the lucrative smart phone category.
Despite being the largest player in the market, Nokia did not see the rise of smart phones. In fact, this lack of foresight allowed brands like Micromax and Karbonn to rise in the Indian market. Nokia’s failure is not surprising, given that the history of business is littered with many such examples. RCA, America’s leading radio company, did not see the rise of battery powered pocket transistors which were first made by Sony in 1955. Sony changed the way the world heard music by launching the Walkman and the CDman. But it handed over the digital music player market on a platter to Apple and other companies.
Some of the biggest minicomputer companies did not see the rise of the personal computer. None of the big airline companies around the world thought there was a market for low cost airlines, until Southwest Airlines walked away with the market.
Closer to home, Hindustan Lever (now Hindustan Unilever) did not believe that there was a market for a low cost detergent. Nirma captured that market, though to its credit Hindustan Lever fought back brilliantly with its Wheel brand. Bharti Beetel, changed the entire landline market in India by selling phones which had buttons on them. But by the time it entered the mobile phone market it was too late.
So why do established companies fail to see the rise of a new category? Clayton Christensen, a professor at the Harvard Business School has offered an explanation for this, in the research that he has done over the years. Established companies have a way of doing things (their existing resources, processes, profit model, value proposition they offer and so on). Anything new that comes along threatens that status quo.
Take the case of Sony. The rise of digital music threatened the vast music catalogue that the company owned. And if it launched a digital music player, people would simply copy music instead of buying it. Kodak was the first company to make a digital camera. But it did not take the concept seriously because any camera that did not use “photo films”, threatened the ‘existing’ business model of the company.
What also happens at times is that the initial market is too small. Smartphones have been around since the late 1990s, but they only took off in the last few years. This ensured that Nokia did not take the new category too seriously because there was money to be made elsewhere.
Christensen feels that the only way big companies can be serious about the rise of new categories is to create a separate organisation within the organisation. He gives the example of IBM, which was the only big company around to benefit from the rise of the personal computers(PCs).
IBM set up a separate organisation in Florida, with the mission to create and sell PCs successfully. The organisation had its own engineers and its own sales channel, and thus did not threaten IBM’s existing way of doing things. When minicomputers went totally out of fashion in the late 1980s, IBM was the only big company around to compete in the PC market.
The moral of the story is that big companies in order to survive need to keep making small bets, which are not a part of the existing organisational set up, and see what works.
The column originally appeared in the Business Standard Strategist dated November 11, 2013
(Vivek Kaul is the author of Easy Money (Sage, 2013). He can be reached at [email protected])