Holding On to Old Business Models

IT’S NO SECRET that innovative competitors, new technologies, and regulatory conditions force industry leaders to adapt to new market realities. Why, then, when the writing is on the wall that paradigmatic shifts are occurring in an industry, do most market share leaders try to perpetuate obsolescing business models?

Consider Microsoft. The company announced last year that it would offer a free, Web-based service that works with Word, Excel, and PowerPoint to allow people to store and access files online, according to an article in the Seattle Post Intelligencer. (http://seattlepi.nwsource.com/business/333748_software01.html)

Clearly, Microsoft is embracing the shift from desktop-based software applications to web-based ones, right? It is responding to the launch in 2006 of Google Docs, a free application that allows users to create and edit word-processing and spreadsheet files online, inside a web browser. It no doubt knows that future growth prospects for its Office software lies in workplace use of Web 2.0 – the use of wikis, Internet delivery of applications, and Web-enabled collaboration – where hosted services, instead of desktop-based applications, are the wave of the future.

Not so fast. Microsoft’s online service, named Office Live Workspace, will require that editing and creating documents still take place on the PC desktop, requiring a regular version of Microsoft Office that users will have to purchase and install on their computers. Why? According to David Smith, an analyst with Gartner, a technology research firm, “They (Microsoft) certainly are not looking to push the envelope and be the leader in providing Web-based Office tools. They need to do it in a way that preserves their business.” Office is Microsoft’s second-biggest product behind Windows.

To be sure, abandoning a market or business model that has served a company well for years is challenging. No company wants to embrace a new business too soon and risk forgoing revenue from a legacy product that still has some life left. Still, holding on to an old business model for too long can cause a market leader to lose its dominant position, perhaps forever. The trick is to maintain market vigilance of indicators of significant change in a way that allows for maximum strategic flexibility.

Take photographic film processing. When was the last time you took a role of film to a local drug store or supermarket to have pictures developed? “Now you can bring your media card in and go to a kiosk and have it printed in a second. Or you can have it printed at a one-hour photo lab. Or you can upload the image to a wholesale facility on the Internet and have it delivered to a retail store,” says Bing Liem, senior vice president of sales for the imaging division of Fujifilm USA, as quoted in The New York Times. (http://www.nytimes.com/2007/10/09/business/09film.html?_r=1&oref=slogin)

So, how have photography companies responded? As its film business has tanked, Kodak has spent the last few years making a transition to digital technology. This transition balances embracing a new business model with a reasonable extension of an old one.

In the heyday of film, some 25 billion photographic images were not just captured but printed as well, according to the Times article. By 2009, as the use of digital cameras continues to grow, some 135 billion images will be captured, but far fewer printed. The challenge is getting people to print those images out.

According to the Photo Marketing Association, when digital camera owners in the United States do print out their digital images, they usually do so in stores rather than on home printers. So, Kodak is helping retail stores replace their old silver halide photo processing equipment with kiosks that consumers can use to print digital pictures.

Meanwhile, Kodak’s strategy for its film business now calls for targeting third world economies where home computers are less common. It is selling low-cost film cameras throughout Asia, according to a Kodak spokesperson. In August 2007, Kodak posted record sales in India.

By monitoring key indicators – in this case, the propensity of consumers to print digital images in stores rather than at home – Kodak has been able to reposition a key product, photo finishing equipment, to correspond to the obsolescence of film and the rapid growth in digital imaging. Meanwhile, instead of perpetuating its film business in mature markets that have moved beyond film, Kodak now is replicating a business model in markets not yet impacted by digital photography technical advances.

The best of both worlds, to be sure.

Could an early warning system have helped predict our current financial woes?

Much has been said about the causes of the financial crisis to which we are all held captive. Politicians blame each other for the mess, citing varying degrees of under (or over) regulation depending on wind directionality, Wall-Streeters blame avaricious mortgage lenders and profligate home-buyers, consumers blame greedy executives and the politicians beholden to them, and media pundits blame everyone. The interesting question, however, isn’t so much who was to blame, but more, what were the signposts along the way that, had they been identified beforehand, could have helped authorities avert the disaster. In other words, could a unified financial early warning system have helped predict and forestall our current financial woes?

To be fair, foreknowledge of the current crises would likely not have been enough to avert it (excessive systemic risk is purged from markets in one way or another) but surely paying attention to the warning signs (of which there were many) would have allowed governments to shore up soon-to-be faltering banking systems or at least ensure that adequate policy measures were in place that would help to guide the flailing, seemingly haphazard decisions that policy makers have made in the last few weeks.

So what, exactly, would the harbingers of a doomed economy look like, and where would one look to find them? Well for starters at least, historically speaking the major economic downturns have been preceded by a marked uptick in panicky investor behavior. In other words: volatility. Well, you may ask, by the time investors and policy-makers have noticed that volatility is on the upswing, isn’t it likely far too late to take decisive action? That depends upon your definition of too late. To be sure, the tell-tale signs of volatility began appearing as early as July and August of 2007. In fact, the Chicago Board of Trade’s Volatility Index or VIX (often referred to as the Fear Index), began a series of what should have been alarming spikes on mounting concerns about, what was at the time, a growing credit crisis. Granted, increased volatility does not necessarily mean a marked downturn, but had policy-makers created an integrated system of early warning indicators that included volatility monitoring, a VIX spike could have put them on alert.

Remember those Wall-Streeters and bankers who were looking for someone to blame? Well it turns out that they had advanced warning of what was going on in the credit markets and broader economy as well. How, you ask? As we’ve all come to know, inter-bank lending is in many ways the life-blood of our economy. When the credit markets freeze up, banks stop lending to one another (well technically they don’t stop lending, they simply charge prohibitive inter-bank rates which in and of itself is a measure of risk and uncertainty in the overall economy). Often referred to as the TED Spread, the difference between Treasury yields and the London Interbank Offered Rate measures the degree to which banks feel that their peers will default on inter-bank loans, or counter-party risk. In fact, that summer the TED Spread saw a spike to levels it hadn’t seen since the Black Monday crash of 1987. So how far back did banks begin panicking? You guessed it, the same exact time the VIX was spiking towards the end of summer 2007.

These are but two of several examples of potential indicators you are likely to hear about in the coming weeks and months. Again, while any one of these signals doesn’t necessarily mean that an economy is doomed, had the right people, armed with a list of triggers or indicators, been paying attention, policy-makers could have taken steps much sooner. When you think about the hysteria of the last few weeks, the speed with which Secretary Paulson tried to cram the Emergency Economic Stabilization Act of 2008 through congress, the ensuing equity market melt-down, and about the shape of things to come, think about how different things might have been if those who hold the public trust had done their jobs.

On second thought, the really interesting question isn’t what the early warning indicators might have looked like, it’s why our leaders weren’t looking for them to begin with. Truth be told, governments should have begun taking action to quash the mounting crisis more than a year ago.

The Paranoid Still Survive

Ten years after former Intel CEO Andy Grove wrote his best-selling book Only the Paranoid Survive, a report in USA Today (January 31, 2007) suggests a healthy dose of insecurity is still at the heart of CEO success. "I am driven by fear of failure," says Dennis Manning, CEO of Guardian Life Insurance of America, which has annual revenue of more than $7 billion. "It's a strong motivator for me. If I fail, maybe 50,000 people fail with me."

What do CEO's worry about? According to the PricewaterhouseCoopers 10th Annual Global CEO Survey, 37 percent of those CEOs interviewed worry about pandemics, 40 percent about global warming, and 50 percent about terrorism. The overall optimism expressed in the survey is also tempered by other considerations tied to obstacles to growth. CEOs cite the uncertain availability of skilled resources, overregulation, and low-cost competition as impediments to future growth. And, sources of future growth most often cited in the survey include penetrating new markets, M&As, and technical innovation, all areas with higher levels of risk than less venturesome options such as better penetration of existing markets.

What does all this mean for strategy and competitive intelligence? Lots. CEO intelligence needs are more complex than ever. Corporate CI practitioners have to maintain vigilance against a wide array of risks, from bird flu to offshore competitors. More importantly, against a wide array of risks, from bird flu to offshore competitors. More importantly, they have to continuously feed their CEO's paranoia. "Healthy doses of corporate insecurity help keep a company fresh and competitive and ensure that the leadership and drive . . . remain active," says Ciena CEO Gary Smith, as reported in USA Today. Intelligence reports and approaches to strategy that harness this paranoia -- by generating plausible future scenarios and corresponding strategy options -- can be highly successful. According to Martin Frid-Nielsen, CEO of telecommunications company SoonR, "Paranoid people often see problems long before their more complacent counterparts. A little bit of insecurity goes a long way to push a company toward perfection, especially when that insecurity resides in the CEO."

A dose of paranoia may be what this troubled economy needs.