Just reading the proofs of Creative Disruption and re-reading my section of Deutsche Post. I’ve written about them as proof of how you can move into new adjacent markets,but only after you have fixed your core business.

Deutsche Post started the modernisation programme on their network back in 1990, when they were loss-making and state-owned. At the time it had nothing to do with the internet, and everything to do with looming privatisation and unification of Germany.

The Royal Mail‘s similar renewal programme didn’t start until 2004. [If you want the full comparison, read Richard Hooper's report Modernise or Decline ].

By making their core mail business profitable, they freed up the cash to move into new adjacencies: notably freight, and logistics [which are actually growing as a result of the internet']. However mail is still Deutsche Post’s cash cow, and even for all their cost control and modernisation it is still losing money.

When I spoke to their strategy boss Markus Reckling, about this – and what they thought was going to happen. He admitted to uncertainty and said

I used to think strategy was about avoiding unforseen events, now I know it’s about being able to cope with them.

There’s an enormous amount of wisdom packed into that little quote. If you follow it’s logic, it will drive you into focussing on making your business as healthy as possible right now, in order to keep your options open in the future. Which, I have to say, I think is exactly right.

In such uncertain times, the challenge isn’t the fine tuning of your big bold plan – but having a good answer to the question: ‘And what if your assumptions are completely wrong’. Because, if we’ve learned one thing – there’s a good chance that they will be, through no fault of your own.

This is why debates about ‘the end of print’ or ‘the death of the high street’ are pretty pointless in buisness. And ‘strategy’ is not about making reckless bets based on long term assumptions about such things.

Blockbuster a long time ago followed the consensus that the future of their business was on demand, so they went into and exclusive 20-year partnership with the most dynamic and thrusting business around to create a direct-to-home, video on demand service. That business was called Enron: the project never made it past a test [although Enron still managed to declare hunderds of millions in revenue from it]

It was about this time that they also turned down the chance to purchase a loss making little business called Netflix for a rumoured $50m.

Kodak, meanwhile, was way, way too certain that people would keep using film [they believed even into the 90s that the majority of consumer image capture would be on film, with people then getting digital prints]. Such certainty cost them dear.

Tweet This Post

I’m very tempted to buy a Kodak Slice when they come onto the market in April (despite a self-inflicted ‘Gadget ban’). Looks like a great ‘social’ camera, and a great way to take the next 5,000 pics of the children; and I’m always keen to do my bit to help Kodak on their road to recovery.

I’m writing a fair chunk in the book about Kodak and their journey since their print business crashed about them. Since their refinancing by KKR over the summer, they’re at least on a more stable footing – but the downturn hasn’t been kind to them. They’ll give their full year figures in a week’s time – but Q3 revenues were down 26% year on year, and they losing money.

One of the things I wanted to know is what could they have done differently. It is – as the slideshow above points out – a completely academic question. It is no use for Kodak, but it is a valid exercise if, knowing what we know now ,there are lessons there for other businesses.

In Jeff’s book What Would Google Do? He takes a leaf from Theodore Levitt’s 1964 classic, Marketing Myopia, , and encourages businesses to ask what business there in. Then he looks at Kodak and  says

Kodak is a classic case of a company said to be making the transition from atoms to bits – physical film to digital services. If it had realised soon enough that it was in the image and memories business – if it hadn’t defined itself by the atoms it pushed and processed – it should have beaten Yahoo to the punch and bought the photo and community service Flickr. When I think of pictures today, the first brand that comes to my mind is Flickr…Who now thinks of Kodak…? No one.

If only it had been that simple for Kodak.

Yahoo bought Flickr in May 2005. By that stage Kodak was already all too aware that it had moved on from the world of selling boxes of film to a world of images, memories and much more. In fact, the opening sentence for Kodak’s 2004 annual report, for example, is

‘Eastman Kodak is the leader in helping people take, share, print and view images – for memories, for information, for entertainment. The company is committed to a digitally oriented growth strategy….’

In other words, they had – conceptually at least – moved on from being defined by their primary means of distribution (film). In fact, Kodak was pushing itself as a broader imaging business for years before that. It had already bought an early version of Flickr, Ofoto way back in 2001 (three years before Flickr was launched) and turned it into the (admittedly not as good as Flickr) Kodak Gallery.

If Kodak had been smart enough to buy Flickr (and if the owners had wanted to sell to them), and had they managed not to ruin it, it would have been a great little asset for them.  Under a CMO such as Jeff Hayzlett who is genuinely committed to social media, it might have acted, as Jeff (Jarvis)  suggests, as a smart piece of branding. But it would have been no more than that. A Band-Aid for a broken leg.

There problems were much deeper than that. To list but a few

• They were distracted by a ferocious price war with Fuji in the late 90s

• They were petrified of cannibalising their film business with digital (further compounding the impact of the Fuji price war)

• They massively underestimated how quickly consumers would ditch film

• Decades of comparable success had made them fat and way, way too happy with themselves

A few months ago, I asked this question to  the my favourite Swedish PhD student, Christian Sandstrom who has made something of a speciality of creating fabulous Slideshare presentations on the changes in the photographic industry. He responded quickly, but I never posted it here. You can see his answer above.

Here’s the quick summary

• Over aggressive diversification left them burdened with debt and in a weak financial state for dealing with the Fuji price war.
• They put too much focus on ‘hybrid’ solutions – using digital as a way to sell print (eg the Photo CD system)

The first point is an interesting one, because without the diversification – or at least without some of the better bits of it – they wouldn’t really have much of a business.

The second one is something that really strikes you when you look at their first wave of ‘digital’ innovations all started from the premise that people would buy film – and then have the prints digitised.

They developed a future in the shape of the past.

Even though they talked about being in imaging and memories – their financial base was still in film, and even though they could move conceptually, they could see no way to move economically (and I suspect that many of us sitting around the Kodak board table at the time would have come to similar conclusions).

It seems like an obvious mistake, but I stumbled across a piece in Fortune in 1997 (What’s Ailing Kodak?) about the price war with Fuji talked in the final paragraph about  ”the danger–still much in dispute–that film sales will soften as digital cameras made by companies like Sony, Canon, and Casio take up a bigger share of the market” (my emphasis).

Still much in dispute? In other words – way back then, the disruptive power of the digital world was still very much in question.

Now we know differently.

So what do we learn from this?

• There are rarely simple solutions to profound structural problems
• Short term competitive pressures can’t be ignored, but nor can they be allowed to obscure long term strategic challenges
• Redefining ‘what business your in’, only works if it is credible financially, as well as conceptually
• Beware hybrid solutions that reframe disruptive forces as growth opportunities – they are often too good to be true

Related articles by Zemanta

• Kodak to Raise $700 Million, Most From K.K.R. (nytimes.com)
• How Kodak CMO Jeff Hayzlett Uses Twitter (pamorama.net)
• Kodak Slice Ambitious Pocket Cam (crenk.com)
• Book Review (in Tweets): What Would Google Do? (heidi-miller.com)
• What should newspapers have done? (economist.com)

Tweet This Post

The one session that everyone goes to is (Sir) Martin Sorrell‘s state of the nation address: an off the cuff. The juicier bits of which were covered here by the Telegraph.

Having now listened to a couple of these, the most interesting dimension for me – is not the latest letter to describe the shape of the recession (L.U.V- if you’re interested), nor the pronouncements on the fate of the media industry, but the way that WPP has evolved over the years.

This year as last, he pointed to three growth trends that are dictating WPP’s direction as a group.

- The growth of the BRIC economies and ‘the next 11′

- The internet, now 25% of revenues and growing (including mobile)

- Consumer insight – which now accounts for 40% of revenues (more than advertising).

[I should add that the one different focal point this year was on the need to 'improve the way we do things' - ie focussing on efficiencies in processes, working across the group. In other words: short term need to keep cost down]

The precise details of each of these is not as important as the overall implication. Following these trends the group shifts from being a UK/ US advertising group into something completely different all together.

Following these three trends has meant change at all levels – from major acquisitions (eg TNS), to organisational change within operational business (eg Mediacom), to edge innovations and investments (eg the stakes taken in a number of start ups by WPP Digital).

As I’ve been putting the book together, a real gulf has appeared between companies/ groups who operate like this, constantly evolving and seeking out growth areas – the standard practice in say, the technology sector; and those who remain in one sector and in one country – which has been the standard practice in much of the media industry. Certainly among those who currently find themselves most troubled.

Some of this is down to public ownership. Investors prefer a public business to do one thing well. And to get bigger and better at it. You don’t get to diversify – because, they will argue they’d rather find a business that excels in a new sector, rather than fund your foray into it. The problem, of course, is that when that one thing you do really well stops delivering the returns it once did – you have nowhere to hide; and investors will leave you like so many liggers scuttling away from a party once the free booze runs out.

The problem is that in this workd, there are very few businesses that can just stand still in this way. They need to be able to evolve – to move into adjacencies, to nudge step-by-step away from the core business before it implodes.

My McKinsey-bred colleagues call this ‘classic S-curve thinking’. Yes, in some sectors it is classic. In others, however, it remains rocket science of the highest order.

Related articles by Zemanta

• Sir Martin Sorrell: Rupert Murdoch’s pay wall plan is right (telegraph.co.uk)
• Admen look to WPP boss Martin Sorrell to predict better times (telegraph.co.uk)
• Recovery? You’re joking, says Sorrell (thejc.com)
• WPP profits down by nearly 50% (guardian.co.uk)

Tweet This Post

Image via Wikipedia

HMV Group is one of the businesses I’m focussing on in the book. A few years ago, I thought there were destined for nothing but failure, a traditional business that had simply failed to make the leap into the 21st century.

They faced a perfect storm of Amazon; Apple; illegal downloading; and supermarkets selling books, CDs and DVDs at cheaper than cheap prices. You could forgive them for going the same way Tower Records had gone before them.

A friend in retail, however, told me when Simon Fox took over that he was a class act, and I shouldn’t dismiss them quite yet. And sure enough, he was right – to the point that Fox of course was said to be top of the list to transform that other digitally challenged UK institution: ITV. In the end, to HMV’s good fortune (and I suspect to his as well) he decided to stay.

Waterstones is still a long way from out of trouble – despite store closures and the savings from the launch of their distribution hub, like-for-likes continue to fall. But the transformation at the HMV business (where Fox is managing director in addition to his Group CEO role) is genuinely impressive.

The lesson here is that the real transformation was achieved by sorting out the core, traditional business. New mix of products (including Apple stuff and iPod accessories – Apple previously wasn’t allowed in the store, because it was seen as the enemy), and a focus on smarter promotion and presentation have all helped.

With that underway, and with financial targets being met, it allows them to expand into new areas, and develop their online business at a more reasonable pace.

The joint venture with Mama Group; the launch of digital cinemas in store in partnership with Curzon; and pushing Sony e-readers at Waterstones – all of these provide a good narrative and glimmers of future growth, but won’t be making a meaningful contribution to the bottom line in the near future.

I doubt they  not going to meaningfully challenge either Apple or Amazon in the online space. In fact, they still have their work cut out to take on Play.com, but the mix of a strong high street presence (at their core, HMV has always been a really well run retailer), a decent online offering and diversification into live music – helped by the decline of Woolworths and Zavvi is a pretty healthy platform for the future.

Today’s news that they’ve bought 50% of 7digital is another nudge in the right direction. A relatively small deal (£7.7m) that will give them a more meaningful digital footprint, and will bring some serious digital expertise into the business. The only thing I’m surprised about is that is that they’ve only bought half the business (not to mention a trading relationship with Spotify).

Why not go the whole hog, I wonder? Or was it just that the VC’s wanted out and everyone else wanted to stay in?

The heft of the still very credible HMV brand is also just what 7 needs if it wants to raise its game. Frankly, in this market, the chances of them creating a viable consumer brand is pretty minimal (they haven’t done it so far), better to team up with someone who already has one.

But, to go back to my point about the importance of the core business – this deal would be largely irrelevant if it wasn’t for the other announcement today that HMV UK like-for-like sales are up 1.7%, with total sales up 12.9% thanks to the integration of the stores they acquired from Zavvi.

They aren’t truly out of the water yet. Given the market the fact that they are high street retailers in a world that is ever faster becoming online and digital, you suspect they never really will be. The fact that their share price is down by 13% this year, despite everyone widely acknowledging that Fox has done an excellent transformation job shows the market is still luke warm about prospects for genuine growth. But, right now, things could be a lot, lot worse for them.

Tweet This Post