Why do businesses fail?

Case studies of once market leaders that no longer exist!

Comparing the 1955 list of Fortune 500 companies to the 2017 list of Fortune 500, there are only 60 companies that appear in both lists. In other words, fewer than 12% of the Fortune 500 companies included in 1955 were still on the list in 2017, and 88% of the companies from 1955 have either gone bankrupt, merged with (or were acquired by) another firm, or they still exist but have fallen from the top Fortune 500 companies. Why so? While the failure rate for startups is bound to be high, why do large organizations, such as those featured among the Fortune 500 fail?

While there are multiple obvious reasons of why businesses fail, such as failure to reinvent in light of changing market conditions/ technological innovations, unable to compete with established market leaders, failure to connect with the target audience and deliver real customer value etc, I have highlighted the non obvious ones below, and supplemented the same with case studies. So let’s dive right in!

1. Thinking hardware over Software — IBM hardware vs Microsoft software

• Today, we are all aware of how deeply software is ingrained in our lives. We are almost a decade into “Software is eating the world”. However, things weren’t so apparent a few decades back.
• IBM was among the pioneers of the PC industry and played a crucial role in making PC a global business, but ended up selling the PC division to Lenovo in 2004. (FYI the “Think” brand belonged to IBM before Lenovo acquired it). It failed in the PC business because it focused on the hardware component which ended up becoming a commodity, while outsourcing the brain of the hardware i.e the software to Microsoft.
• It asked Microsoft to develop the operating system (IBM PC-DOS) to be used on the IBM PC version. The agreement allowed Microsoft to sell the operating system to other companies under the name MS-DOS. Microsoft believed that the road to success was by controlling the operating system, which would be interoperable across the hardware, thus making the underlying hardware a commodity. IBM did not consider this, nor did they foresee that companies would be able to successfully clone their hardware platform.

• Once companies were able to clone the hardware, they approached Microsoft for the operating system. Hence, though it was IBM’s name that pushed the IBM PC into prominence, it was the combination of hardware cloning and Microsoft licensing the operating system that created the dominant platform of the PC era

2. Thinking lone wolf vs ecosystem — Nokia Symbian vs Android/ iOS ecosystem

• While lot has been written about factors leading to Nokia’s failure- inferior technology, lack of vision and a culture of shared fear in the organization, the core reason why Nokia failed was its reliance on its unwieldy operating system called Symbian. While Symbian had given Nokia an early advantage, it was a device-centric system in what was becoming a platform- and application-centric world.
• There were multiple versions of Symbian — the product-specific software was only compatible with a particular device in many cases. Nokia did not appreciate the power of platforms and decided to pursue a lone wolf strategy with the non open-source Symbian OS at the front. Nor did it focus on nurturing a community of developers — external developers had to wade through numerous legal procedures to bring their apps to the market. Even after Nokia made the Symbian OS fully open source, the platform was unappealing to the developer community. The Symbian ecosystem was driven by the manufacturers and the operators, while the other ecosystems that emerged then were dominated by the applications and the service developers.
• Hence, there were limitations in creating apps on the Symbian OS, while Android and iOS made themselves indispensable to developers by providing them access to user friendly and feature rich developer platforms. Apple has best leveraged the power a platform through The App Store ( maybe in problematic ways), as Ben Thompson discusses

3. Thinking too little of your competitors and missing the opportunity to buy them out — Blockbuster + Netflix, Yahoo + Google/ Facebook/ Microsoft

• Most businesses lose out to competitors not because their competitive strategy fails, but because they underestimate their competitors and stick to their old school ways of maintaining their leadership. Barns and Noble underestimated Amazon’s capability to establish an online book store, long before Amazon was “The Everything Store”. But some companies miss out on the golden opportunity to buy out their competitors, at a fraction of what they are worth today. 2 cases that I would like to highlight here are -
• Blockbuster’s rejection to buy Netflix: Lot has been talked about how Blockbuster, once a dominant force in the DVD rental market, failed to see the power of online distribution until it was too late, and ended up filing for bankruptcy in 2010. Blockbuster could have avoided this by buying Netflix — Reed Hastings, founder and CEO of Netflix, approached Blockbuster chief John Antioco in 2000 seeking to sell Netflix for $50 million, to which Antioco laughed and said no. Netflix has a market cap of $230billion today.

• Yahoo saying no to Google, Facebook and Microsoft: Yahoo was one of the pioneers of the early internet era during 1990s and was the most visited site in the world in the early 2000s. It was the best positioned to capitalize on the technological innovations, given its suite of products such as Yahoo! Search, Directory, Mail, News, Finance etc. However, Yahoo failed to maintain its leadership position due to multiple reasons, the biggest ones being turning down opportunities that could have changed his future. Yahoo failed to gauge its biggest competitors and refused to buy Google’s Larry Page and Sergey Brin’s PageRank system for as little as $1 million in 1998. In 2002, Page and Brin approached Yahoo once again, this time to raise funds worth $3 billion. However, then Yahoo Chief Terry Semel refused the offer as it looked to again build its own search engine to compete with Google, and we all know how that turned out. In 2006, Yahoo had the opportunity to be at the forefront of another digital era by buying out Facebook. Yahoo initially offered $1 billion to Facebook but later lowered it to $850 million, to which Facebook refused. And the last nail in coffin was Yahoo’s refusal to Microsoft’s acquisition offer for $44.6 billion in 2008. Yahoo does not consider this a fair price, and almost a decade later, Verizon bought Yahoo for $4.48 billion.

4. Fear of cannibalizing sales of your high margin core business — Kodak film segment if digital camera was sold

• What comes to your mind when you think of Kodak? A camera, right? But the company’s core product and profit center was the film and printing photos, not the camera. This is the classic razor and blades business model where one item is sold at a low price or given away for free in order to increase sales of a complementary good — where the camera is the low priced item, used to grow sales of the film.
• People think that Kodak failed because it missed the digital age, and stuck to analog cameras. However, it is not so. Kodak in fact invented the first digital camera in 1975. However, instead of marketing the new technology, the company held back for fear of hurting its lucrative film business, even after digital products were reshaping the market. Digital cameras were “Disruptive Innovation” as Clayton Christensen would call it.
• However, just after digital cameras came smartphones which took the world by storm and digital cameras producers saw their sales quickly spiralling down. People started moving away from printing physical pictures to storing them digitally on smartphones or sharing them online on social media platforms. Kodak didn’t miss this either. Many years before Facebook, Kodak made a surprise business move and acquired a photo-sharing site called Ofoto in 2001. Unfortunately, instead of going the Instagram way, Kodak used Ofoto to try to get more people to print digital images.

• As this article of HBR notes “Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. Where they failed was in realizing that online photo sharing was the new business, not just a way to expand the printing business.”

5. Overestimating strengths of vanity moats such as brand loyalty, evangelist community -Blackberry

• Many times, companies fail to recognize their true moats (I’ve written about Moats earlier here), and rest on their laurels of vanity moats. This is what happened with Blackberry. BlackBerry once reigned as king of the smartphone, controlled 50% of the smartphone market in the US and 20% globally. Even though Blackberry was meant to be an enterprise phone (Corporations and government organizations relied on BlackBerry’s security, reliable email, and utilitarian functionality to keep their workers productive on the move), BlackBerry Messenger gained the support of an evangelist community, making a business device popular among young users as well. Being able to BBM added you to that exclusive club of BlackBerry-only users.

• Blackberry considered this community and brand loyalty its defensible moat, and failed to jump into bigger technological changes brought about by other smartphone manufactures. Blackberry suffered from the Innovator’s Dilemma, i.e “ the decision that businesses must make between catering to their customers’ current needs, or adopting new innovations and technologies which will answer their future needs”. It took the wrong route and focused on the millions of customers it already had, missing out on the billions that were yet to come.
• Another reason for Blackberry’s failure relates to the point (2) mentioned above — Blackberry kept BBM locked down to its own hardware in a world where cross-platform applications like WhatsApp amassed users due to interoperability across platforms.

What are some of the other reasons for such ‘iconic’ failures? If you’d like to chat, feel free to ping me on LinkedIn/ Twitter. I’d love to learn from you!

Originally published at https://futurex.substack.com.

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