Last week I wrote a post on the impact that digital technologies are having on the newspaper, entertainment and media industry in general. It was based on the “Social Media Implications for Business” panel I moderated during my recent week as Innovator in Residence at USC’s Annenberg School of Communications and Journalism.
The panelists pretty much agreed that many legacy media companies are going through a kind of near death experience as the industry transitions from analog to digital technologies. Two forces, in particular, are wreaking havoc on the industry: cannibalization - inexpensive new products that are cutting into their existing revenues; and fragmentation - audiences being shared across the many new kinds of content and experiences now available to them.
Jeff Zucker, President and CEO of NBC Universal, has succinctly captured what is going on in the media industry, with his widely quoted comment that the new digital business models are turning media revenues from analog dollars into digital dimes. The key problem for legacy media companies is thus to come up with new, innovative business models that will enable them to make money and survive as their industry continues to transition from a business model based mostly on analog dollars into one based mostly on digital dimes.
“In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power . . . Companies that once revolutionized and dominated new industries . . . have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.”
As I was writing the blog, my personal experiences at IBM kept flashing through my mind, both our own near-death experience back in the early 1990s, and what we learned a few years later as we embraced the Internet and came up with the e-business market strategy, which played such a key role in helping to transform the business models and culture of the company. IT and media are clearly very different industries, but there are parallels from which perhaps we can learn. Let me discuss three such potential lessons.
Lesson 1: If disruptive changes are inevitable, it is critical to start planning for the post-change future and take whatever actions are necessary to survive.
Once you have spotted a creative destruction asteroid heading straight at your company and/or your industry – that is, once you have identified that a disruptive change is inevitable, - you must take action and start planning for the post-asteroid future. This is really difficult, especially if the actions require restructuring the company to significantly lower cost and expenses, as well as transforming its business models and culture.
By the late 1980s, advances in microprocessor technologies were enabling new competitors to attack the dominant products in the IT industry - mainframes, supercomputers and minicomputers - with significantly less expensive client-server solutions based on UNIX and PC platforms. We knew what we had to do in IBM - transition the mainframes to exploit microprocessor technologies and introduce IBM’s own client-server platforms. However, the new microprocessor-based products commanded significantly lower profit margins than the products we had been selling for the previous several decades.
Thus, the transition to these new products required a massive restructuring of IBM to lower cost and expenses, including closing factories and sales offices around the world and laying off large numbers of employees. To survive, we had to come up with a very different business model. This was our equivalent of transitioning from dollars to dimes.
IBM’s top executives rationally understood that the management systems and business models built around the previous generation of products were no longer competitive, and agreed that the company needed to organize and run itself in ways that were based on the economics of the new, less expensive technologies. However, they had a tough time stepping up to the full extent of the needed restructure, and moved too slowly in taking the necessary actions until it was almost too late. Finally, as the financial situation of the company became increasingly dire, IBM’s Board brought in a new management team, with Lou Gerstner as Chairman and CEO.
By then, IBM’s business was in free fall - $16 billion in net losses between 1991 and 1993. A plan was drawn to reduce expenses by almost $9B in total, including further layoffs which eventually brought IBM’s employment to around 220,000 in 1994, about 55 percent of the number at its height ten years earlier. The dividend was cut by more than 50 percent.
Much of what had been affordable in previous years, no longer was. For example, over the years IBM had amassed an important fine-arts collection which it displayed in a very nice museum in the IBM building at 57th and Madison in Manhattan. The collection was sold at auction and the museum closed. The 51-story building itself was sold, as were similar IBM buildings in prime locations in cities around the world.
It was all very painful, but there was no alternative for the company to survive.
Lesson 2: Major changes to business models require considerable experimentation in the marketplace.
While such a massive restructuring was necessary for survival, it was not sufficient. The market environment in the IT industry had significantly changed. For IBM to once more be relevant to its customers, it had to come up with a business model and culture that embraced the new realities of the market. Otherwise it would just be an irrelevant, once-great company.
In the mid 1990s, it was becoming clear that the Internet and World Wide Web were moving from being networks primarily used by universities and research labs, to becoming transformative innovations of historical dimensions across all aspects of business and society. By the fall of 1995, having pretty much stabilized IBM and returned it to profitability, Lou Gerstner commissioned a team led by one of his most trusted senior executives to recommend how IBM should best align with the emerging, powerful Internet forces.
The task force recommended that IBM should commit the resources of the entire company to lead in this next wave of network-centric computing. It called for the creation of a central group to coordinate the company-wide Internet efforts. In December of 1995, Lou called me into his office and asked me to organize and lead this new cross-IBM group, which we called the IBM Internet Division.
We knew that the new Internet and Web capabilities were very exciting and enabled a variety of novel, useful applications. After all, that is why the research community had been hard at work developing the Internet for more than twenty five years. What was not yet clear were the implications of the Internet for business. Early applications focused on e-mail communications as well as on publishing all kinds of multi-media content that could now be accessed via browsers. E-commerce applications were starting as well, as newly formed companies were experimenting with selling all kinds of new products over the Web.
Our biggest challenge in the early days of the Internet Division was to formulate our basic market strategy and business models. What was the value of the Internet to IBM’s clients, as well as to IBM itself? How would they, and we, make money from the Internet, either by becoming more efficient or by increasing revenues? In 1996, a couple of years before the dot-com bubble, we did not have clear answers to these questions.
The Internet Division job was different from any other I had until then. There was no single technology or product you could develop in the labs to answer these questions. This time around, the strategy had to come not from the labs, but from carefully watching and learning what was going on in the marketplace, - and that is were we found our answers.
The universal reach and connectivity of the Internet were enabling access to information and transactions of all sorts for anyone with a browser and an Internet connection. Any business, by integrating its existing databases and applications with a web front end, could now reach its customers, employees, suppliers and partners at any time of the day or night, no matter where they were. Businesses were thus able to engage in their core transactional activities in a much more productive and efficient way. And they could start very simply, initially just web-enabling specific applications and databases.
We worked closely with our customers, and collaborated with a number of them in developing prototypes and conducting market experiments across a variety of industries. After a while, it became clear that the Internet was going to have a profound impact on all aspects of business and in every single industry around the world.
We did not invent our e-business strategy. We discovered it in the marketplace.
Lesson 3: Every business and institution can benefit from embracing disruptive innovations, - not just start-ups.
As the Internet frenzy started to pick up intensity toward the latter part of the 1990s, there was a buzz in the air that in the Internet-based “new economy,” born-to-the-Web start-ups had an inherent advantage over “brick and mortar” companies with legacy infrastructures. Many thought that because of their grounding in the physical world they could not possibly compete in this fast-moving digital space and were therefore headed for extinction. This tension between dot-coms and legacy companies ten years ago is somewhat analogous to the tensions between new and old media companies that we discussed in the aforementioned Social Media panel.
The essence of IBM’s e-business message was that the Internet marked the beginning of a profound revolution with the potential to alter the shape of businesses, industries and economies over time. But it was a transformative, not a rip-and-replace, revolution. Any product that embraced the new open standards of the Internet would be able to integrate seamlessly into the fast growing Internet and Web infrastructures. Any business and institution would benefit from embracing the Internet, not just the start-ups. The brand reputation, customer base and IT infrastructure that businesses had built over the years were even greater assets when properly combined with the universal reach and connectivity now offered by the Internet.
Whether talking about the Internet twelve years ago, or digital media today, an established company can embrace disruptive innovations not by trying to act like the start-up it is not, but by figuring out how to leverage the new innovations to evolve its organization, culture and business models into the future. How can you best leverage the skills and talent of the organization, while embracing the new ideas and market realities? How can you leverage your installed base and customer relationships, so they become early adopters of the innovative new products and services? How can you continue to generate the bulk of the your cash and profits from legacy products, while supporting the new offerings until they can begin to stand on their own? How can you increase the power of your brand by infusing it with the new energy and freshness that accompany disruptive innovations? And how can you leverage the strengths of the organization that have served you well all along, while leaving behind those parts that have become outmoded?
These are not easy questions to answer, but then the stakes are very high. Only those companies able to find answers to these questions will be able to survive and move into the future.