When business cases teach the wrong lessons

Jeffrey Pfeffer, in his great book “The 7 Rules of Power” declares that “success excuses (almost) everything.”  Success also determines which stories about the origins of that success get told and which headlines are buried.  This makes it all but impossible to know the real causes for why things worked out the way they did, inhibiting learning. 

On learning, case studies and missing information

Human learning is like the scientific method. It requires us to assert a hypothesis, which can be formal or not, conduct an experiment, and see if what we thought would happen happened.  We can then adjust our hypothesis to reflect the new facts we have hopefully uncovered.

Here’s the problem with a lot of  our learning in business – it often takes the form of stories and case studies, which themselves are subject to what Phil Rosenzweig famously dubbed “The Halo Effect.”  In other words, we’re not told the whole story, and so we make inferences about causality without really knowing what happened.

Let’s revisit one of the most famous “cases” of corporate decline, the long, sad story of Kodak.

Kodak’s demise was more complicated than it is usually portrayed

I was reminded of this in class last week when a participant observed that what killed off Kodak was the digital camera revolution.  That is true, but not in the way the observer meant it. In a fascinating re-telling of the Kodak Story, Ron Adner points us to the real culprit – the improvement in the quality of screens which made printing photographs at home unnecessary.  So, as Ron says, they won, but they won the wrong game, which we discuss in our Friday Fireside Chat.

Unlike those who say Kodak missed the digital revolution, they enjoyed tremendous initial success with digital tech.  Indeed, in 2001 the company debuted its “easy share” line of cameras which were a huge consumer hit.  By 2005, Kodak made the top-selling digital cameras in the United States.  Unfortunately for the company, rapid commoditization meant little in the way of margins for their products.

Looking for the reincarnation of printing at HP

Which brings us to Kodak’s strategic decision to go all-in on printing.  Their former CEO, Antonio Perez, had made a huge name for himself at Hewlett Packard, running one of their fast-growth businesses, its division dedicated to printing labs and at home printing.  As a Bloomberg piece glowingly reported, “Under his watch at HP, its installed base of inkjet printers grew from 17 million in 1995 to 100 million in 1999 and printers became a $10 billion business.” Nonetheless, he lost out in the CEO competition to Carly Fiorina in 1999, joined Kodak in 2003 and was named CEO in 2007.

The wheels were already turning on what would end up being the disastrous move into printing.  While still at HP, Perez architected a joint venture between the two companies, announced in 2000.  The joint venture didn’t’ go as planned – it was dissolved in 2003.

By 2007, Perez announced a massive entry by Kodak into the  $46 billion ink-jet printing business.  Unlike the standard set by HP, Canon and others, in which printers themselves were heavily subsidized and profits were made on ink, Perez planned to go the other way around – sell more expensive printers, but save money on ink.  Skeptics were not impressed – as one analyst observed, Kodak was just moving “from one buggy whip business to another.”  That same article noted that Perez had directed hundreds of millions into the printing business, “even as printouts are increasingly being replaced with electronic copies on computers, tablets and smartphones.”

Even as Perez continued making rosy predictions, one annoyed investor was highly critical of the Kodak board.  In a rather frank take on the situation….

Ken Luskin, a disgruntled Kodak investor who runs Intrinsic Value Asset Management, said Mr. Perez’s turnaround strategy was the story of how “a company has been run into the ground by one guy’s ego needs.”

“He said, ‘I’m going to rub this in Hewlett-Packard’s face.’ This is why they are doing this,” Mr. Luskin said.

Kodak declared bankruptcy in 2012.

Investing in options, but not commercializing them

One fascinating aspect of the Kodak story is that the company was an R&D leader in many technologies that subsequently became important.  I describe investments of this kind as creating “real options” in which the risk to make the investment is small, but the benefits if things work out can be huge.  My Dad, who worked at Kodak for many years, could attest to the quality of the research groups.  As part of a memorial for him, one of the scientists told me of what seemed to be the core problem:

“I went to the marketing guys and showed them a new material with tremendous potential.  They said, ‘but its never been sold before.’  I said, Yes, that’s the point, it’s never been sold before – we can create a whole new market! They said, “how can we sell something that doesn’t exist?  They had no imagination.”

An example offered by a Wharton case study of the company is illustrative:

David A. Glocker’s company, Isoflux, is expanding — thanks to technology he developed in Kodak’s research labs. He didn’t steal anything. In fact, before he founded Isoflux with Kodak’s blessing in 1993, Glocker approached his managers at the company and suggested they market the coating process he had developed.

“In a nutshell, I went to them and said, ‘I think this is valuable technology and it’s not being commercialized…. I’d like to do that if Kodak is not interested,’” he recalls. “And they said, ‘Fine, do it.’” So he did, in his spare time, for five years while still working at Kodak, then full-time after leaving in 1998. Today, several patents and innovations later, Isoflux is a growing company in Rochester, N.Y., that coats a range of three-dimensional products, from drill bits to optical lenses to medical devices.

The technology is one of countless innovations that Kodak developed over the years but failed to successfully commercialize,

It wasn’t that Kodak didn’t invest in options.  By one account, a legacy of their founding was that called the “Eastman Nickle.” For every dollar the company received in revenue, R&D got 5 cents. That ensured the resources were there – but managing a successful growth portfolio takes more than that.

Nurturing Loonshots and the need for Sherpas

At a high level, the problems described at Kodak are a characteristic of truly breakthrough innovations – the kind that today’s experts think can’t possibly happen.  Safi Bahcall describes these as “Loonshots” and argues that they are major sources of human progress, but that we struggle to manage them appropriately.  Because they are new and fragile, Loonshots need time, resources, passionately interested advocates and freedom to experiment and tinker.  This is completely out of whack with the order, metrics and progress expected from ongoing management in the main businesses of a company.

The solution, Safi suggests, is to create a role similar to the one that Vannevar Bush, Dean of Engineering at MIT, persuaded President Roosevelt to create during World War II.  It’s an innovative structure that both nurtured fragile loonshots and allowed them to scale to military-grade applications when they were ready.  At a national level, Bahcall is hopeful that such a role will inspire and restore technological progress.

I call these folks “Sherpas.” Just like the Sherpas who will get you to the top of Mount Everest, the organizational sherpas are intensely knowledgeable about the environment they are navigating. They typically have deep technological chops (in tech companies) and are well respected. They are seen as fair and relatively unpolitical. Their genius is figuring out how to orchestrate the conflicting needs of innovations and the demands of the day to day business.

Perhaps the real lesson of the Kodak story is that companies can indeed innovate from within – but takes a special kind of structure to integrate, as Safi says, the artists and the soldiers.

What’s new at Valize

We’ve successfully launched our fall cohort of on-line learners with a great group of people now entering Week 2.  They’ve learned the principles of discovery driven planning and are now learning how to do insightful customer interviews.  More on the program here.

We’re also increasingly delighted with our SparcHub app that allows you do introduce discovery driven planning into your organization, view your portfolios and track your learning – easily and transparently.  More on that here.