It is a rare company that realizes it is time to fire the CEO when the financials are good but the business is fundamentally heading for a cliff. For me, I learned this lesson first hand. I had joined the board of a $200million public company that 15 years earlier had single-handily created an industry. The company had innovated, found a business model, grown successfully but now even as revenues continued to grow, the company was slowly but surely dying.
There’s nothing harder than making radical changes when the numbers look great.
Lifecycle
The company’s two co-founders had created a new technology and an innovative business strategy. The engineering co-founder had created a consumer electronics security product that created an entirely new category. The other founder, the business guy, managed to get its product legislated into consumer electronics devices. After the initial few years of technical innovation, they found their business model in licensing and over the next decade and a half grew into a $200 million company.
As the revenues grew, engineering continued to pursue sustaining innovations– incremental improvements on its core technologies.
At the same time its business strategy became operational execution focused on licensing and legal to collect royalties.
Execution
Over time the co-founder responsible for the original business innovations departed. While a large loss, it wasn’t fatal as the company now was executing a repeatable business model. The new CEO was promoted from inside the company and did an excellent job of running the company. Even though the company was in Silicon Valley, he ran it like it was in Kansas: no frills, no hype, no crazy expenditures, just year after year of increasing revenue and profits. And year after year he managed to come out on top renewing the licensing contracts with Hollywood studios, (who were no pushovers in negotiations). It was impressive.
We Think We Need Some Technology Advice
To their credit, the board and CEO realized that this business model couldn’t continue forever. They acquired a small, innovative company in what they thought was an adjacent market. The acquisition turned out to be a culture clash of titanic proportions, kind of like the irresistible force meets the immovable object, as the great startup founder ran headlong into the excellent operating guy. Neither company really understood what it would take to integrate such different worldviews. (More on this in another post.)
In the middle of this acquisition, both the board (who were finance and Hollywood executives) and the CEO realized that while they were physically in Silicon Valley, they were missing someone familiar with business innovation in technology companies.
This is when I joined the board.
Distracted
After a few months on the board trying to understand the difficulties of integrating the new acquisition, I realized that this was just a side-show. The real issue was that was that the instincts of the board and CEO were right. There were tectonic shifts happening outside the company – changes in markets, technology, platforms, regulations, etc -and outside their control. Worse, these shifts were outside the company’s control, because unlike the original co-founder, now gone, who managed to get their technology written into legislation, no one was working the same magic on the next generation of digital standards online or in the cloud.
We realized that the company had three to five years left before its licensing business would drop by half. As a board we slowly came to the conclusion we’d have to reinvent the company, and we didn’t have much time. The CEO agreed.
Reinvention
Over the next few years, the company built an internal engineering department, and expanded its business development team in search of a new strategy and new companies to acquire.
To the outside world, things still looked great; year over year, revenue and profits were still increasing.
At each board meeting, we’d hear about new products and approve new acquisitions while we were increasingly worrying about when revenues of our core product would start declining.
The world outside the company was changing faster than we could. The new strategies and acquisitions ended up as slight variations on the ones we were already executing.
We seemed to be out of big ideas.
Time For a Change
The problem was, the company needed to think like a startup again. The current team was too focused and ironically too steeped in our current business to imagine radical reinvention.
We concluded that we needed a new CEO and new board members.
There’s nothing harder than changing strategy with a CEO who the board admires, with revenues seemingly increasing. Yet the consequences of ignoring the shifts in the market, technology and regulation is a going out of business strategy.
This was a tough call for the board as we liked the CEO, and he was the one who had asked us to join the board.
As one could imagine, the existing CEO didn’t agree. “I’ve done everything you guys have asked. Our revenue is still growing and we are acquiring all the new companies.”
While the CEO is the responsible executive for operating the company on a daily basis, ultimately it’s the responsibility of the board of the directors to hire and fire the CEO. The board is responsible to the shareholders and all the stakeholders for the ultimate survival of the company. Our call was that it was going to take a new set of eyes to get the elephant to dance.
Postscript
The new CEO turned the company on its head, divested most of the acquisitions, made other acquisitions worth billions of dollars, refocused the company, changed out most of the board and senior management.
And he even renamed the company.
Revenue doubled in the last 3 years and the market cap is approaching $4 billion as he reinvented the company.
A tough call but the right one for the shareholders.
Lessons Learned
- Just because a company is profitable doesn’t mean its core businesses isn’t crumbling under its feet.
- Big companies are dead long before they close the doors.
- Ultimately it’s because the board of directors doesn’t act in time.
- The dilemma is how to make sure that the board is not just a cheerleader for the CEO when the CEO is the primary recruiter for the board.
- Microsoft fits this description. Their failures in multiple markets is no longer just a failure of management but a failure of board governance. (Hard to fix when the major shareholder is the lifelong friend of his handpicked replacement.)
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Filed under: Corporate/Gov't Innovation, Customer Development |
Hi Steve,
I’ve been reading your blog for a few months and love it. Thanks for always bringing such difficult business issues to light with so much honesty and showing what we can do to rise to the challenge. Cheers!
Would you characterize the new CEO as having “vision” and the right knowledge/skills for the task of creating sustainable innovation in the company? What did you and the board look for in the new CEO?
We looked for someone with experience in reinventing companies of this size rather than direct domain expertise.
We were looking for someone capable of disruptive innovation rather than just sustainable innovation.
One could argue that we did it right or were just lucky.
steve
This sounds exactly like Yahoo’s story right now…
There was a great post on this last month on the HBR blogs site: see Scott Anthony’s “The Key to Spotting a Disruption Before it Happens” at
http://blogs.hbr.org/anthony/2010/05/the_key_to_spotting_disruption.html
key extract:
How could a relatively flat line be scary?
It just looked so eerily familiar. Go back and look at what happened to CD sales from 1996 to 2001. Or check out newspaper company revenues from 1996 to 2005. Or Kodak’s film sales during the 1990s. Or Blockbuster’s revenues in the early part of the 2000s. Or Digital Equipment Corporation’s revenues in the 1980s. And on and on and on.
In the early days of transformation, market leaders tend not to feel deep pain. The transformation takes root away from the mainstream, or in a seemingly non-connected market. It’s not yet good enough for mainstream markets. Or, the overall increase in consumption acts as a “rising tide” that lifts the boats in the mainstream market. This makes it easy for executives to say, “I get what you are talking about. But my business is healthy! It’s all overblown.”
[…] When Big Companies Are Dead But Don’t Know It It is a rare company that realizes it is time to fire the CEO when the financials are good but the business is […] […]
Schwan’s Home Service, Inc. is in the same predicament whether they admit it or not. My husband has worked for them for 15 years and we have seen trouble brewing for the past few years. Schwan’s has tried 100’s of little things to fix the problems instead of making a few key changes and focusing on them. Unfortunately the corporate office has had their heads in the sand until now and it is probably already too late. It is very sad.
I’ve been through this. That company did not survive.
I Moore’s technology adoption lifecycle the market is represented by the area under the normal curve. As time goes by a company moves to the left. What gets lost is that the company is consuming it’s market. Tragedy strikes when a company has consumed 50% of its available market. Growing revenues are indirectly proportional to the available market remaining until 50% is consumed.
The cure is to bring a discontinuous innovation into the tornado before 50% of the market is consumed.
Something else also happens as you move to the left on the technology adoption lifecycle. The organization matures. The mature organization is the wrong organization to bring another technology through the lifecycle. Each phase of the technology adoption lifecycle requires an organization tuned to its market phase. Further, the new technology will not sell to the existing customer base, so the customer base is unique as well. Christen’s separation notion needs to be extended not just to starting a new company for the new technology, but new companies for each phase of the lifecycle.
The early adopter custom applications phase requires a different set of skills than the vertical market served in the next phase. The tornado is a different organization as well. The can do “free” for seats. the post-tornado organization is yet again different, as is the late market/SaaS organization.
Unfortunately, we learn new things and forget the old things. We cannot go back. Staff divides into process owners and client/customer knowledge owners.
Instead of assuming linearity, assume discrete organizations serving discrete markets with discrete products. Long-term survival is quite possible, but you can’t get there with long-term linearity, economics of scale, or organization-wide alignment. Align to the phase. Each phase-specific organization needs its own cost basis and policy model. What works in one should not be rolled out to the others. Mind Christensen’s separation across Moore’s technology adoption lifecycle.
Our company didn’t need to die. Neither does yours.
Reminds of 1995 in Germany. Why was Amazon pioneering e-commerce instead of all those big mail order services? I mean the web is just like made for them.
For me those guys (Otto, Quelle …) died in 1995, Some of them still exist, but they failed to exploit and achieve what Amazon accomplished
So, the question is how one can balance the delicate tasks between sustaining bread-and-butter business while nurturing the earth-shifting new innovation inside the same company. I can guess the answer is also different between big, matured company vs. medium, newly matured company.
You are getting at the heart of one of the most problematic issues for large firms: how to make a pivot when culture, processes, people, and everything else are pointing in a certain direction (and is a pivot even the right move!). So far, the prescriptions from Christiensen, Gilbert, and others suggest the value of a separate organizational unit, changing management, or trying to be ambidextrous. All these answers are a bit of a black box (for example, if you carve out a separate organizational unit, what will they do and will it be any different than what they did in the parent company).
So what is the difference between Microsoft in 1995 (when it was dead but was able to resuscitate itself) and Microsoft in 2005 (when it was dead and remains to this day blissfully ignorant of that fact?)
A hint: on May 26, 1995, entrepreneur CEO Bill Gates wrote his famous “Internet Tidal Wave” memo, which unflinchingly set the company on a new path that embraced the technological disruption of the Net. Then, in January of 2000, business-focused Steve Ballmer took over as CEO of MSFT, where his relentless focus on execution has tripled revenues of his existing business lines.
This article pretty much lays it all out, although it doesn’t give enough credit to Bill Gates for the pivot in 1995, saying that Microsoft was still nimble then but is lumbering now (as if that was a pure accident.)
http://www.newsweek.com/2009/10/28/the-lost-decade.html
I got this comment from a CEO of a large company who for obvious reasons didn’t want to use his name.
“Your reference about Microsoft is spot on. I have been up in Redmond and spoken with a few of their executives recently and thus have some insight into their business.
They are deer in the headlights and have an organization that is so structured and culture so internally focused that they really can’t do anything. Someone needs to come in to replace Balmer that will shake up the company and change the culture and strategy.”
And this one came from another CEO who has been brought in to do public company turnarounds.
“In turnarounds or repositions, the culture must be one of the earliest things that changes so that the organization can drive and support change as opposed to fight the inherent change required.”
I like this answer the most. All other suggestions would mostly fail when the company culture stays the same. Most big companies got a real hard time doing any change at all in my experience. Only when a top leader pushed down the idea of change in full force, then you would see some impacts. Most famous example is IBM with Sam Palmisano.
Change the DNA for Species Evolution or Wait for Extinction.
Go Darwin!
You just wrote about the problem with the country. It’s old and tired and doing things that waste time and money.
To the comment about Schwans, it’s an interesting situation with them. I interviewed with them a few years back and then one of the founding brothers was very old and transitioning things to a new CEO. I thought from the outside it looked like a pretty cool place, but I looked at Glassdoor last month and it got one of the lowest ratings by its employees of all the companies listed.
So glad you wrote this. Couldn’t agree more. It’s so tough to operate smart when you’re big and enter politics, scale, public offerings and other things into the equation. MySpace is a great example of how it can go wrong in my opinion. When you are big, you can forget about your customer’s and their experience, and that’s when you lose.
[…] read a great post this month from Steve Blank entitled When Big Companies Are Dead But Don’t Know It. Steve writes about a company he was involved with where everything appeared just dandy on the […]
Hi Steve
Great post. I’ve been thinking about this in my part of the software space (telecoms BSSOSS) for a while now. So here’s what we think about this topic:
http://www.microsperience.com/?p=1638
Our view is that the telecoms market is fundamentally changing and therefore quite a few software vendors risk being left high and dry because they’re continuing to sweat their existing assets or incrementally improve their offering.
But this swerve is fundamental and challenges many of the norms that have been built into existing software.
This means that we now have zombie business and operational support systems (BOSS) vendors being led by zombie bosses – some of these guys aren’t really even sweating yet, although they should be.
It doesn’t have to be terminal, as you explain in your post, but it does require some pretty strong action. What I’ve seen is that when there’s a change of mgt – risky as that can be – then it can resurrect the vendor. A US OSS provider comes to mind that seems to be moving back from the edge – nice to see – facilitated from my PoV by a change in staff.
Here is Geoffrey (Crossing the Chasm) Moore’s talk at the Business of Software conference 2009.
http://www.blip.tv/file/3314388
Great post and awesome blog. I always get something from your posts.
This one reminds me of some of the key items in Jim Collin’s “How the Might Fall” (Author of Good to Great and Built to Last)
http://www.leanforeveryoneblog.com/2010/06/how-the-mighty-fall-lean.html
Here is Malcolm (The Tipping Point) Gladwell’s TED talk from a few years back. He talks about a process similar to customer discovery and customer validation in the food industry based on the work of Howard Moskowitz. The food industry used the work of Howard Moskowitz to reinvent itself.
http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce.html
I like the quote from around the 9:35 point in Malcolm’s talk where he says
” Assumption number in the food industry used to be that the way to find out what people want to eat, what would make people happy, was to ask them.”
But what they discovered in the food industry was that
“People don’t know what they want (to eat)”
“The mind knows not what the tongue wants, it’s a mystery”
I wonder if this applies to other industries as well.