3

THE ROAD BARRIERS

Marty Crane lives in all of us. Marty Crane is the guy who moves his scruffy, overstuffed, duct-taped recliner into the stunningly sleek and urbane living room of his son Frasier upon coming to live with him. (Watch the reruns of Frasier on Netflix. No matter your age, it’s still a classic.) Marty is a creature of habit. It’s just natural to want to hang onto things that are in our comfort zone. We all do it. The familiar makes us feel safe, especially when our world feels out of control. As the world spins ever faster, more out of control, and more into areas that are unfamiliar, there is a tendency to hold tighter to what’s comfortable.

Companies, brands, organizations, and people—including Marty Crane—all face the incredibly hard challenge of being able to shift to stay current, or ahead of the currents of market change, while at the same time not losing what makes them what and who they are. In the course of preparing this book, we studied many companies, brands, and organizations, looking into the root causes for their losing relevance and not acting fast enough to shift to the next successful phase. We investigated what stood in the way of being able to shift and focus in order to maintain a leadership position and what kept them the brethren of Marty Crane, who can’t give up something that comforts him, although it’s literally falling apart at the seams.

Importantly, there is no single cause that causes most brands or organizations to lose relevance. Rather, there are many, often interrelated. The stories that follow bring them to light.

KODAK READ THE WRITING ON THE WALL
(but Wasn’t Willing to Pay the Price)

Paul Simon’s song “Kodachrome” refers to the seemingly always-sunny “Kodak moments” in life, captured on film and pasted into millions of analog photo albums that clutter attics and basements worldwide. Unlike what many people may think (including us, before we started researching this book), Kodak did see the “writing on the wall” relative to the rise of the digital age and how it could disrupt picture-taking and, more critically, how it might have an impact on the new ways consumers could interact with their photos, the technology, and the market, specifically social media. Viewing and sharing pictures has become a foundation for everyday socialization. To cut to the chase, Kodak filed for bankruptcy protection in 2012, exited its legacy businesses, sold off promising patents, and now exists as a mere shadow of its former self. Once one of the most profitable companies in the world, Kodak has a market capitalization of less than $1 billion today.

No, Kodak’s demise did not come about, as many assume, as the result of myopia. It came about, more so, as the result of not making the big, very necessary financial bet required to stay the incredibly iconic brand it had been. The fact of the matter is that Steve Sasson, an engineer working for Kodak, created the first digital camera in 1975. Kodak invented the technology, but failed to invest in it for over a decade. We will unpack the yellow (Kodak) film box and tell you how and why this all came about.

The Eastman Kodak Company, commonly known as Kodak, was founded by George Eastman in 1888. It followed the “razor and blades” strategy, selling inexpensive cameras and generating large margins from consumables—films, chemicals, and paper. As late as 1976, Kodak commanded 90 percent of film sales and 85 percent of camera sales in the United States. Traveling around the world with their cameras after college, recent graduates could always count on seeing that familiar yellow Kodak signage on street corners from one country to the next where they could purchase more film. Kodak was ubiquitous.

Kodak was one of Allen’s key accounts early in his career. He spent many hours at its Rochester, New York, headquarters, where despite a posh lobby with all the accoutrements of Fortune 100-dom, the marketing department and other upper floors were indicative of why what happened did happen. The offices were stodgy and the bureaucratic structure—endless meetings and decision-making processes—equally so. The status-quo-oriented culture was evident long before Instagram was a gleam in someone’s eye.

So, it wasn’t that the Kodak crew didn’t see the train coming or the writing on the wall. It became clear to us, after our conversations with many people who went through this era as company insiders, that the company’s own projections of the demise of film were incredibly accurate. Its strategic forecasting group was spot on.

Jim Patton, an executive at Kodak for over thirty years, recounted this state of affairs during our conversation. “We had some really good technical forecasters,” he told us. “As a matter of fact, one of them nailed the basic—the major shift from film to digital right to the year it happened. I want to make it very clear that we knew digital was coming. There was a fork in the road and they took the wrong fork. We knew we had to replace film, but the problem with film at the time was that the earnings from film were probably 110 percent of the corporate earnings. And that was not a slip of the tongue. The explanation from the company was, ‘This is what we do. We have no choice but to be here.’ I think you do have a choice.”

Kodak’s own in-house experts were saying with great accuracy when the tipping point would occur. The problem, as Patton put it so directly, was an issue of management not wanting to walk away from the easy money flowing from film.

The fork in the road was a pivot point ignored. Kodak had a corporate management team that was Rochester-centric. Despite all the data and prescient presentations, they were firmly entrenched in their way of doing business and in the way they generated money from their business. Film was so profitable, at that moment in time anyway, that management had gotten lazy and fat. The film, chemical, and paper manufacturing and distribution models were wonderfully optimized. Faced with starting over, especially as addicted to this profitable business model as they were, was not something anyone wanted or was willing to take on. It required enormous resources. It required a different assortment of skillsets than existed in-house. And it required a different mindset than existed in-house. With the tension of the golden handcuffs, no one wanted or was willing to face Wall Street pressuring the company to deliver increased revenue and profit. No one had the daring to say, “Hang on for a couple of years, fellas. We’re gearing up and going digital.” It was a Kodak moment in time that would not go down as a happy memory.

Brands, organizations—and the people who run them—have an extremely difficult time freeing themselves from the pull of the past. And the management teams are generally made up of very competent and very smart people. From Kodak to Blockbuster, Radio Shack to Nokia, the landscape is littered with companies that have done a core set of things well for years and years, and they’ve made money for years and years. Where they struggle, as this Kodak moment—a teaching moment—tells us, is in their ability (or lack thereof) to make the decision to commit the resources required to fund something that represents the wave of the future. Even, and especially, something in their lane, something the brand is known and respected for, and for which the brand has ultimate credibility: Picture-taking and all its emotional and sociological implications was about to take a left turn, and Kodak refused to follow.

Andrew Salzman, another former Kodak executive, added texture to the nature of the golden handcuffs that shackled Kodak. Salzman, currently a principal at Geoffrey Moore’s Chasm Group, a team of technology professionals who specialize in helping technology-based companies deal with the challenges of staying ahead in both emerging and established markets, ran global marketing for Kodak’s consumer imaging division at a time when digital technology was transforming the category.

“In the case of Kodak specifically, and this would probably be true for other companies as well, if 95 percent of your revenue is coming from your established lines of business—in this case film, paper, chemicals—your stock price is likely to come under siege if you execute a pivot that would draw resources from those established businesses that are essentially making the numbers for the street. It’s very difficult for a smart management team to divert resources from its core revenue,” said Salzman. For Kodak, it would have taken what Salzman called an “asymmetrical bet,” putting the entire team behind new digital initiatives that promise to deliver ten times improvement on the current category offering. He is referring to the well-understood notion that often it may be more beneficial to place greater investment in what is currently a product with lower profitability than in one that is more profitable.

“They would have had to resource this digital transformation with talent and money, resource commitments in products, sales, marketing, business development, and the like in much the same way they were resourcing their current business model,” Salzman continued. “You need to spend a lot of money on it, you need to put the best people on it, and you need to expect and plan for a two-to-three-year J-growth curve that anticipates negative cash flow while growing a new category and business at material scale. It would have to have diverted a disproportionate amount of funding. You have to recognize that the revenue you generate will be a gradual build, but time is of the essence, and the volume of resources—the people and the money required to stand up to that business model, operational, and infrastructure shift—are significant. You must be willing to run the major risk on the new business success and you are likely to miss your overall company revenue and margin performance numbers for a period of time.”

Kodak should have resourced the next wave of growth rather than resourcing its current model. As Salzman said, “You need to spend a lot of money on it [the future] and you need to put the best people on it.”

Salzman’s bottom line is that it’s much easier to keep on throwing short-term money to try and prop up short-term business to make the next quarter numbers versus diverting funds for a longer-term business plan with a higher risk profile. If you’re the CEO, answering to shareholders, and make an asymmetrical bet on a future growth wave, you’d better have what it takes to stand up to a disappointed Wall Street for at least eight to twelve quarters.

For firms like Kodak, it takes more than just money. You build up an organization to deliver on what’s required to win in the current business. Often, if not usually, making a shift of the magnitude Kodak was confronting would require a complete retooling. Kodak’s roots were firmly entrenched in Rochester, literally as well as figuratively. This new business, one focused on digital technology, hardware, software, partnership ecosystems, and the continuous beta-centric innovation required to stay ahead of the Silicon Valley curve, was not baked into the Rochester way of doing things.

As Salzman put it, “They required assembly of an entrepreneurial team run by risk-taking leaders, not managers—pretty much like all the start-ups that we see in the Valley. How can we quickly build a viable product? How can we enable the supporting value chain to ensure what we call a ‘whole product’ solution, such as software partnerships? How can we quickly get traction with a growing base of mainstream customers such that the business begins to represent something material and that will get the attention of—and patience from—Wall Street? The culture would have required a seismic shift to commit to funding a substantial start-up [with] everyone across the company signed up and compensated based on the success of this category reinvention effort.

“When your category and core business is being disrupted,” he continued, “you’ve got to act fast, to be willing to make mistakes, and learn and iterate fast. You need to be willing to operate under a different set of performance metrics relative to the traditional business side, focusing on business traction and user growth over revenues, bookings, and margin. Negative cash flow in the beginning stages isn’t particularly well received on that core performance side of the house, the traditional business side. The management-oriented people initially attracted to Kodak were attracted to a well-established, leading, stable company with cyclical growth patterns. They want safety and predictability. Those are not the kind of leadership-oriented people you need to reinvent yourself.”

Entrepreneurial companies, with entrepreneurial leaders, are willing to take risks, financial and otherwise. It’s not a matter of making small, incremental changes to get where you want to go. As Salzman explained, “It’s the difference between death by a thousand cuts and slashing off a limb. In other words, if you miss your number by, say, 5 percent every year, you cannot spend too much time trying to prop up a declining category and business to continue to make [your] numbers for Wall Street, while concurrently dabbling in starting up a new business.

“Kodak did not die overnight,” Salzman added. “It saw little signs that things were starting to go south, such as losing a significant contract for photo-processing at Walmart to Fuji because Fuji had committed to losing money and [was] beating them on price in their traditional business. The whole idea [of] being able to capture, store, archive, retrieve, and manipulate images—Kodak’s R&D investments in this technology dated back to 1987. What they did not do is commit to commercializing these inventions, suffering the same fate as Xerox did with its many Xerox PARC inventions. Kodak also executed its digital strategy as early as 1994, but it did it without [the] required ‘all-in’ effort in people, dollars, resources, partnership, etcetera, that was required for starting up a whole new approach to consumer imaging and for owning a category of reinvention. An inherently entrepreneurial company like those we see in Silicon Valley—Apple, Amazon, Google, and many operating in start-up cultures—would have made the investments and commitments into business initiatives [with] the kind of magnitude and power that digital imaging offered.”

That the company clearly recognized that digital imaging and all that went with it represented the next wave in the industry was not the issue. The mother ship did not want to jettison the current business to go full throttle into the new business. For Kodak, it was an effort to keep propping up what it had, while also gradually trying to stand up its new business. The company didn’t have the mindset that would allow it to accept that film, paper, and chemicals would go away, and that if the company didn’t jump on digital it would be obsolete in ten years. Like many companies in similar situations, they didn’t have what it took to be able to “go big or go home.”

Kodak has been misjudged by people thinking the company had blinders on. Kodak had exceptionally bright and talented engineers and sales people, product people, and marketing people. Across the board, they had what it took to run a traditional, risk-averse, “razor and blades” kind of business. What they didn’t have was the desire or wherewithal to make the asymmetrical bet required to seize the day and the future market. Kodak had the inability to free itself from the pull of the past and the revenues that made Wall Street happy. Managers saw the writing on the wall, but didn’t—or wouldn’t—make the magnitude of shift of resources and effort to bring the future to fruition before others did. They couldn’t withstand the gravitational force of the metrics, the process, the strategic planning, or equally important, the change in culture that was required. It’s a story of potential lost.

XEROX:
Sunk Cost Bias and Golden Handcuffs Deterrents to Both Business and Brand

In 1959, Xerox joined the ranks of Kleenex as iconic brand names that stand for the product categories they participate in. Decades later, Google joined these ranks, too. “Can you make me a Xerox, hand me a Kleenex, Google this bit of information?” Xerox was huge in its day. In 1959 it launched the Xerox 914 photocopier that revolutionized the document-copying industry by enabling one to make 100,000 copies per month. That may not sound all that amazing nowadays, as a gazillion tweets can circle the globe in a nanosecond. But for 1959, it was amazing. Equally amazing, on a negative, not a positive note, was how relatively quickly this company, whose brand name was synonymous with photocopying, if not all-out technological innovation, lost its footing and fell down the financial rabbit hole, dragging its brand equity with it.

A decade ago Xerox was caught up in the first wave of change, doing what it could and should to shift into the business services landscape instead of just selling product. Its objective was to turn itself into a “solutions” company. To Xerox, a solutions company was one that designed and ran document systems for businesses. Everyone was talking the digital talk, and many were successfully walking the digital walk, and Xerox legitimately wanted—and needed—to follow the digital money. The primary problem Xerox faced was that the relevance of its long-established and heavily funded offering was fast fading. Most of the copying that people did was on desktop printers. More than this, the bread and butter of its business, copying and processing documents and statements for major financial services companies, was crumbling. The world was going paperless. Everything was moving on-screen, online, and eventually into the cloud. This meant that not only did Xerox have the challenge of shifting its business, what it did, and how it operated, but it also faced the challenge of shifting its brand perception, which may be the harder of the two challenges. A brand is what you stand for in consumers’ minds. Successful brands stand for something absolutely focused and memorable, as in “Xerox is top-quality copiers.” Xerox’s vision of where it wanted to go as a business and brand was generic and unfocused. The title of “solutions” company was being touted by everyone, from IBM to boutique management consultants.

The sad irony of the situation was that Xerox was among the early innovators in many of the areas of technology, digital and otherwise, that we take for granted today and that other companies are taking to the bank—big-time. For example, in 1984, Apple, Inc. launched the Macintosh computer, the first computer with a graphical user interface (GUI). This enabled those of us with no knowledge of text-based operating commands to navigate the world of personal computing. What many people don’t know, or remember, is that Apple did not invent the GUI technology. It was one of the many accomplishments that came out of Xerox’s Palo Alto Research Center (PARC). Other PARC innovations included the computer mouse, Ethernet, intuitive word processing software, and the laser printer. So what happened? Xerox never concentrated or commercialized these technologies, choosing instead to make copiers more efficient.

Moving quickly ahead in the story, when it wanted and had to catch up with where the market was going, Xerox didn’t have the financial wherewithal. It had waited far too long. It had fallen victim to the sunk cost fallacy. In economics, sunk costs are those that have already occurred and cannot be recovered, no matter what you do.¹ In contrast, decisions should always be made according to the future value of the investments you make today. Sunk costs are irrelevant in strategic decision making. A gambler at a Las Vegas table shouldn’t base decisions on whether he is up or down. He should never stay simply to try to win back his earlier losses. Those are sunk costs. His decisions should be made according to the odds on the next play. These are always against him, so he should always leave unless he is willing to pay his stake for the entertainment value of gambling. Social scientists often term the behavior of those who refuse to abandon an initial strategy a “commitment bias.”² The sentiment underlying it is reflected in such clichés as “Throwing good money after bad,” or “In for a penny, in for a pound.”

Xerox was intent on leveraging a manufacturing process and sales force that were optimized for making and selling back-office products, which is a manifestation of the sunk cost fallacy. Feeling the commitment to sunk costs, Xerox was dividing both time and money, splitting its dwindling investments between past and future. This is not a recipe for success. The sunk cost fallacy and commitment bias can inhibit the asymmetrical bets that Andrew Salzman talked about and that we discussed earlier in the chapter.

Christa Carone spent seventeen years at the company, most recently serving as its chief marketing officer, overseeing all marketing and communications globally. She is currently chief operating officer at Group SJR, a content company in the WPP communications organization. She gave us her firsthand account of the situation.

“I joined Xerox in 1996 at a point where the decline had not yet started,” Carone said. “I always say that Xerox is like a cat with nine lives because it had survived a number of business transformations or shifts over the course of its seventy-year history. When I joined, it was going through the shift from analog to digital—analog being the straightforward ‘I walk to the copier to make copies’ [and] digital, wherein everything is connected to the computer and the printer makes the copies. Then laser printers, connected to computers, became more prominent in the workplace and competitors like Hewlett-Packard grabbed market share. While Xerox was a pioneer in laser printing, competitors were faster to market in scaling down the technology into small laser printers that sat on the top of desks in offices small to large.”

Carone went on to confirm that “it wasn’t so much that everyone was complacent, just comfortable with the quarter-to-quarter profits.” That is, until the quarterly profits started to really dry up. “We were huge in the financial services industries, healthcare, mortgages. Anything that required documentation,” she said, then “companies began looking for ways to automate their processes. They realized they could start delivering bank statements, billing statements, mortgage applications, and healthcare forms electronically. Think about all the money this saved these enormous organizations in reducing the cost of printing. However, that cost reduction was starting to have a meaningful impact on Xerox’s bottom line.”

What happened next in the Xerox timeline was the result of color. People were shifting from printing in just black and white to printing in color. With all that ink, it was more profitable for Xerox and became a relatively healthy business for the company. However, it wasn’t enough to offset the fact that people were still copying less. At the end of the day, the advancement in technology translated into less copying. The category became commoditized where price, not brand name, drove revenues, and the category was just basically shrinking as the result of technology trends. Much like the preceding tale of Kodak, Carone made clear that Xerox did see the train coming.

“Yes, and that’s when we started to make the shift toward being a professional services company,” she said. “Hardware was our bread and butter, but we knew we needed to get into a complementary business to offset the decline of the traditional business. What Xerox did was buy a business, Affiliated Computer Services [ACS], as a way to try and catch evolving market needs. It was an aggressive move and it required a massive shift in the legacy perception of Xerox. But selling copiers and selling services are two completely different business models. To balance the secular challenges of the technology business with the up-front investments needed in the services business, plus the marketing costs to shift perception, Xerox was at a turning point as a company that required patience, prioritization, and a great deal of flexibility with its business model.”

So, where is Xerox now? Well, after a series of initiatives, major financial stress, and a bit of soul-searching and fund-sourcing, on January 3, 2017, Xerox separated into two independent, publicly traded companies, each with a single focus and more efficient allocation of capital. One is, yes, a document technology company, called Xerox Corporation, whose objective is to be a global leader in document management and document outsourcing. The other is the business process outsourcing (BPO) company named Conduent Incorporated, which works with clients to improve workflow. Revenue for each of these companies is on the uptick. That Xerox could have been on par with Apple, IBM, or Google had it leveraged its initial brilliance in technological innovation and dealt with sunk costs properly is another, even better thing that might have been. At the very least Xerox could have saved itself some very challenging years, including a close call with bankruptcy. Given its strong brand name and its competitive position, it could have unlocked the future. Instead it was a victim of short-term thinking.

Time and money is the two-pronged moral of the Xerox story. Xerox could not afford the investment required to adequately fund its new business because its traditional business was getting weaker every day. As dedicated as it was to the initiative, by the time it decided to shift, its core business wasn’t generating enough cash flow. Another moral? If your brand is so tightly associated with a particular category, it takes a lot of positive, in-market customer experience with the new category, not to mention a lot of marketing muscle, to get consumers to see your brand in a new light.

TOYS “R” US:
Playing Catch-up Is Hard When You’re Competing on the Wrong Metrics

The difficulty of sustaining success is a central theme of the teachings of Clayton Christensen of the Harvard Business School. He is the author of The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, once deemed by Andy Grove, the former CEO of Intel, among the “best books I’ve read in the last ten years.” In this classic bestseller, Christensen shows how even the most outstanding companies can do everything right and still lose market leadership. No matter what the industry, his theory goes, a successful company will get pushed aside unless managers know how and when to abandon traditional ways of doing business. As the title states, the innovator’s “dilemma” comes from the idea that organizations will reject innovations based on the fact that customers cannot currently use them. He goes into great detail about the way successful organizations adhere to customer needs, adopt new technologies, and take rivals into consideration.

While the first two examples in this section on barriers to successful shifting deal with failure to shift to “new technologies,” it’s not only technology that can be a disruptive factor in sending a category leader off the rails. Barbara Lawrence, cofounder and managing partner of Lubin Lawrence Inc. (LLI), a consultancy that develops innovative corporate growth strategies, referred to Christensen’s teachings when discussing Toys “R” Us, which is one of the large companies LLI works with (other clients are the Walt Disney Company, Johnson & Johnson, PepsiCo, and Fidelity Investments). A few years ago, LLI worked with Toys “R” Us to help the company address the competitive impact of new, low-priced toy-buying channels and the emergence of online buying habits.

As further background, Lawrence explained that although the Toys “R” Us (TRU) everyday low price (EDLP) and “long-standing reputation for good value/low prices had pioneered the low-cost/low-service toy shopping experience . . . this model was facing aggressive new competition from Walmart, Target, and Amazon. These competitors’ business models allowed each to profitably out-execute TRU on three levels: lower prices, more inventory breadth, and greater convenience. Essentially, TRU was being ‘out-executed’ on the business model they had pioneered. The challenge was clear,” she said. “We had to figure out what to do, which targets to serve, what to focus on, and where the strategy shift needed to go to return to profitable volume growth. As Christensen writes about, TRU faced a game-changing market event: During this time, you realize that you are losing traction as a leader, and management realizes that a new path forward is needed, yet the organization is resistant to change because everything is built on the initial strategy—in this case, being the low-cost/low-service operator. Toys ‘R’ Us was a first-mover in the EDLP volume game, but it no longer had the advantage.”

Toys “R” Us had been playing a volume game for a very long time, and it had been very good at it. What parent (of a certain age, anyway) didn’t live it? Tremendous stores piled high with toys and dolls and Legos and board games. And, oh yes, Geoffrey the Giraffe would be there. You’d bring your holiday gift list, pile your shopping cart high, and go home with the gratification of knowing you got everything everyone wanted for the least amount of money possible. Then, as Lawrence pointed out, Toys “R” Us wasn’t the only game in town anymore. First, Target and Walmart eclipsed it on pure price, plus those stores had the advantage that you could buy your toilet paper, a toaster oven, and new pajamas while you were out buying toys. And then you didn’t even have to go to Target or Walmart. You could click on Amazon and do all of this shopping in your comfortable new pajamas while sitting at your computer at home and now your phone.

Yet, this was not the only dilemma the early toy retail innovator faced. To address these challenges, LLI conducted qualitative research with a variety of toy-buying parents and grandparents as well as schoolage children.

“We needed to find out more about the ideal playful experience and fun toy experience, as well as the ideal shopping experience for adults,” Lawrence said. “We learned a lot. First, the ideal experience had nothing to do with the lowest toy pricing. The most motivating experience toy buyers wish for is one that will give their children a chance to learn and discover while they are having fun, through experiences that are both educational and entertaining. Toy buyers hope that their choices will expand their child’s world through experiences that foster growth. Price alone was not a preference driver.

Said Lawrence, “We also learned that parents have plenty of money to spend on educational toys, but the shopping experience and the merchandise must be presented in a way that feels like a journey of discovery for children. The benefit the mother wants for her children is to develop certain skills early in life. They want a store that is staffed accordingly as opposed to lots of stuff, no staff, and good luck.” Service and merchandise that delivered both fun and discovery could withstand premium pricing.

This research led TRU to design, build, and open a massive flagship store in New York City’s Times Square, complete with a Ferris wheel and unique merchandise boutiques such as the Imaginarium, designed to foster a child’s journey of discovery. Following its opening in 2002, the new flagship store initially saw strong business results. However, over time, and in the wake of internal management changes and growing strategy concerns among some of the new leadership team, focus behind the original vision shifted, which eventually led to declining results as store performance gradually eroded. The Times Square store’s performance continued to decline and the store closed fourteen years later, in December 2016.

Toys “R” Us needed to dig itself out of years of morass and re-innovate. Its brand name was associated powerfully with toys. A strong brand name gives a brand permission to shift, to change things up to meet consumers’ changing requirements and desires. But it’s usually not just one thing when an organization fails to make the shift to a more relevant and sustainable position in its category. There was a lot of shuffling in top management and even in ownership structure in the process of asking, “Which way do we go?” From 1994 through 2015, there were six CEOs. Toys “R” Us signed a partnership deal with Amazon, only to abandon it six years later. In 2005, it was sold to Bain Capital, Kohlberg Kravis Roberts & Company and became a private company.

“The ‘crisis of confidence’ and endless internal debates at the board level added to the challenge,” Lawrence explained during our conversation. “You have one group saying, ‘We’ve got something that’s working, it’s too expensive to do anything else,’ and another saying, ‘No, here’s where we have to go.’ They’re seeing a lot of red ink, they’re seeing strategies that are potentially more attractive, and they don’t know whether to scale up or scale back.”

There was a lot of tension and indecision. In his book, Christensen writes about how the processes that drove previous success will often lead to companies denying the reality of disruption. Christensen also argues that it’s critical to listen to customers, to track competitors’ actions carefully, to invest in activities that will enable higher profits. Toys “R” Us was brilliant at running its existing business, a discount business, and didn’t look at its customers’ real needs, or at the spectrum of competition.

Change didn’t happen nearly fast enough, nor was there enough cash on hand to keep the company from going through some significant financial setbacks. The predicament was similar to what Kodak and Xerox faced; it was a matter of depriving the future to pay for the current business. Valuable time and several years of lost value ensued. Toys “R” Us continues to struggle.

PROCTER & GAMBLE:
Not Too Big to Fail (or Stumble)

Someone not familiar with the backstory might have good reason to ask, “So what’s so bad about that? Those numbers sound pretty good to me.” The up-front story, which ran in the Wall Street Journal in June 2016, stated that “P&G [Procter & Gamble] hasn’t created a blockbuster product with $1 billion in annual sales since 2005. Overall sales growth has been stagnant since the recession, hitting a four-year low of $70.7 billion in 2015.” Apparently, $1 billion isn’t a good number, nor is $70.7 billion, not when you’re P&G.

Procter & Gamble tapped David Taylor as its CEO in 2015, and since then the company continues to be challenged not just by its competitors’ pricing, but by a growing consumer appetite for constant innovation. When Taylor was hired, it was to halt the aforementioned falling sales and to streamline the whole process of product development and go-to-market strategies. As part of this process, Taylor cut a number of underperforming brands from the company roster and several advertising agencies as well. It has reinvested those fees into other marketing initiatives, as well as research and development activities. But even this hasn’t been enough to change its trajectory, let alone maintain a leadership position in a world that’s changing faster and more furiously than ever.

Remarking on his company’s challenges in an analyst call after his first year as CEO, Taylor admitted that to “restart” revenue growth, the company needed to “get back to making consumers aware of its products and communicating their benefits. We need to be more relevant in-store and online.”

There is that word, relevant. Get the consumer’s attention with something that is new and different and that genuinely meets an unmet need. To be—and stay—relevant, you need to be able to shift with agility while maintaining a focus on your strengths (which as you know by now is the focus of this book).

P&G had always had the reputation of being ahead of the pack in terms of understanding the consumer, identifying unmet needs, and meeting these needs through comprehensive research and product development. Whether it was keeping babies and their parents happy with diapers that didn’t leak, or formulating a dish detergent with the fantastic ability to get rid of grease and minimize the time spent washing dishes, or a laundry detergent that both cleaned and softened your clothing, P&G knew what was important to its myriad target markets, and it delivered brilliantly—and profitably. Its strategies worked for years upon successful years. Until they didn’t.

What happened? What barrier stood—and stands—in the way of P&G being able to shift, stay relevant, and keep its edge in the market? Whereas P&G always had products that satisfied its customers’ needs better than anyone else, it no longer does. The lack of relevant product differentiation has made P&G vulnerable to many other things. First is the pricing issue, or the Internet-pricing issue, with consumers being able to self-source and buy commodity products at a lower price. Next, new and innovative competitive business models are taking hold, such as the Dollar Shave Club that has been cutting mightily into P&G’s Gillette razor sales. (P&G absolutely needs to up its e-commerce game.) Then there are major global issues, some certainly out of P&G’s control, as in the difficult economic conditions plaguing many countries. But others are very much under its control, such as being able to operate fluidly enough across multiple markets to cater to the idiosyncrasies of local tastes and preferences. All of these issues need to be addressed, to be sure. However, they would not be the problems they are if P&G’s products stayed ahead of the competition the way they used to.

Something else has influenced, in one way or another, these key issues. It’s the very culture of the company. And, more specifically, it’s a culture that is stymied by a “massive middle.”

This was at the heart of the conversation we had with Deborah Henretta, formerly Allen’s client at P&G when she served as the company’s group president and who is now a senior adviser for SSA & Company, a management consulting firm that helps Fortune 500 clients use big data and advanced analytics to drive top-line and bottom-line results. She shared her perspective relative to P&G and as a lesson of caution for all big companies, old and new alike.

“What they need to do requires a sense of urgency, and an agility to shift gears really fast to adjust to new trends and marketplace realities. But that’s not the P&G way,” she said. “To be fair, in general, the bigger the company, the harder it is to activate change. But nevertheless, it can be done. When I was running P&G Asia for seven years, I was lucky to have a group with a more entrepreneurial forward-looking mindset—not tied to the past—and we were making fast, transformational changes to the business. When I returned to the P&G headquarters in the United States, I realized how far behind the company was. The organization seemed wedded to the strategies, the systems, the processes they grew up with and had been successful with—and that makes it hard to change. This creates what I call ‘the massive middle,’ content to deliver in the same old, familiar ways, pulling attention and money away from making the kinds of needed transformational changes. P&G is at a tipping point. They know they need to operate differently and at a faster pace, but they’re just not set up to move quickly enough. The middle is so massive at P&G and the movement is so slow, they can’t see the path forward.”

The challenge, as Henretta reinforced, is that P&G had been so successful operating for so many years in a certain way that there is no objectivity. There are no fresh eyes looking at how things are done. There is no one challenging the status quo. Often, she says, these big, massive-middle companies in need of fresh, objective eyes will call in large consulting companies, who have the same massive-middle problem they do.

“What I encourage businesses in this situation to do,” she told us, “is to think like a start-up. One of the great ironies about P&G is that they were actually way ahead and sophisticated in the digitization of the product supply community. Yet it’s so difficult for them to apply this agile, inventive thinking to any other area of their business. There’s great nervousness about changing for fear of tampering with success models. If you’re so desperately trying to protect the business you’re in today, you’re going to miss [how] your category is evolving. They need to think like market disrupters—the Amazons, the Ubers, the Dollar Shave Clubs, who show us that any industry can be disrupted and will be disrupted if the incumbent doesn’t get with the program. It reminds me of kids playing soccer. All the kids are grouped around the ball and no one is on defense. You’ve got to have a culture that is tuned in to where the ball is going.”

We’ve learned from the many big companies we’ve worked with, across myriad categories, that the bigger the company, the more massive the middle. We’ve also learned that successful change can only come about when it’s led from the top and executed from the bottom up—with no bottlenecks. Reading about what P&G CEO Taylor is doing, and plans on doing, to inject a “sense of urgency” into the organization, we can’t say there are any revolutionary ideas—not so far, anyway. For example, some are concerned that he is not taking millennials into consideration as much as he should be, a group as interested in sustainability as they are product performance. Some don’t think his workforce-cutting initiatives will prove all that effective in solving the problem. As the old business saying goes, “Nobody ever cut their way to greatness.” Needless to say, constant cost-cutting doesn’t do much to help morale.

P&G can’t get away from how it used to do things. Too many people in the organization, including the CEO, are tentative about moving out of the comfort zone. As Henretta told us, “I went to work in Asia, thinking I’d left this very developed world to give it a try in an underdeveloped, less advanced world. Fast-forward seven years, I’m back at U.S. headquarters, and I felt like I’d gone backwards again, especially in terms of the application of digital and the Internet. I went back to the future and it was at a standstill. It will be interesting to see where David Taylor, P&G’s CEO and a thirty-six-year P&G veteran, will take [the company]. Will he look at the company with fresh, objective eyes and do something revolutionary or will he keep plans close to the vest, trying to build on historical success? All I know is that it’s hard to challenge the status quo, especially in these big companies.”

BLACKBERRY:
Invincibility Is A Myth

In 1984, Mike Lazaridis, an engineering student at the University of Waterloo, and Douglas Fregin, an engineering student at the University of Windsor, founded an electronics and computer science consulting company called Research in Motion, or RIM. For years, the company worked under the radar until it focused on a breakthrough in technology: an easy, secure, and effective device that allowed workers to send and receive emails while away from the office. They called it the BlackBerry. Located in Waterloo, Canada, RIM grew into one of the world’s most valuable technology companies. The BlackBerry became the indispensable accessory of heads of corporations, heads of state, and the Hollywood elite.

Former GE CEO Jack Welch carried one on the golf course. He couldn’t afford to miss a critical communication. Barack Obama used one on the campaign trail for the same reason. Investment bankers, hedge fund managers, and IT professionals carried BlackBerry devices on their belt buckles. Working mothers who needed to stay in touch with things in the office and the equally important things at home wouldn’t leave the house without their BlackBerry. Police departments across the country handed them out to officers on the beat. It was the requisite device for those working at the Department of Defense. The BlackBerry began life as the must-have communication tool for those whose communications were both time and security sensitive.

Many readers of this book will have lived through the rise and the fall of BlackBerry. In New York, the “masters of the universe” types in the financial services industry started using them as the incredibly efficient and effective business tools they were developed to be. Black-Berry’s ubiquity was due to three critical factors. First, the BlackBerry was specifically developed to allow users to very efficiently send hundreds of email responses daily. The functionality of the tactile keyboard made typing fast and easy. Second, BlackBerry was all about security. It built its brand reputation on security. If you’re a commander on Wall Street or the commander of the free world, security is essential. Indeed, the “black” in its name evoked images of Black Ops secrecy. Third, when the BlackBerry device was launched, Apple and Android smartphones had not yet taken hold. Those of us who did eventually succumb to the cool allure of the iPhone were—initially—able to segregate our mobile phone activities. We used the BlackBerry for the serious business-related stuff and the iPhone (or Android, if that was your product of choice) for listening to music, or taking pictures, or playing games. You lived with both devices and each had its place in your life.

This story is about the fall. The quick answer is that BlackBerry’s inability to shift and move forward was caused by its own sense of invincibility. The longer explanation, along with some critical lessons learned, is as follows. It begins with the mighty rise in popularity of those aforementioned iPhones and Androids. Not only were these smartphones also built for ease of communication on multiple platforms, they were beautiful to look at. The perfect marriage of function and design, the smartphone became just too much to resist for even the most security-centric masters of the universe. When Samsung made security one of its selling points, it made matters that much more challenging for the people up in Waterloo.

What did BlackBerry do as a result? Just what it shouldn’t have. Instead of focusing on its core customers and what was critically important to its core customers, it began to chase the market with subpar versions of the competitors’ brilliant machines, thinking its core customers would follow them. That did not happen. BlackBerry thought it was invincible. No brand, product, or organization is invincible, especially when it dismisses the needs of its most loyal audience.

The developers at BlackBerry should have doubled down on what made the product so vital to this loyal audience. BlackBerry should have kept its focus on its relevant point of difference in the market-place—security—and capitalized on it.

We spoke to a number of people who experienced, from the inside, BlackBerry’s rise and the beginning of its fall. Among them was David Camp, BlackBerry’s vice president of integrated marketing in its earlier years. “BlackBerry suffered from what I’ll call institutional arrogance,” he told us during one of our conversations. “They had a belief in their own invincibility. They believed that customers were more loyal than they actually were. Or that the competition [was] stupider. BlackBerry had this point of view that, ‘Hey, we invented the category,’ but when Apple and Android smartphones entered the scene, BlackBerry initially dismissed the notion of the touch screen and an application-driven experience as silliness and nonsense. Their institutional arrogance led to an inability to innovate to keep up, and [then] to an inability to execute quickly enough when they came up with a product they thought would catch the competition. The real problem,” Camp said, “was that they didn’t have enough clarity around a product vision, nor did they have a road map. They just couldn’t build a product that could compete.”

Equally important, from a brand perspective, people started to position BlackBerry as the old, as in your father’s Oldsmobile. As Camp explained, “It’s like, ‘This is not for me. I’m creative, I wear a hoodie and use Spotify and Instagram.’ They had to fight the perception that they were irrelevant. The business started to crater, confidence was lost.” That’s around the time Camp showed up, joining the company in 2013, “right before the launch of BlackBerry 10, which had a decent enough operating system and was supposed to be the saving-grace product launch—our version of the other guys’ smartphones,” he said. “The board expected us to go after Apple and Samsung with a value proposition that was good, but not great. The response was tepid. The thing is, we shouldn’t have been going after Apple and Samsung, but rather returning to the roots of our enterprise, which was all about business productivity and security. There was very little chance of winning the consumer business no matter how many marketing dollars we had.”

Camp and his team were absolutely right. The company should have had the courage and strength of conviction to go after and own a smaller but intensely dedicated share of the market. BlackBerry was all about security and business productivity and, ironically, security in the mobile communications area has only continued to grow. These days it seems that a week does not go by without some front-page story about a major hacking debacle. The lackluster launch of the BlackBerry 10, a wannabe product, turned out to be the pivot point of no return for BlackBerry. It went through a series of upper management changes, entertained merger and acquisition strategies, and eventually cut thousands of jobs and several operating centers. If the company had stuck with security as its prime selling point, in this hack-a-day age it could have remained a huge player in the industry with a powerful, differentiated, long-term proposition.

“BlackBerry burned up a whole lot of goodwill,” Camp said. “But they acted as if they were a monopoly, even after it was clear that they weren’t. They continued to act like they were the only game in town. It was institutional arrogance. I think any business, no matter how successful, that can maintain a strong level of humility is destined for great things. As Jeff Bezos at Amazon says, ‘No matter how successful your business is, remember, it’s always day one.’”

As we were researching this chapter, we found a September 2016 New York Times article headlined: “BlackBerry Abandons Its Phone.”³ It began, “Stepping away from its signature product, BlackBerry will no longer make its own smartphones, the device it once defined.”

NATIONAL GEOGRAPHIC:
A Well-Documented Case of Cultural Myopia

In November 2015, 21st Century Fox took control of National Geo-graphic’s major assets—its stake in the television network, its flagship magazine, and its TV studio—in a $725 million deal. Upon hearing this news, a veteran marine photographer for National Geographic magazine said to a reporter covering the story, “I told my wife I would rather see National Geographic die an honorable death than be swept into something it’s not supposed to be.”

If ever there was danger for a culture clash between two brands joining together, this one was it: lowbrow versus highbrow, sensationalized reality-television versus well-documented academic discourse, a focus on titillating headlines of sex, drugs, and criminal activity versus a focus on science, exploration, and discovery. You get the picture. Except it’s not the whole picture. The challenge for National Geographic was how this independent nonprofit organization could keep up in an age of shifting distribution channels, migrating ad dollars, and diminishing loyalty for traditional brands.

The fact is that National Geographic may not have had to follow the Fox-merger route to keep its well-respected brand alive had it more carefully attended to its internal cultural situation, a textbook case of cultural myopia. (And, just for the record, the marriage of these strange bedfellows is not turning out to be nearly as sub-optimal as one might have supposed. But that’s a story for another chapter in this book.)

In the summer of 2016, Allen stood on the bow of the Endeavor, a National Geographic sailing vessel, staring through the slowly lifting fog at the Margerie Glacier, a massive natural structure situated in Alaska’s Glacier Bay National Park and Preserve, a vast area of southwest Alaska’s Inside Passage. It is an awe-inspiring and almost unspeakably beautiful part of our country to be able to explore. The Margerie Glacier was like National Geographic in its heyday. It was massive and impressive. It had gravitas. It was quiet and monumental. Like many of our national monuments, man-made and natural, it had a sense of permanence.

Founded in 1888 as the National Geographic Society by an elite group of scientists, explorers, and wealthy patrons interested in travel, it was “a society for the increase and diffusion of geographical knowledge.” Among the founders and presidents of this nonprofit group was Alexander Graham Bell. The National Geographic logo is among the most well-known things about it, a yellow portrait frame, rectangular in shape, which appears on the margins surrounding the front covers of the magazine and the television channel logo.

The National Geographic magazine, the product most associated with the National Geographic Society (NGS) historically, is at the same time well respected and the genesis for the organization’s decline. Published monthly, the magazine contains articles about geography, popular science, world history, culture, current events, and carries photography of people, places, and things all over the world and the universe. In the 1980s the magazine’s subscriptions and newsstand sales peaked at about 10.9 million monthly readers, but began to decline after 1990. Today the publication has a U.S. circulation of about 3.3 million, according to the Alliance for Audited Media. The Internet, cable news channels, and 24/7 news cycles usurped the NGS as a scientific authority and the source for stories about geography, popular science, world history, etc. Aficionados of topics such as these could find content faster, more easily, and in greater abundance through other sources.

The NGS believed that its long-standing position as a respected institution would be enough to insulate it from the fast-changing behaviors in media creation and consumption. Not being able (or not wanting) to see what was happening outside its own monumental—literal and figurative—edifice, it was unready for the changes that were occurring and began to rapidly lose money. While NGS did start its own television and digital media base, it wasn’t fast enough.

Linda Berkeley was formerly the executive vice president of the National Geographic Society and president of National Geographic Enterprises. She is now president of LEB Enterprises and an adjunct professor at Harvard and Georgetown Universities. We talked to her at great length about what led to the end of the era for NGS, once the unchallenged leader in its field.

“It did own the category,” Berkeley began, “for over 100 years. Its roots [were] things that are eternally relevant: exploration, discovery of new things, curiosity. And, ironically, it was founded as a society, a community of like-minded people, which is so related to the world we live in today. In fact, in this respect, National Geographic was way ahead of everyone else. It had also been very financially successful. It had a truly storied history, in all ways, in documentary television—telling the best nonfiction stories anywhere—and had won a record number of Emmys for outstanding television. The brand was universally known and viewed as in a class by itself. It opened doors anywhere in the world.

“However, the main source of revenue and income was the magazine, which was subscription-based, not reliant on advertising,” Berkeley explained. “Because of immense loyalty to the brand and unparalleled reputation, National Geographic magazine was able to remain profitable and hold onto its subscriber base even when most other magazines had started to struggle. But the centrality and success of the magazine ultimately made it harder for National Geographic to shift and broaden its main focus to other media channels. First, for too long, they defined themselves, in their tone and culture, as a magazine company. That was where the heartbeat of the organization was. It would have been a perfect example for Theodore Levitt, the marketing expert who wrote the textbook case about railroads starting to fail because they wouldn’t define themselves as being in the transportation business, only the railroad business.⁴ They could easily have expanded their mission view and launched their own cable channel way before the competition—and were even approached to do so. But, while many people at National Geographic immediately saw the threat of the Discovery Channel, many others felt that National Geographic was in the magazine business, not the cable channel business—or, even more aptly, understood that National Geographic was really in the ‘curiosity about the world’ business, not in the business of any specific media channel. Thus, so much later, they had to play catch-up.”

At this time, the National Geographic Society did begin to bring in people who were fluent in the cable and digital media business. But this decision led to an internal culture clash: one side was ready to move forward, the other held strictly to the view that the National Geographic Society was a magazine-centric institution. “This is so typical [when] trying to change legacy organizations,” Berkeley explained. “Even when you bring in people from the outside, you can have immense pushback from people on the inside. You have a world-renowned history for doing things a certain way. The business model was print-oriented and you had a fundamentally magazine-focused print culture that resisted strongly to giving up ground. The endemic culture of the National Geographic Society—its behavior, its values, its style, its attitude—were the opposite of everything that was happening everywhere else, certainly in the media world. It was a slow-moving culture. Historically, stories in the magazine took months to research, fact-check—an increasingly valued skill, even today—[and were] absolutely well documented and incredibly well written, superb quality in every way—but they took lots and lots of time. You couldn’t turn on a dime.”

The National Geographic Society did not think of itself as a “brand,” either. That was far too commercial a term, with all the negative implications of consumerism. The editorial staff decided what was going to be written about, who would write it, and what they wanted the consumer to know. The idea of consumer-generated content was anathema to this ideology. While readers loved and respected the magazine, as the subscription base began to decline and research into the cause ensued, even the proverbial writing on the wall didn’t set off the alarms it should have. For starters, people were not reading hard-copy magazines anymore, let alone keeping copies of old ones in the basement. Those inclined were finding lots of media outlets in their quest for interesting stories about our extraordinary planet.

Hoping to make up for falling print revenue, the National Geographic Society invested in everything from Hollywood movies to IMAX theaters to mobile games. It got into cable television, where it did pretty well, but it just wasn’t enough to stem the revenue losses. Given that the National Geographic Society was running out of time and money in its fight for relevance, it was in the mid-1990s that the National Geographic Society first approached the Murdoch organization, which had the millions of dollars necessary to shift direction.

As Berkeley explained, “This is a lesson for any legacy organization—[the] legacy organization being a double-edged sword. While you have all these rich assets and history, which are incredibly important to people and bring people together, you can get caught up in this history. A culture like this makes shifting hard. You’re holding onto and living in the glory of your past.”

Lest you be concerned, the National Geographic Society continues to exist as a separate entity, even after the 21st Century Fox deal. And while Fox has said there would be minimal change and that it was dedicated to maintaining the editorial approach and voice of National Geographic, only time will tell. The much smaller National Geographic will become a for-profit company, perhaps the only way the magazine, founded and edited by the family of Alexander Graham Bell, can survive.

PLAYBOY:
A Yesterday Brand, with a Lesson Relevant for Today

Ah, Playboy. No matter your age, you’ve most likely heard about Hef, the bunnies, the Mansion, and of course, the magazine’s centerfolds. You’ve likely seen movies wherein mothers of preadolescent boys find copies of Playboy magazine stuffed under their mattresses. And if you’re closer in age to our generation, you know it’s all about reading said magazine “for the articles.” But did you know that Hugh Hefner, the suave guy in the Mansion with the bunnies, initially wanted to call his magazine Stag Party, but had to go with Playboy as a second choice? Stag was the trademarked name of an “outdoorsy” magazine and the editors said Hef’s magazine title would have been a conflict.

Given what the mothers of preadolescent boys are finding in their sons’ rooms these days, with media channels and the content available having moved far beyond paper and ink, it’s pretty easy to understand how Playboy—and Hugh Hefner’s empire-as-lifestyle—became irrelevant. Well, partly irrelevant. The Playboy brand had always included two components: the obvious—beautiful, mostly naked young women—but also an intellectual manifesto called “the Playboy Philosophy” that espoused ideas that were way ahead of their time: free, open sexuality; equal access to that freedom for women as well as men; inclusiveness and a welcome mat for blacks, gays and lesbians, and others not considered mainstream in 1950s America; and a fervent respect for the First Amendment. This heady, thinking-person’s Playboy was made moot because it largely accomplished its goal. Just about everything the magazine preached actually got accomplished. It’s the other stuff—which is the bane of a mother’s existence—that got left behind on the ash heap. Lest you think we’re not aware that this story itself is so yesterday, it’s not. It’s representative of the barriers that stand in the way of being ready to shift your business, brand, or organization into the future. If your business, brand, or organization is all about the founder’s vision—and if there’s no way to profitably reimagine this vision for the present—well, that’s not good. But we’re getting ahead of ourselves.

Quick, really quick history: Hugh Hefner was Playboy. He embodied the lifestyle: silk robe, martinis, fur-covered pillows, very pretty and very well-endowed ladies always by his side, and just the right amount of interesting and intellectual repartee. In 1953, he launched the magazine out of his kitchen, the first issue quickly selling out nationwide. That it featured photos of Marilyn Monroe didn’t hurt. The first Playboy Club opened in Chicago in 1960, creating an opportunity for aspiring Hefners to join in the fun. By 1966, Playboy magazine proved itself a credible source for literary excellence, featuring works from well-respected writers including John Updike, Joyce Carol Oates, and Kurt Vonnegut. Whether for the articles or not, by 1972, 25 percent of male American college students were reading the magazine every month. The November 1972 issue sold 7.1 million copies.

Then, in 1988, as Hefner’s daughter Christie took the helm, she found an overbloated octopus on the edge of financial extinction. Egodriven expansions into jets, a publishing imprint, a record label, clubs in less-than-optimal locations (Playboy Club Des Moines?), an overprogrammed television channel, and other fledgling diversions were hemorrhaging money. The huge circulation included mostly unprofitable subscription, pumped up to dazzle prospective advertisers. Hef and his team had made some mistakes rooted in arrogance, like angering gaming officials in Nevada and London, which resulted in valuable gaming licenses being revoked. Plus, video porn and its viewers, along with lots of competition from magazines like Maxim and Stuff, emerged to dig into Playboy’s readership.

Christie Hefner’s solution was smart enough. She decided to get rid of the losing businesses ASAP and find some new tent poles to prop up the company. She also took the occasion to dump some of Hef’s cronies and install new, young, well-credentialed executives to look for business opportunities that were international and electronic. Home video and TV went global, and Playboy jumped on the brand-new Internet market.

The strategy paid off for a while—about fifteen years—then the ship started taking on water once again. While not anywhere near the revenues and profits of the glory years, business grew and newly floated nonvoting stock reached an apogee of $30 by the late 1990s, only to crash back to penny-stock status by the early years of the twenty-first century. The anything-goes Internet really began to pose problems for the Playboy franchise. A 2005 reality TV show that followed the lives of Hef and his girlfriends in the Mansion gave the brand a little, but short-lived, uptick. Print media, in general, began its continuing decline. In 2008, Christie Hefner stepped down as an increasingly rancorous board, channeling the demands of the investment community, flexed its muscles. A new CEO was brought in to pretty-up the company for sale, and even Hef faced the prospect of financial ruin if his huge pile of stock became valuable only to line bird cages around the world. The company was broken up and taken over by a venture capitalist, although Hef gets to stay in the Playboy Mansion until he, too, reaches the end of his life cycle.

What was the core problem? The international and electronic incarnations of the brand maintained increasingly tame and out-of-step “standards of taste and quality,” and as emerging markets matured, they ran past Playboy’s level of “heat” as fast as they could. The company just kicked the can down the road, because they couldn’t shake off the dust of Hef’s original vision. When the world started to change, and Hugh Hefner’s lifestyle had become passé, there was no ability to reinvent—make that reenvision—how this brand . . . might continue to succeed. Instead of shifting ahead and coming up with a strategy that could truly revitalize revenue streams for the long term, the team ran itself ragged trying to figure out how to sell the Playboy of the 1960s and 1970s to men (and women) born after Hef’s seventy-fifth birthday.

Jeff Jenest was one of those young, well-resumed executives brought in to take the brand international and electronic. He put it this way: “It was all too easy to be convinced that the brand continued to be relevant and continued to be valued. We kept uncovering these pools of money—big pools of money in previously untapped markets like Europe, Latin America, and Asia—but we were never able to establish a brand persona that would resonate with consumers under age sixty. Our thinking—for too long—was that if you kept opening new doors, the brand and its content would ride itself out long enough to celebrate its centenary in 2053.”

No matter how resourceful company executives were in playing out these scenarios and going for the obvious quick monetary opportunities, the fundamental core premise wasn’t working anymore—the founder’s vision was irrelevant and no one could come up with a way to capitalize on and optimally leverage any of the other original assets of the brand.

As Jenest said, “It’s not that we didn’t have a lot of smart people trying to bring the brand up-to-date and reclaim some of its former relevance. We didn’t move fast enough. When the brand started to fall off the cliff again in the first decade of the new millennium, that fall was fast and steep.” Resources were tight. Layoffs and contraction became the norm. Attracting the new capital necessary for a complete overhaul was impossible.

The fact of the matter is that it is very difficult to resurrect a brand that, once perfect in its day, is no longer relevant. When you have a founder with a vision that was tailor-made for its times, you need an organization whose top priority is to identify and execute complete brand overhauls every decade, if not more frequently. This is a timeless lesson. Oh, and as a footnote, in 2015, Playboy’s new owners announced that the magazine would no longer feature nudity in the magazine. Nobody cared.

AMERICAN CANCER SOCIETY:
Leadership on Autopilot Is Fatal in Fast-Changing Conditions

If an organization is financially healthy, the employees are happy, the public continues to give you the thumbs-up for your efforts, and there’s no contest when it comes to the competition, an organization might be tempted to proceed “steady as she goes.” But one of the themes of this book is that this won’t last, and you need to constantly be looking for the curve ahead. In any event, “steady as she goes” is definitely not a good leadership strategy when any or all of these conditions are in less than positive territory. And all of these conditions—a veritable perfect storm—were in pretty negative territory until very recently at the American Cancer Society (ACS).

Revenues for its core fundraising engine, Relay for Life, have been down significantly year-over-year. According to the Chronicle for Philanthropy, the event brought in $100 million less in 2014 than it did in 2008, when it raised $439 million—a record for ACS—and was overtaken by newer and more innovative initiatives by other nonprofit groups. ACS was operating as a decentralized group of over 300 local chapters, each with its own governing body, its own internal processes, each empowered to do its own thing. However, the organization was not able to instantly and telegraphically communicate what it stood for. Was it research, fundraising, advocacy? More than this, there was little indication that anyone at the top had a clear understanding of the biggest population of emerging potential donors—millennials.

The ACS is a textbook case of “hero product leadership,” the belief that you can set it on autopilot and keep going, with little regard for the fact that conditions have shifted and, ergo, a shift in operating strategy is required. Rather than assigning judgmental terms such as good or bad, weak or strong, let’s say it is more a matter of whether the leader in place has the oversight and agility to navigate in an evolving category, if not marketplace. And all categories and marketplaces eventually evolve. We spoke with Andy Goldsmith, a healthcare executive who formerly worked for the ACS as VP of creative and brand strategy and who currently serves at The Pursuant Group as SVP, creative director, about this topic.

“I was there in the midst of its perfect storm of challenges,” he told us. “ACS was a pioneer in community-based fundraising events. It built Relay for Life thirty-five years ago, which generated hundreds of millions of dollars. That said, it was roughly two-thirds of the revenue stream, and they were never successful at fundraising. Because ACS had owned the space for so long, the peer-to-peer fundraising initiative, it didn’t really look beyond this. All of a sudden there were several other organizations copying their community framework with more innovative offerings, gaining the philanthropy share of the dollar.”

And it wasn’t just the larger organizations gaining on ACS, including St. Jude’s, for example, or the Susan G. Komen Race for the Cure. It was the smaller, more nimble, and social media-savvy groups. There was the runaway success of the Ice Bucket Challenge sponsored by the ALS Association; the 2014 cancer-fighting St. Baldrick’s Foundation, which raised millions of dollars from its hundreds of events during which participants shaved their heads as a show of emotional support; and the Cycle for Survival, a seven-year-old series of indoor cycling events benefiting New York’s Memorial Sloan Kettering Hospital.

You would think that with the huge number of people impacted by cancer, simply saying you’re raising money for cancer would be enough to keep ACS going strong. But it wasn’t. “It was no longer good enough to stand for general cancer,” Goldsmith explained. “The market has become very fragmented, cluttered with many important but much more focused causes—pancreatic cancer, leukemia, breast cancer. We had such a broad mission. We tried to be ‘all things cancer to all people’ and ended up confusing potential donors. People didn’t know what they were investing in, what they were writing the checks for. Just because you have a good cause, which ACS does, it’s not enough to stand out in an increasingly cluttered marketplace.”

It didn’t help either that ACS as an organization was so fragmented. “We had a National Home Office as well as eleven different divisions, in many cases led by folks who were there for their entire careers,” said Goldsmith. “What you see is that local priorities are different than national priorities, and everyone’s making their own decisions about fundraising. There was no core innovation engine in place. You had no one focusing on millennials. It gets down to the strength of nationwide leadership, the skillset of the leadership, and their ability to set a vision for the organization and to get the entire organization behind it. It was a classic case of an organization not paying attention until the revenue really started to drop, which is a lagging indicator, not a leading indicator.”

Founded in 1913 by ten doctors and five laypeople in New York City—and originally called the American Society for the Control of Cancer—the ACS has undergone a major restructuring over the last year and will hopefully regain its footing. As ACS states on its website: “We know more about how to fight cancer than ever before but the successful application of that knowledge is dependent on our ability to make a sustainable connection with partners and donors who fuel the mission. The landscape has changed, and the cancer fight is inextricably linked to successful consumer engagement in the face of increased competition for dollars and mindshare.”

TEACH FOR AMERICA:
The Challenge to Get Back to the Founder’s Mentality

In 1989, Wendy Kopp, a senior at Princeton, had a big idea, one that would change the academic outcomes for thousands of lower-income kids. The idea, Teach for America, the topic of her senior thesis, was to recruit high-performing college graduates to teach in high-need urban and rural schools. It was a truly innovative idea and, as its passionate founder, Kopp went all out to ensure the organization would succeed. It did, incredibly so. By the year 2000, it had over 3,500 alumni and launched an ambitious five-year plan to double the size of its corps of teachers and the number of sites it served.

In the mid-2000s, Teach for America started experiencing growing pains. While its mission to give all students access to excellent education never wavered, there were issues with execution and operations. The ambitious goals were not always being met as hoped. While Teach for America was very good at recruiting teachers, it wasn’t nearly as good at supporting the talented young teachers they recruited. Consequently, teacher attrition began to rise. In turn, recruitment efforts became more challenging. Those in charge were not quick enough to grasp and deal with the complexities of changing demographics, both in terms of the communities the organization served and the potential teaching population.

Current CEO Elisa Villanueva Beard told us that the problems stemmed from the role of leadership in a growing organization. “When you’re the founder, you feel a deep personal responsibility. If there’s a survey, you read every last comment. You don’t let others synthesize reports for you. You’re obsessed about deeply understanding everything that’s going on and coming to your own assessment,” she said. “When you grow as big as we have, bureaucracy sets in. Conversations take place in individual silos. Those who are in charge get farther away from what’s happening on the front lines.”

It was, as Villanueva Beard asserted, a perfect example of “founder’s mentality.” The problems of fast growth and leadership’s concurrent “loss of proximity to the issues” were keeping the organization from shifting in order to stay relevant. A book on this very topic became an essential guide to Beard in refocusing the organization and getting it back on a successful track. The Founder’s Mentality: How to Overcome the Predictable Crises of Growth was written by Chris Zook and James Allen of Bain & Company. In their book, they look at why profitable growth is so hard to achieve and sustain. The authors explain that most executives manage their companies as if the solution to this problem lies externally. Instead, they found that when companies start to falter in terms of their growth objectives, 90 percent of the causes are internal. As Beard made clear, among these causes are increasing distance from the front lines, loss of accountability, and frustratingly complex processes. Even for the best organizations, Teach for America included, these challenges, if not identified and dealt with properly, can impede future growth.

As Zook and Allen explain, overcoming these internal barriers to restore speed, focus, and a genuine connection to the customer requires, yes, a “founder’s mentality”—initiatives embodied by a passionate founder, which might also be called an owner’s mindset, a relentless obsession with the front line. Paraphrasing the authors’ website:

This is exactly the situation in which Villanueva Beard found herself when she took over the reins at Teach for America. “Size had become a challenge. We knew we couldn’t go back to the future and operate as we had when we were a smaller organization, but we had to figure out how to regain our founder’s mentality,” she said. “Our core purpose has not changed, but we’ve had to shift strategies to take advantage of our scale and diversity. The relevance and meaning of our work has never been more important. But, as a result of our bureaucracy, we fell behind the curve of understanding what was happening both in our communities and in the behaviors and expectations of this generation of potential teacher recruits.”

When Villanueva Beard came on, the organization had not only grown cumbersome and more complex, fomenting internal challenges, but there were market forces creating strong headwinds. First of all, unlike when Teach for America was launched twenty-five years ago, there was now intense competition for young, talented people who wanted to “change the world.” Google, Facebook, Amazon, and all manner of millennial-centric organizations were on campuses across the country vying for the best and brightest. At issue for Teach for America was that these organizations would allow these idealistic kids the opportunity to change the world—and make a lot of money. They could do well, and do good. In particular, as Beard told us, “We . . . missed the cue on the importance of internships. Over the past several years they have become so consequential to the people we wanted to recruit. If you don’t get to these students in their sophomore or junior years, you’ve missed the opportunity.”

Second, Teach for America wasn’t always as focused as it should have been on the front-line experience of its recruits. Tapping into community issues in addition to individual school issues, Teach for America was not able to ensure that every one of its teachers was having an optimal experience, nor were the students they taught. As Beard told us, social media magnified this challenge. As we all know, social media puts a spotlight on the unhappiest people. Despite the organization’s best intentions, the social media buzz on Teach for America was pretty unflattering.

The challenge faced by Teach for America, its inability to shift more quickly to stem years of decline, was not a function of the wrong leadership or poor leadership. Paradoxically it was a function of great leadership—leadership that fueled huge growth, but that made it a less agile, more complex organization.

“We’ve re-geared,” Villanueva Beard said. “We have reset our strategic direction and one of our top-line goals is to build on the strength of our community, at our core member level, at our alumni level, and at our staff level. We have brilliant people; we attract the most brilliant people in our country to this work. What you learn over twenty-five years is that you cannot become too confident. You need to know how to adapt, to refocus the organization in order to allow it to operate like it did when it was founder led,” she said. “We are working to become more agile, and trying to reject bureaucracy at every level. It’s about creating an incredible organization that doesn’t just have a transformational impact on children, but ensures the whole community, the whole city improves.”

Lessons Learned

Examining the stories in this chapter reveals three categories of causes, or reasons, for a business’s inability to change: financial, cultural, and leadership. Let’s review the specifics with respect to each and derive corresponding lessons. We start with financial barriers, by far the most prevalent barriers we found in our research.

Lesson #1: Beware “the golden handcuffs.” We use the term “golden handcuffs” to refer to the (perceived) need to deliver short-term financial results to Wall Street, or to investors, at the expense of investing in the change necessary to stay relevant for the longer term. To set off in a new direction, to shift from one business strategy to another, requires a major investment of both money and time. The financial investments will, in almost all situations, decrease current earnings. Wall Street does not like decreased earnings, even if for a short period of time. Some of the companies we studied that failed to stay relevant were making plenty of money with their current business model and were unwilling to free up the funds necessary to make the longer-term investments. Kodak and Xerox are prime examples. The short-term revenues and profits were too good to walk away from—they were too comfortable. And the pressure from investors and Wall Street to deliver these short-term results was too great a challenge. Either the subjects in question ended up underfunding the new initiatives that would potentially keep them relevant, or not funding them at all. This kept Wall Street happy in the short term, but disappointed them in the long term. (Bankruptcy is disappointing.)

Lesson #2: “Empty pockets” restrict options for maintaining relevance. The term “empty pockets” is pretty self-explanatory. That is, by the time the company realizes it’s lost relevance, the money has run out. There’s insufficient cash on hand to fund a turnaround. Such was the case with Toys “R” Us. Things get so bad that you need to lay off people, close stores, or shut plants. Profits are so squeezed, revenue is so far down, credit is so woefully unavailable that by the time a firm is ready to act, the financial situation is so dire the firm no longer has the wherewithal or scale to execute an effective shift.

Sunk costs present one way in which pockets can be emptied. Xerox, for example, fell victim to the sunk cost fallacy. So much money had been invested in the existing business model. Manufacturing plants had been built; a new sales force had been hired; technology investments had been made. Xerox fed the pet it had raised, despite the fact that it had many more attractive options for its investment. More generally, and keeping with the metaphor, the lost cause or bad idea is followed down the road. As the time and resources devoted to the failing business model add up, it is increasingly difficult to change course.

Lesson #3: Culture clashes kill. We now move to the second category of barriers to maintaining relevancy, cultural barriers. Culture is the inherent qualities that make one organization different from another, comprised of everything from values and beliefs to systems and working habits. Culture is baked into an organization and directs how it operates and why. It’s a preexisting condition often perpetuated by the onboarding of employees who exhibit the same values and beliefs as those already there. Culture is often codified in some sort of statement. It might be literally instructive: Consulting firm McKinsey & Company clearly articulates how clients should be served, colleagues treated, and professional standards followed. Or it might be simple and whimsical, but just as directive: Google famously uses the phrase, “Don’t be evil.” In whatever manner it is verbally communicated, culture manifests itself in myriad ways, both tangible and intangible, from physical environment to dress code and everything in between. To shift, companies need an entrepreneurial spirit as part of the culture.

Sumantra Ghoshal, a noted scholar from the London Business School, who tragically passed away from a brain hemorrhage in 2004, but whose influence continues to this day, produced a set of lectures on culture and organizational strategy that still garner thousands upon thousands of viewers on YouTube. In one particular and very popular lecture, during which he explained his “springtime theory,” he would tell audiences about his annual visit to Calcutta to see his parents in July.⁶ “Imagine the heat, the humidity, the dirt, the noise. It sucks up all your energy, drains your brain, and exhausts your imagination.” He would then go on to talk about the forest of Fontainebleau, close to INSEAD, where he taught at the time, referring to “the smell of the trees, the crispness in the air, the flowers, the grass underfoot. How one’s heart lifts up, how the creativity and energy bubble away.” Go through the door of any business, he would then tell the audience, and you can tell whether it’s Calcutta or Fontainebleau, and whether there is an opportunity for innovation and reinvention.

Just as there are several variations on the financial barrier theme, there are several reasons that organizational culture can get in the way of a successful shift and focus. The 30,000-foot view is that it’s just plain hard to overcome how things have always been done. In some instances, it’s size that gets in the way.

Larger organizations, like Procter & Gamble, often exhibit the syndrome of the “massive middle.” Junior management is open to making a change—these are generally younger folks, possibly millennials, who have an appetite for change—but the hordes of middle managers, long-entrenched in the way things are and were, are more reluctant. They muck up the gears of progress as if they were molasses that the more aggressive managers are trying to get through. At P&G, careful deliberative new product development based on reliable marketing research had always been the firm’s modus operandi. They wouldn’t tolerate the voices of those among them who recognized the faster pace of change in the modern retail world. Deborah Henretta used the metaphor of kids playing soccer; everyone is focused on offense, because that is what they do, in a game where defense wins.

Lesson # 4: Pride goeth before a fall. This biblical proverb stems from the idea that if you are too proud and overconfident, you will make mistakes leading to your defeat. Pride is one of the seven deadly sins. It leads to arrogance and consequently the tendency to live in a bubble.

The most written-about marketing mistake in history was the recipe change and the introduction of New Coke in 1985. Coca-Cola management could not live with the fact that it lost to Pepsi in a series of blind taste tests. The president of the company felt that no one can beat Coke on anything; Coke had to be number one in everything that matters, including taste. Coca-Cola scientists reworked the recipe over and over until it could beat Pepsi in taste tests. Of course, in doing that, the beverage lost the essence of what made it great. Coke was no longer “the real thing.” The consumer backlash is a matter of history. What a display of arrogance!

RIM’s experience with BlackBerry mirrors the New Coke story. Preoccupied with matching the apps of the Apple and Android devices, RIM took its eye off the security ball. Its arrogance in fighting the competition led the company to take its customers for granted. The rest is history. The experience of New Coke and RIM suggests a corollary to Lesson #5, which turns to the final category of barriers—leadership.

Lesson #5: It takes a special leader to execute a shift. The third major category of barriers to being able to shift and focus with any success, leadership, is tied with absolute certainty to the first two (financial and cultural). There are many types of leaders, but as strategist Joel Benenson said during our discussion, “There has to be a decision maker. Authority, responsibility, and tasks are the three tiers of the decision-making process, but you need a strong leader who will listen to opinions, who will want to make it a consensus decision as much as possible, but is ultimately charged with implementing the decision.”

Time and again we’ve seen situations where there were too many cooks in the kitchen, too many masters, along with superfluous committees and task forces, all without a commander-in-chief. There are many people running in many directions, talking about change, leading change efforts, but the company is fragmenting its efforts and again does not have one person helping focus the efforts. David Ogilvy once said that you can search all the parks and all the city squares, but you’ll find no statues of committees.

We learned from information gathered during the research of this book that a lack of urgency on the part of leadership tops the list of complicating issues. Yes, change is coming, but I’ve got to attend to business as usual. Tightly connected to this is the “future is closer than you think” factor. Leadership knows change is coming in the marketplace, but greatly underestimates how fast the public will react to it. How quickly will people replace film cameras with smartphones? How soon will it be that they get their news from sources other than a newspaper, their clothing from online retailers, shift their travel sleeping accommodations from hotels to the homes of strangers? A third barrier in the realm of leadership is the “which way do I go” syndrome—analysis paralysis as some consultants call it, as Procter & Gamble experienced. While there’s no easy choice and there may be several alternatives to staying relevant, each with positive and negative aspects, the person in charge can’t make a decision. So what happens? Either they don’t decide and continue to evaluate options until the train has left the station, or they’re too late to the game to seize an opportunity and their competitors have beat them to the punch (“you snooze you lose”). Or they hedge their bets and pursue several options, not putting the necessary resources behind any one of them and fight a multifront war (in Chapter 4, we describe Sony as a classic example).

Lesson # 6: The magic only happens outside the comfort zone. We end this chapter where we started it, with Marty Crane. Psychologists and behavioral economists have a phrase for the Marty Crane-like preference for the comfort zone. They call it the status quo bias, and it refers to the tendency of people to prefer things to stay the same by doing nothing or by sticking with a decision made previously.⁸ The status quo bias is related to the previously discussed sunk cost fallacy in that both lead decision makers to stick to decisions already made, even in the face of contradictory evidence. If the world changes and you don’t, you lose.

Status quo biases exist even in the face of very important decisions. One study on university health plan enrollments, for example, showed a large disparity in health plan choices between new and existing enrollees. In particular, one new plan with significantly more favorable premiums and deductibles had a much higher market share among new employees than it did among existing employees. The pattern could not be explained by differences in preferences for plan components.

The status quo bias inhibits firms from taking risks. Surely it made it easier for Wall Street to place the golden handcuffs on Kodak. It cemented the culture of the “massive middle” at P&G and created the cultural belief that the National Geographic Society was a magazine-centric organization.

On the other hand, the status quo bias has not prevented Roger Federer from becoming the greatest tennis player of all time. Federer first came into the view of ardent tennis fans (like Joel) at Wimbledon in 2001, where he upset Pete Sampras, then the four-time defending champion and seven-time champion overall, in five sets in the fourth round. What seemed like a monumental upset at the time now does not seem like a bad loss for Sampras in retrospect. Roger employed a serve and volley net-rushing strategy—the strategy that had been the key to success for fifty years on grass courts such as those at Wimbledon. Then in 2002, things changed. Following the 2001 tournament, Wimbledon ripped up all of its courts and sowed new ones made of 100 percent perennial ryegrass. The old courts were a 70–30 split of ryegrass and creeping red fescue. The change was ostensibly made to make the courts more durable. But because ryegrass stands taller and its soil is drier and firmer, the side effect was that the ball now bounced higher and slower. The tried-and-true grass court strategy of taking advantage of low-skidding approach shots to win point after point at the net was no longer unbeatable. Baseline play became much more effective. In the 2002 tournament, Federer lost in the first round and Sampras lost in the second to journeymen Mario Ancic and George Bastl, respectively. Two baseliners, Lleyton Hewitt and David Nalbandian, contested the final. At this point, Federer took off his Marty Crane clothes to reveal a big red “S” on his chest and then restyled his game to be played mostly from the baseline. He then proceeded to be Superman and win the next five Wimbledon titles and three more for eight overall. Take that status quo bias. Roger Federer responded to a change in his world and became the most successful player in the history of his sport.

Fortunately, there are many similar stories of organizations in this book that broke through the status quo bias: Adobe, Forbes magazine, IBM, and New York University, among them. There is an old Latin proverb “audentes Fortuna iuvat,” which literally means “fortune favors the bold.” These organizations had all achieved success in previous incarnations. However, the fast-moving world in which we live was placing a wall right in front of them—a wall seen by effective leaders, but not necessarily by everyone else. Had they imitated Marty Crane, their organizations would have been in trouble. Instead, they made huge investments in changing the fundamental ways they conducted business and, as a result, remain at the forefront of their industries. They followed the advice of the rock band American Authors who sang the 2016 hit song “Go Big or Go Home.”