Monday, May 7, 2012

Some Companies Just Need to Go Away (Yahoo? RIM? Kodak?)

End-of-life spending in healthcare has been a blistering topic for years.  In the US and Canada we spend about one third of our overall healthcare resources in the last year of life.  Medicare paid $55 billion in 2009 just for doctor and hospital bills during the last two months of patients' lives--more than the budget for the Department of Homeland Security, or the Department of Education.  An MD writing in Daily Finance watched his father-in-law’s final six months, reporting “More health dollars were probably spent. . .at the end of his life than were spent on the rest of his 75 years combined. Despite all that money and effort, he was miserable.”

While the stories are heart-rending and the economics upside-down, all this effort comes from a noble impulse.  Doctors wants patients to live and are willing to make heroic efforts to save them.  Many patients expect those efforts, and even when they do not, their families often do.  End-of-life medical spending appears to be one of those frustrating loops where everyone is trying desperately to do good and the results are somehow coming out sideways.

But this isn’t a post about end-of-life medical spending.  It’s about that same heroic, often misguided impulse that forces a management team to save the life of a once successful company that is in the final throes of its life cycle--noncompetitive, increasingly irrelevant, and unsalvageable.

Take Yahoo, which is an especially interesting case because it’s the kind of patient that doctors dread most--no one ailment is life threatening, but in the “whack-a-mole” race to address each one the patient is unable to withstand the cure.

Last month, Yahoo announced it was laying off another 2,000 employees, the sixth major layoff in the last four years under the sixth CEO in the last five years.  Facebook and Google are stealing Yahoo’s revenue.  The company has a huge proxy fight looming over board seats.  Yahoo charged Facebook with patent infringement a few months ago and Facebook countersued last week with the charge that 80% of Yahoo’s revenue last year violated Facebook patents.  Things are a mess for Yahoo in China and Japan, where it cannot extract value for its holdings.  Right Media, its ad exchange, and its search alliance with Microsoft are both considered failures. 

 As one member of the family of investors noted, “Cutting headcount is not executive genius.  Margins are not the issue, revenue is.  Is Yahoo going to grow?  Or is this a downward path to zero?”

All of which allows us to asked an indelicate question of Yahoo that we are unable to ask of our great-uncle: If Yahoo went away tomorrow, would anyone care?  If Yahoo Sports dies, we’ve got ESPN.  Missing OMG?  Try TMZ.  Search?  Not hardly.  In fact, gone tomorrow, I would submit that Yahoo would be a distant memory in a month, joining the hallowed ranks of Mosaic and Prodigy. 

Why take extraordinary measures to save this patient?

Teaching Business Leaders Palliative Care
Many hospitals have begun disciplines around palliative care, helping very sick and often terminally ill patients simply stay comfortable so that their quality of life is optimal and they are allowed to die with dignity.  Perhaps there should be a course taught in business schools, just as we develop start-up and turnaround specialists, that teaches end-of-life “palliative care” to leaders who will be asked to carefully unwind dying companies in a way that optimizes investor wealth.  Nobody is suggesting that we give up early.  Nobody is suggesting that if a miracle drug in the form of a merger or acquisition or new product comes along we wouldn’t take it. 

But the idea that we can innovate ourselves out of any mess underestimates the power of the market, the presence of competition and the inevitability of life cycles.

Take, for example, Research in Motion’s BlackBerry.  It revolutionized the way workers communicate, had a fantastic run--a product life cycle for the ages--but was simply overtaken by Apple and Android.  Market share shrank from 50% in 2009 to 17% in 2011. A make-or-break announcement of its new, life-saving platform (BB10) last week fell completely flat.  Its stock has been in a death spiral.  

"We don't see any scenario where BB10 can compete meaningfully against the three major smartphone operating systems: iOS, Android, and Windows Phone,” one analyst said. "Our longer term view is that RIM will be forced to focus on the low-end, emerging market opportunity, as we believe that segment remains the only jump ball the company and its products will be able to grasp."

Does that sound like much fun?  And, if Blackberry went away tomorrow, would anyone miss it?

That sounds to me like a job for a business expert in palliative care.  End-of-life should be as profitable as possible, which means an immediate cease and desist order on developing new products and throwing good money after bad. 

Life and Death: Kodak and Fujifilm 

One of the strongest defenses for heavy end-of-life medical spending is that some patients actually live.  Doctors just don’t know which ones and therefore feel compelled to treat them all.  

Can we apply that concept to a business scenario, when two outstanding companies appear to have reached the end of their natural lives and management takes heroic measures, actually saving one?

Kodak and Fujifilm may provide some clues.

Kodak filed for Chapter 11 bankruptcy in January 2012 and last month reported a Q1 $366M loss, saying it would retreat from digital cameras and picture frames to focus on retail and desktop-inkjet printing.  Management claimed “Kodak is focusing on opportunities” hoping in 2013 to have a 'leaner, stronger and sustainable business.'"  Does that seem very convincing to you?

Think back to 1988.  Kodak had 145,000 workers worldwide making cameras, motion picture film, floppy disks and pharmaceuticals.  The company finished the year with profits of (the current equivalent of) $2.5B.

Digital photography, invented by Kodak in 1975, exploded in the market shortly after its 1988 banner year, as did film competition from Fuji. Unable to adjust, Kodak shares began a steady decline, falling from $25 to pennies in five years while worldwide employment declined to below 19,000.

In its prime, Kodak had more than 70% of the US film market and was one of the world’s most valuable brands.  Its business model was successful for a century.  So it’s almost offensive when a marketing “expert” steps up to give us the Marking Myopia pablum, as one did recently, opining on how Kodak failed at marketing: “The company," he wrote, "had the nearsighted view that it was in the film business instead of the story-telling business.”

The story-telling business?   Seriously?  How about this more practical reading of the situation: Kodak was in the film-making and film-processing business, boasting dominant distribution and market share, and generating in excess of 70% gross margins.  When that business model began to be overtaken by digital, it owed its investors a much better option than “the story-telling business,” which looked in every direction suspiciously like a small, fragmented industry with low barriers to entry, massive garage-entrepreneur competition, and sub-20% gross margins.  The digital camera business, facing some of the world’s finest electronics companies, had all the makings of a fiercely contested commodity business.  And neither fell neatly into Kodak’s competencies, one of which involved being the best in the world at rendering gelatin efficiently from the bones of cows.  That, dear marketing expert, is a long, long way from story-telling.

A former director of new product development at Kodak echoed this view: "The digital business was not going to be nearly as profitable as the film business in any respect. The film and chemical business was one of the all-time great business models. A lot of the change was going to come whether Kodak aggressively embraced digital business or not."

Technologies advance.  Business models end.  But don’t we owe investors something better with their returns than dumping cash into inferior business models?

Our palliative care business leader would have been tasked at Kodak with milking the film business for all it was worth, using the profits to fund as much of Kodak’s pension program as possible, experimenting cheaply with Kodak Gallery and the like just to see if a miracle cure was available, retraining workers for other emerging industries, selling its patent portfolio, offering its hoard of Brownie cameras on ebay, and having as his or her central mission bringing a world class company and American icon to a dignified end.

Of course, the family of Kodak investors expected heroic efforts and now can blame the doctors for not having the “vision” required to save the patient, but we know the truth: There was no good option, no matter how the business was defined.  Kodak needed to be unwound as profitably as possible, thanking its stars everyday for a hundred years of dominance. Live a grand life, make us all happy for a century, and you should be allowed a dignified end.

"There are no indications I can point to that management did not attempt to find additional innovative products,” the former Kodak executive said.  “But it just never worked."

Welcome to life in the American cathedral of innovation, where many prayers are offered but only a few answered.

Now for the good news, the patient who lived, Fujifilm.  "Both Fujifilm and Kodak knew the digital age was surging towards us," Fujifilm Chief Executive Shigetaka Komori said in a recent interview. "The question was, what to do about it."

“What Fujifilm did,” the Wall Street Journal reported,  “was to look further than simply moving to digital photography from analog. Instead, the company tapped its chemical expertise for broader uses, such as drugs and liquid-crystal display panels. Cosmetics, as well: It seems the process for stopping photos from fading can be used on skin, too.”

In the process of saving the Fujifilm patient, manufacturing facilities were shuttered and thousands of workers lost their jobs.  The company took what it knew about chemicals and pharmaceuticals to develop an LCD-panel component business and a skin-care line.  It also spent billions to acquire healthcare companies.  Never as dependent as Kodak, Fujifilm now makes about 1% of its revenue from photographic film, down from 20% ten years ago.

Mr. Komori’s conclusion: “Fujifilm was able to overcome by diversifying.”

A great success, right?  The patient lived.  Except, of course, with a few clicks of a keyboard, the average investor could have dumped Fujifilm stock and invested in leading, world class pharmaceutical, LCD-panel and skin-care companies without having to suffer through the extraordinary “end-of-life” machinations.  The patient lived, but it’s not clear members of its extended family weren't wounded by the cure. (It's also unclear if the patient, like the Six Million Dollar Man, had any of his original body parts left.)

There are many unanticipated consequences to a business culture that worships at the altar of innovation.  One is the tendency to spend bad money after good trying to evade the end of a business life cycle.  We leap from our comfortable, profitable life cycle curve to an inferior position on a new curve that’s already well populated with smart competitors, often in a smaller and less attractive market--and then squander the riches of our old model to try to recreate its glory.

Blackberry is coming to the end of a brilliant product life cycle.  Kodak already has.  Both had the great misfortune of showing other smart people what’s possible, and then having the students exceed the teacher. That happens.  It’s called competition.  

The apostles of Myopia and disciples of innovation believe that it’s all about defining the business correctly and generating the next great idea.  Sometimes, though, a thoughtful, orderly shuffle from this mortal coil seems like the wiser, kinder, and more profitable decision.