Change Management: When Good Companies Fail

Dec. 21, 2004

It's not just weak, poorly managed companies that are vulnerable to the competitive pressures spawned by technological change. "Well-managed companies that have their competitive antennae up, listen astutely to their customers [and] invest aggressively in new technologies" also can lose market dominance, says Clayton M. Christensen in "The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail."

Sound business practices--such as concentrating investments and technology on the most profitable products currently in high demand by the best customers--can ultimately weaken a great firm, says Christensen. Breakthrough innovations--which he calls disruptive technologies--are initially rejected by customers.

Such technologies often underperform established products in mainstream markets, but have other features that a few fringe customers value. Examples of disruptive technologies include transistors (relative to vacuum tubes) and dirt bikes (relative to motorcycles). When traditional customer-driven innovation causes companies to bypass riskier opportunities, more nimble, entrepreneurial companies gain a foothold in new markets.

"The Innovator's Dilemma" provides compelling examples of good firms that have failed to respond to disruptive technologies. Digital Equipment Corp., as well as other minicomputer makers, were slow to enter the desktop personal computer market. Ironically, Christensen notes, the very decisions that led Digital to its decline were made at the time it was widely regarded as being an astutely managed firm.

Another example: The failure of integrated steel companies worldwide to adopt minimill technology. Christensen offers a solution-spinning off an independent organization to pursue the new market-in a case-history chapter on what he regards as a potentially disruptive technology: the electric vehicle.

'The Living Company'

The average life expectancy of a large, multinational corporation is between 40 and 50 years. One-third of the companies listed in the 1970 Fortune 500 had vanished by 1983--"acquired, merged, or broken to pieces," says Arie de Geus in "The Living Company." On the other hand, Sumitomo Group has existed in some form for over 400 years and Du Pont & Co. is a venerable 200 years old. The ingredients for corporate longevity have long fascinated De Geus, who worked for centenarian Royal Dutch/Shell for 38 years.

In 1983, when he was coordinator of planning, the corporation conducted an informal study of large companies that were older than Shell. "In the end we found only 40 corporations. . . . We wanted to find out whether these companies had something in common that could explain why they were such successful survivors."

Based on that study and subsequent research, De Geus identifies four components of corporate longevity, none of which have anything to do with the ability to return investment to shareholders. "The profitability of a company was a symptom of corporate health, but not a predictor or determinant of corporate health," he says. Credited with originating the concept of the learning organization, De Geus decries the dilemma of managers who know that their success depends on building and developing the knowledge base of their enterprise, yet whose performance is still judged on return on investment and capital assets.

If companies mobilize human potential, restore or maintain trust and civic behavior, and increase professionalism and good citizenship, De Geus asserts, "I believe that average corporate life expectancy will begin to rise, to meet its potential span; and all of humanity will benefit as a result."

'Changing Focus: Kodak and the Battle to Save a Great American Company'

Long-lived companies are not necessarily immune to turbulent times. Eastman Kodak Co., founded 115 years ago, is emblematic of American business in the 20th century because, like General Motors, IBM, and "many other capitalist icons," it took its success for granted, says Alecia Swasy in "Changing Focus: Kodak and the Battle to Save a Great American Company."

Slow to recognize the competitive threat of Fuji Film, senior executives also paid little attention to the changing marketplace or to management performance. "When Kodak did try to diversify to counter problems in its core photography businesses, it had difficulty coping outside insular Rochester and made costly wrong turns," notes Swasy, whose last corporate expos, "Soap Opera," dissected the corporate culture of Procter & Gamble Co.

The result at Kodak was massive layoffs, bitterness among both fired and surviving workers, and Depression-like trauma in upstate New York. Kodak's struggle to reinvent itself under CEO (since 1995) George M. C. Fisher provides a fascinating cautionary tale for managers caught in the maelstrom of change.

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!