Old giants fight to reclaim glory days of high-tech

Many must make major changes to remain relevant, even survive

With a dramatic gesture some years ago, Motorola took on one of the toughest questions in business: Can a technology company remake itself when technology changes?

The track record across business history isn’t good. Ask Western Union or RCA.

The hopeful news: Some have done it, among them Motorola decades ago.

Motorola said it would spin off its $5- billion-a-year semiconductor chip division so it could refocus on communications. The company had been in decline since the late 1990s, which had investors and analysts wondering if it could regain its former greatness, or if it would descend into corporate purgatory.

The last decade, we’ve seen more older tech-based companies similarly struggling. Eastman Kodak drastically cut its dividend so it could invest in a sharp turn toward digital photography. Xerox, which has steadied itself financially, says it is focused on the future — one that can’t rely on copying, the only core business the company has known.

Sun Microsystems was issued an unusual warning by high-profile Wall Street analyst Steven Milunovich: Ditch your cherished business model built on proprietary technology, or become a niche player — the next Unisys.

AT&T, Lucent Technologies, and the regional phone companies were all built around a technology — circuit-switched networks — that was increasingly challenged by the Internet’s packet-switching technology.

All those companies once were mighty names in tech. All have to fundamentally change to stay relevant. Whether they did, mattered to millions of people — the companies’ shareholders, employees, retirees, customers, and suppliers, not to mention communities in which they operated and some still do.

“It really is a long-odds proposition,” said Michael Raynor, co-author with Clayton Christensen of the book The Innovator’s Solution, a follow-up to Christensen’s The Innovator’s Dilemma. “Companies that are successful get very good at specific things. But by definition, they’re not good at doing other things. And it’s very difficult to change.”

Tech giants have fought these battles before:

Western Union dominated communications for the last half of the 19th century, building the first transcontinental telegraph line, developing the stock ticker, and becoming one of the original 11 stocks in the Dow Jones industrial average. It couldn’t make the transition to voice communications and exists today as a low-profile money-transfer entity.

RCA was a searing-hot growth company from the 1920s to the 1950s, dominating broadcast radio, phonographs, and television. But as those businesses leveled off in the 1970s, RCA lost its way, as illustrated by its disastrous videodisc system, which got crushed by the cheaper, more flexible VCR. RCA’s pieces are now owned by General Electric, Bertelsmann, and Thomson Consumer Electronics. The company is gone.

Westinghouse was born in 1886, six years before Thomas Edison’s General Electric. It had the better technology — alternating current, as opposed to GE’s direct current. For two decades, Westinghouse was the star pioneer of electricity. But as electricity became a commodity, it could not evolve quickly enough into other areas, falling farther behind.

When markets shift

Academics see echoes today

Kodak could be Western Union — a company utterly associated with the product it created. As at Western Union, Kodak’s leaders could see change coming, but could do little about it, says Nitin Nohria of Harvard Business School. Some 80% of Kodak’s revenue came from products, such as film and photographic paper that digital photography would decimate. The company finally acted weeks later.

“We’re acting with the knowledge that demand for traditional products is declining,” said CEO Daniel Carp. But the risk is huge. The day Carp announced Kodak’s plan, shares fell 18% to $22.15, the stock’s lowest point in years. Monday, it closed at $21.35.

Sun became like RCA. Sun had been wildly inventive, and its machines were the engine of the Internet boom. But, analysts note, it’s offering high-end proprietary products (such as RCA’s videodisc) that were increasingly losing out to lower-cost, more broadly based products from Dell.

Just as human nature is the same in the ancient stories of Homer, the nature of businesses hasn’t changed much. “It’s a testament to the efficiency of markets and constant renewal,” author Raynor said. “Markets shift, and once-dominant companies find themselves stranded. The pond just dries up.”

Time for big change

But a dominant tech company doesn’t have to accept that fate.

Shifts in market can render primary products hard to sell

Motorola has successfully fought it. It did so by never tying itself to one product, or even one industry. As Jim Collins and Jerry Porras pointed out in their book Built to Last, longtime CEO Robert Galvin wrote a series of 31 essays to employees about “who and why we are.” The essays discussed topics such as creativity, renewal, customer satisfaction and ethics. They didn’t talk about any particular product or sector.

In the 1970s, Motorola was one of the world’s biggest makers of TV sets. But when TVs didn’t look like a good long-term business, Motorola sold off that huge piece of itself so it could turn its attention to an emerging business — cellular telephones.

The question now is whether Motorola is still capable of that kind of change. It has been slow to change in the past decade, and its semiconductor business is a good example.

Years ago, companies such as Motorola needed to make their own chips in order to have the latest technology, says Jim Feldhan, chip analyst with Semico Research. Now, cutting-edge chips are more standardized. Some, such as Taiwan Semiconductor Manufacturing Company (TSMC), make specialized chips to order. “It’s a tough market, and a capital-intensive industry,” Feldhan says.

In less than a month, Motorola had pushed out CEO Chris Galvin — son of Robert, who was the son of founder Paul Galvin — and now was dumping the chip business. While both are major changes, “they need to do a lot more,” said Kevin Dede, an analyst at Merriman Curhan Ford in San Francisco.

Now again, analysts had to wait to see if Motorola had the wherewithal to take more radical action, and ultimately, get into another risky business that would renew the company.

“The right way for companies to renew themselves is to attempt to create their own wave of disruptive innovation,” Raynor says. “And that’s hard. Not a lot of companies have pulled it off.”

Intel shows the way

The good news for big companies — and perhaps bad news for upstarts — is that managers understand more than ever the dynamics of getting in front of industry changes. One place to see that is Intel.

Intel’s industry-dominating business model had long been to make ever more powerful, more sophisticated chips, invest heavily in research, and stay far ahead of competitors. But in the mid-1990s, that model faced a challenge. PCs got so powerful that many customers couldn’t use a fraction of the power of the high-end Pentium processors inside. Companies such as AMD began to take advantage of that gap by making lower-end, lower-cost chips.

If Intel didn’t change, it would be like RCA, making beautiful technology that most people didn’t need, while losing customers to the cheaper stuff. Then-CEO Andy Grove decided to do the unthinkable: Intel would make its own low-margin cheap chip.

The strategy worked. Intel’s Celeron is one of the most successful microprocessors of all time. “Survival was a function of launching its own disruptive innovation,” Raynor says. “Other companies might’ve avoided some pain if they’d done the same.”

There’s one catch, which Harvard’s Nohria points out. The companies in trouble — Sun, Xerox, Kodak, Motorola, etc. — are centered more on manufactured tech goods. Nohria wonders if a bigger, more inexorable shift is pushing a sector of the economy into the background to make way for something new — most likely based on Internet technology.

Nohria did a study of old-line industrial companies from 1975 to 2000. Prior to 1975, he says, they enjoyed a boom, much as tech companies experienced through the 1990s. But after 1975, the economy shifted away from industrial companies and toward information technology companies. “Of the 100 largest industrial companies in 1975, only about one-third exist as independent entities today,” Nohria says. He’s unsure if today echoes the late ’70s. But if it does, more tech firms will run into trouble, he says. “These companies will need to fundamentally reinvent themselves as opposed to making hopeful noises that they’ll be OK once tech spending rebounds.”

 

 

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