Frankie, disasters are really very sad, they are tragic by definition. But one of the things we can do is to learn from things than have gone wrong in the past. And we do that, we investigate accidents, we investigate tragedies. And we do that to try to learn how to prevent them from happening in the future. And so in that spirit we're going to reexamine or summarize all the things that we have seen to date about Kodak, Blockbuster and Borders. The companies I call the Three Amigos because their fates all turned out to be the same. They all failed, this is our model. We had information technology leading to an innovator who comes up with new products and services, or a new business model and then we have the incumbent. In this case our friends Kodak, Blockbuster and Borders. And these cases all illustrate the factors that we said inhibit the incumbent's response, denial, history, resistance to change, mind set, brand, sunk costs, profitability and lack of imagination. And there are three ways out of this model. The most successful companies have been able to morph their business model. A more difficult path is to abandon your model and in the case of the three companies we're looking at here, the ending point was failure. All three of these companies faced disruptions. Kodak, ironically, from its own invention and from the Internet, because it failed to understand that it wasn't just in the film business, it was actually in the imaging business. And the Internet and digital cameras change the process of taking pictures and distributing them. And to change the process in such a way the people really didn't need film anymore to take advantage of it. Blockbuster suffered from Netflix and DVDs by mail and streaming movies, and denying that this would have an impact on them. Plus going through a lot of management turmoil and changes of ownership. And of course Amazon had a strong negative impact on Borders. So, in all of these instances there was a failure to adapt, a failure to act. Kodak was really stuck with this mindset of being analog. I had a student many years ago in an executive program who said to me, you know, the problem I have, Hank. Was all the things that you are trying to teach us here is I've start about it and I decided that I'm an analog guy and you are trying to get us to think digital. I'm not sure I should keep to think this in zeros and ones but I trying to think about the implication of Digital technology and Information technology. Kodak also suffered from the problem that senior management could not convince middle managers of the need to change of the future that was coming down the road in terms of Digital technologies. Blockbuster, managerial turmoil, lots of changes of ownership, very controversial owners. Sumner Redstone, the people from Wayne Huizenga, to Redstone to Carl Icahn, different ownership styles, change in CEOs. It's not surprising that they have a great deal of trouble executing and Borders fail to respond. Managers there just seem to be almost asleep. Now what could Kodak have done? And it's easy to look back and say you should've done this. It's much harder if you're sitting there in that situation, and trying to look ahead at what's happening. I think a very senior level manager of digital products. Maybe a person who was there consistently over a period of time, not being replaced or shuffled around. A consistent organisation, a separate unit. This is Christiansen's recommendation always. Put the innovators in a separate unit so that they are not influenced by the people who are vested in the past or the status quo. Trying to hire the right people, again the time Kodak was going through this technology field was pretty hot. And you might have had difficulty luring those with a great imagination in the technology world to work for a film company. They probably would much rather have worked for Google or Yahoo, or someone that looked like they were on the cutting edge. So hiring the right people was not easy. Kodak invested billions of dollars in digital photography but they weren't able to extract much to get much return from that. And they weren't very good at all at predicting the market. They needed a massive organizational change program and I'm not sure that in a company this old. We said it 120 years actually if you look at the dates it's more like 130 years old when it filed for bankruptcy. I'm not sure it was possible to change an organization of that size. With that many layers of management to take a new focus to move into this digital age. And you just can't worry about cannibalizing yourself, because somebody else will. This is a perfect example of what Jobs supposedly said, Steve Jobs said if you don't cannibalize yourself someone else will. Well in this instance, a lot of someone elses cannibalized Kodak, Blockbuster. What could Blockbuster have done? Well, we could've had fewer changes of control, there was not much of a consistent strategy there. They could've predicted technology and not denied that it was coming. Targeted their investments at starting an online distribution system to compete with Netflix. They eventually did this but they weren't able to promote it, it was actually kind of a natural. So you go online and reserve a movie and if you want it sent to you, fine we'll mail it to you or we'll hold it in the store and you can come pick it up if you want instant gratification. They clearly denied Netflix businesses model is going to affect them and when they try to do something they just really couldn't execute very well. And Borders? Well Borders didn't predict technology very well, they didn't invest in new products and services they have outsourced. I think it was a very conservative management, they didn't want to take any risks and just as with Blockbuster when they tried to do something they didn't execute very well. So what is this look like? When we think about our factors that inhibit an effective response, the first of these is denial. At Kodak, it was overwhelming, it means that the digital photography was going to impact their high profit, high margin film business. Blockbusters are the same way Netflix's business model. People aren't going to want to wait for a DVD in the mail. I'm not sure how they denied the streaming, because clearly streaming wasn't something that required you to wait. But they still fell behind there and seemed to deny that there was something that they had to become especially competent in doing. Borders yes, just like the others. History, Kodak we said 130 years. Blockbuster embroiders much shorter life spans, they didn't have a huge history to rely on but if you look at their businesses, they kind of were successful for a while. So if you look back we had some growth, we had revenues. So, things are not all that bad historically for us. Resistance to change, again, Kodak is massive. Blockbuster clearly demonstrated resistance to change and Borders as well. Mindset yeah, Film, film is the answer. Blockbuster, you're going to go to a physical store. We're opening stores, we're opening them rapidly, that's our business model. And Borders, it's physical books, not electronic books, it's physical books and it's going to a store to buy them. Brand, I think probably Kodak had one of the number one or number two brands in the world. I think that lulled them into a sense of security. Blockbuster's brand was strong too, because it revolutionized the video rental industry. In fact if you look at the competition, Blockbuster stores were far more appealing than any of the other video chains or the local video stores. And Borders was okay, I mean, there weren't that many large bookstore chains in the country. Sunk costs, Kodak had a huge campus in Rochester, with lots of buildings on it. Manufacturing film, chemicals, paper packing for films. You couldn't look at this and easily say, we're all going to see this all go away in the future, so they had a big sunk cost. Blockbuster and Borders had less in the way of sunk costs. They had a lot of real estate that they might have been either leasing or owned. They had buildings, and they had inventory. So they may have also felt that they were constrained somewhat by past investments. Kodak, again, lots of money, remember Carly Furim's comment, they were sitting on a mountain of cash. It's very hard for them to endanger the contributes to that mountain. Blockbuster and Borders had some rough times, so their profits went up and went down, their stock prices went up and down. So profitability for them was probably not as much of an inhibitor as it was for Kodak. On the imagination score they all get weak. [LAUGH] They did not imagine what could happen to them. I think they didn't really do something that we might advocate called scenario planning. Where you develop scenarios and try to see which ones are most likely and what your response should be to that particular scenario. So as a faculty member, I have to give all three an F. Well, that's a pretty easy grade to assign, because they're all bankrupt. And what's the tragedy here, well many, many people lost their jobs. Hundreds of thousands of people lost their jobs. Wealth is wiped out and the root cause, management itself failed the company and the shareholders. These organizations managed their way to bankruptcy, it wasn't that outside events forced them to go bankrupt. It was the inability to respond to outside events and to effectively manage the organization.
