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1/12/2012
01:11 PM
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Why Did Kodak, Motorola, And Nortel Fail?

All three were technology-driven and had a "franchise" with happy customers, yet all three are close to pushing up daisies.

Let's look at Motorola. This was a technology company; it did integrate backwards into chips--remember that all those early Apple computers ran on 68000s. It was a supplier to the carriers and got out of spectrum so it wouldn't be seen as a competitor to the AT&Ts, Verizons, and Sprints of the world.

It was the carriers that hobbled Motorola, because there was more capability in the phones than the carriers would allow. Along came Apple, violating the conventional wisdom by making its smartphone pitch directly to the consumer. And suddenly Motorola had an obsolete product line and a weakened hand. It lost first to Nokia, then to RIM, then to Apple. Cell phones became fashion purchases, and Motorola found itself in the backwater. What should MOTO have done? Gone into the carrier business and competed with its existing customers? Pushed the idea of the smartphone directly to the consumer?

Nortel owned the high end of switches; its customers were the world's telecom authorities. It was a major factor in routers as well. What went wrong? This was not a flagrantly mismanaged company, was it?

In fact, it was. Nortel went on a spending spree the technology world had rarely seen before, acquiring Alteon, Bay Networks, Qtera, etc. These mild-mannered Canadians had a dream: to be the next Cisco. If Cisco got credit every time it made a multibillion-dollar acquisition, whether accretive or not, couldn't Nortel do the same?

Yes, for a while. Then the telecom boom ended, the 300 CLECs (competitive local exchange carriers) found their funding cut off, and all of a sudden there was no market and these expensive acquisitions were hemorrhaging cash. Not that Alcatel/Lucent was doing any better.

So here we have three poster children--all technology-driven, all with a "franchise," all with happy customers, great brand names, and strong balance sheets. And all close to pushing up daisies.

When Intel was having its problems 20 years ago, Gordon Moore and Bob Noyce asked themselves what a new CEO would do if he inherited the paper-thin profit margins that memory chips were generating for their firm. Their answer: A new CEO would immediately get out of the memory business. So they did. Fortunately, there was a great new opportunity on the horizon: personal computers. If you're going to jump out of an airplane, it helps to have a parachute.

IBM also flirted with its own death spiral. It was as hooked on mainframe hardware, mainframe software, and mainframe profits as Kodak was on film. Having realized that those glory days were never to return, IBM rebuilt itself on a platform of software and professional services, jettisoned hordes of employees, and got out of PCs because it saw that it was never going to make money in an increasingly commoditized business.

The first job of leadership is to be stark realists. IBM and Intel were. Kodak, Motorola, and Nortel were not.

A few columns ago, I decried One Generation Companies such as Novell, 3Com, and Palm, which all flowered but eventually burned out. Kodak, Motorola, and Nortel are different. They're 75 to 100 years old--four- and five-generation companies. And even though all three were well run for much of their existence, in the end they weren't.

They had good, not great, leaders. They recognized change and adapted, but not quickly enough, not violently enough. Hewlett-Packard is having its own Come To Jesus Meeting even as we speak.

In the end, these three icons, Kodak, Motorola, and Nortel, thought they were managing risk. In the end, it didn't matter.

GlobalCIO

Howard Anderson, founder of Yankee Group and co-founder of Battery Ventures, is currently the William Porter Professor of Entrepreneurship at MIT. He can be reached at handerson@mit.edu.

For more Global CIO perspectives, check out Global CIO.


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Guest
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Guest,
User Rank: Apprentice
1/16/2012 | 7:11:58 AM
re: Why Did Kodak, Motorola, And Nortel Fail?
There is no profit in PCs for the OEMs (plenty of profit for Microsoft and Intel). Dell, which you name, has a PC business that runs at 3% net profit margins. After Microsoft gained control, all of the PCs became more or less the same. There was/is no way to differentiate from their competition on technological innovation. Price was the only differentiator, where Dell came into the picture, which killed all profitability.
Guest
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Guest,
User Rank: Apprentice
1/16/2012 | 7:01:11 AM
re: Why Did Kodak, Motorola, And Nortel Fail?
Nice article. Intel isn't really comparable with Kodak, Motorola and Nortel because they were a fairly small company before x86. Intel's Kodak moment is coming with the rise of ARM and companies deciding to design their own chips and have someone else fab them.

The rest is correct. The three companies mentioned always thought the impending shift would be manageable and allow them to hang on to their high-margin cash cow divisions. It also speaks to the difficulty in coming up with a second act, or second great idea. Many of these management teams did not have the talent or the luck of their founders. HP, as you mention, has this problem at the moment. Prink/ink, their cash cow, is going away and no one has a great idea that will make similar margins. No executive wants to admit to themselves or Wall Street that the future business model will run at lower margins than their current business model, which is why they hang on until it is too late.

@Lucymcq
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@Lucymcq,
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1/14/2012 | 6:27:44 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
Proof point: in 2003 I went to Schaumberg to pitch Motorola on a music downloading service they could provide on their new windows smartphone. When I proposed we split the revenue three ways (labels get a third, motorola gets a third, we get a third) they promptly replied "Oh no, we would give our share to our carrier partners"

The iphone came out 4 years later integrated with itunes.
Wally Wombat
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Wally Wombat,
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1/14/2012 | 2:27:21 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
Hired Gun, your recollections are correct, but not out of line with the "out for no profit" observation. I was with IBM during the late 70's and the 80's. You are spot on regarding the Micro Channel faux pas, perhaps eclipsed by the 10-pounds-in-5-pound bag mistake also known as OS2.

But all of this, and the rise of Mr. Dell and the phallanx of other PC makers occurred some two decades before IBM bailed on the PC business. By the 2004 sale of the PC division to Lenovo, the PC hardware business was/is indeed a thin-margin business with little opportunity for IBM value-add and/or any technology/innovation benefit back into the new engine of the corporation: services and software.

An addtional interesting note from a reent interview with ex-CEO Sam Palmasano in the Verge: "Palmisano says that despite offers from Dell and private equity firms, IBM chose selling to Lenovo because of its location in China, which helped IBM establish itself within the country's lucrative market."

Not too bad a move on the whole. Particulalrly when the original sales forecast for the PC back in 1980 was 250,000 units in total sales....
Hired Gun
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Hired Gun,
User Rank: Apprentice
1/13/2012 | 10:45:16 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
I can fully appreciate your comment about customer service. I stopped buying Packard Bell computers (if you remember them) because I had to get up a 3 AM just to reach somebody to solve a problem. Not so with Dell. And don't even TRY to call some other manufacturers. Dell has been so incredibly successful because if you can give them a Service Tag Number (serial number) they will talk to you even after the computer is out of warranty. This is smart business because if they can identify the problem, they know you will order the part right then. DUH! (Granted, sometimes I have to talk to somebody in India, but even then, the problem is embraced by the company.)
Hired Gun
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Hired Gun,
User Rank: Apprentice
1/13/2012 | 10:34:55 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
You wrote "IBM . . . got out of PCs because it saw that it was never going to make money in an increasingly commoditized business." I was around in those days. My first PC was an IBM with no hard drive. With a wheel printer it cost me about as much as a new car. My wife and I went into a computer store looking for something for her little word processing business. I think this was about 1982. I looked down at the magazine rack and saw 3 issues of PC Magazine. The first one was 3 months old and was about 1/8 of an inch thick. The second one was about a quarter inch thick. The most recent issue was a half inch thick. I did not even pick up the magazines. I looked at my wife and I said, "We are getting an IBM PC. All of these advertisers cannot be wrong." True story. (PC Magazine later went to biweekly when it grew to over an inch thick.)

However! IBM made the mistake of attempting to control the market like they had done with mainframes. BIG MISTAKE. They abandoned the open architecture and switched to what they called "Micro Channel". By this time there were hundreds, if not thousands of suppliers that were not about to pay royalties to IBM. Hence, the birth of dozens of PC manufacturers like CompuAdd (who sold many systems to Sears) and then Northgate and Dell.

Dell was founded by Michael Dell basically out of a garage. I think he ran the business from a University of Texas dorm room. They now employ over 100,000 people, I think.

My point is: IBM could not have done this because there is no profit? Really?
ANON1243011411578
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ANON1243011411578,
User Rank: Apprentice
1/13/2012 | 8:00:55 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
Kodak failed because they had no concept of Customer Service. They obsoleted their products within 2 years, so that if you purchased a camera and their box to develop the shots you had taken from them, it would no longer be able to be fixed by them once 2 years had elapsed.
Beside that, if you sent something to them to repair, they were more than likely to lose the item, which was done to me personally twice and took me a year to recieve a developer for pictures I took back from them. Still it was not fixed and they did not seem to care. Then try calling them and complaining. How about waiting on hold for 45 minutes only to be hung up on.
I understand that we are in the digital age, but if customer service will not answer your request for service, then your firm deserves to fail. And Kodak has. This should be a lesson that we teach to our Business Students on why companies fail.
Alan Strong-Los Angeles, California.
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ANON1246877940818,
User Rank: Apprentice
1/13/2012 | 7:55:50 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
Great article. I think it is also important to note how Apple was in trouble in the late 90's and with the ipod really turned the ship around. So it can be done! Microsoft is also moving hard into the Cloud (office365 and Windows8 - HTML 5) to redefine themselves out of the PC OS space. I believe they will be successful, but it will be interesting to watch.

The scary reality we live in now is the lightening speed change comes. I'm already hearing rumblings of the death of Facebook. Hmmm -- doesn't seem possible. But I wonder - I know the hype for me is over. Will FB adapt? What about Living Social and Groupon? Are these companies that will become consumer staples or go the way of the dodo bird?
TJN
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TJN,
User Rank: Apprentice
1/13/2012 | 7:43:58 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
Instead of mourning the losses of old established companies, we need to look at the process of change itself. Complacency is a deadly disease. I can think of many more companies that could go broke within the decade. Is that bad? Not if new ones delivering better products at lower prices take their place. My big concern is whether they are US companies or foreign ones.
gimhoff605
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gimhoff605,
User Rank: Apprentice
1/13/2012 | 7:36:46 PM
re: Why Did Kodak, Motorola, And Nortel Fail?
Good article of facts. The one common thread to success may be found in just 1 word: Innovate.
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