Most businesspeople would be pleased to own a profitable business that was a pioneer in its category, had a stellar brand reputation, and generated more than a billion dollars in annual revenue. Yet, in 2012, IBM got rid of just such a business when it sold its retail point-of-sale (POS) business to Toshiba. The heart and soul of Hewlett Packard was its first division, which manufactured and sold electronic test and measurement equipment and counted Disney as its first customer. Nevertheless, in 2000, HP spun off this profitable division as Agilent Technologies, which in 2014 spun off the business again as Keysight.
Why spin-off large profitable businesses? In the case of both IBM’s POS business and HP’s test and measurement business the answer lies in the availability of better options. These businesses were, at best, distractions – slow-growing businesses in highly mature markets where profits were flat. What were once core businesses that defined the brand had become a drag on the overall business and they were jettisoned so that the firms could focus on larger, faster growing, and more profitable businesses. Such changes in product and market focus are common and are examples of business pivots, fundamental changes in business focus, products, and/or markets in response to a changing environment, and the availability of new opportunities.
Such radical changes in business might seem rare, but, in fact, they are quite common. A few examples illustrate the phenomenon. William Wrigley began his career as a soap and baking powder salesman who gave away chewing gum as a way to differentiate his product. YouTube began as a video-dating site. Suzuki was originally the purveyor of weaving loom machines for Japan’s silk industry. Samsung began as a grocery trading company.
There are also legendary stories of firms that failed to pivot. In 1999, Kodak had a 70% share of the photographic film market with margins approaching 70% for many of its products. By 2012 Kodak was in bankruptcy. Xerox copying machines were so ubiquitous that it brand name, Xerox, was synonymous with making a copy. After flirting with bankruptcy and making several unsuccessful efforts to redefine itself, Xerox is a shadow of its former self with a recent market cap of $ 1.63 billion current compared to $ 36.3 billion in 1998. In neither case was the company surprised by changes in the environment or the obsolescence of technology. Indeed, Kodak invented the digital camera and Xerox’s Palo Alto Research Center invented much of the technology that drives contemporary computing, including the mouse, ethernet, GUI interface, object-oriented programming, laser printers, and optical storage, among other innovations. The problem was that neither of these companies changed their business (failed to pivot) in response to known changes in technology, markets, customer behavior, competitors, and economics.
The need for a business pivot is always easy to see in hindsight. It is not so easy when the pivot involves moving away from a business that has a history of success. What sense does it make to change direction, with all of the associated risks of such change, when a business enjoys a 70% market share and 70% margins? It makes sense when the future will be different from the present in significant ways. But this means that senior management and the Board must be looking at the future, as well as the latest performance results.
Pivots involve some dramatic change(s) in a business: technology, products, markets, distribution channels, pricing, and, sometimes, all of these things. Such changes may be in response to a slowing or declining business or, even in the face of currently sound business, the availability of better opportunities for return on investment in the future. Because a pivot involves a change in the definition of a business, as opposed to a new strategy for the current business, pivots must be driven from the top of the organization: the C-suite and the Board. This means that an important task for senior managers, especially the CEO and CMO, and board members is forecasting and responding to an anticipated future. Once it is clear that the current business is failing, it is usually too late to pivot. This is one reason making a pivot is difficult – it often involves radical change at what appears to be the height of success.
Various people, from Niels Bohr to Yogi Berra, are credited with the statement, “it is difficult to make predictions, especially about the future.” Indeed it is, and it is even more difficult to contemplate actions in response to change.
There is so much that can change: at the macro level changes might reside in the economy, technology, competition, demographics, and consumer tastes, among others; at a more micro-level such changes may occur in costs, availability of materials and human talent, government policy and regulation, and business processes, among others. The sheer amount of potential change is overwhelming, and senior managers and Board members would do well to ensure that it is the specific responsibility of someone or some unit to monitor change and the implications of that change for the business. Even so, monitoring change and its implications for a business is a challenging task.
However, that task can be made easier by assuring that the focus is always on customer behavior: how will a change in X effect customer behavior, how will change in customer behavior affect the business, and what do the changes in customer behavior suggest about changes in the business. There are also clear signals of the need to pivot: declining sales revenue or margins, shrinking market share, customer complaints or requests for improvement or support, personnel turnover, and new competitors. And, yes, customers can help predict the future; they just need to be confronted with questions about how their behavior would change in response to the changes they might experience and how they wish to obtain some beneficial outcome. A formal technique for obtaining these insights is called “information acceleration.” There are also “lead” customers who are especially attuned to the future and how changes may influence their behavior (or their own business) who should be identified and cultivated for their insights.
Pivots involve risk and a willingness to make bold decisions. They also require the right decisions and the agility to make corrections quickly. However, failing to pivot also carries risk. When thinking about a pivot it is useful to consider the fate of companies that did not pivot and the sobering fact that only 52 companies have been continuously on the Fortune 500 list since it began in 1955. This makes the life span of a company less than the live span of a person and there is evidence that the lifespans of businesses are growing shorter. Successful pivots can add years to the life of a business.
Contributed to Branding Strategy Insider by Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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