Why do successful tech companies fail so often?
Friday August 10, 2012 By David Olive Business Columnist
With Research in Motion Ltd. poised to detail its restructuring plans as early as Monday, speculation on RIM’s survival prospects will intensify. Yet the more pressing issue, for a country at risk of losing a second “flagship” tech enterprise in less than a decade, is what makes tech success so difficult to sustain?
The tech sickbay is crowded with household names, including Hewlett-Packard Co., Nokia Corp., Microsoft Corp. and Facebook Inc. Tech sector layoffs are at a six-year high. RIM plans to lay off 5,000 employees, and H-P will cut 26,000 jobs this year. H-P and Nokia lost a combined $9-billion-plus in their most recent quarters.
RIM shares are down 94 per cent from their 2008 peak. But neither can investors be pleased with H-P, whose stock has lost three-quarters of its peak 2000 value. Or with Nokia, whose shares are down 92 per cent 2007. The Street regards Microsoft shares as “dead money.” The stock is down 48 per cent from its all-time high 13 years ago, and has flatlined over the past decade. And in the IPO fiasco of the new century, Facebook shares are worth scarcely more than half their IPO price in May.
The skyrocketing value of Apple Inc. stock has obscured how tough conditions are in techland. And that Apple itself was about 90 days from bankruptcy in 1997, destined, it then seemed, to share the fate of Nortel Networks Corp., Lucent Technologies Inc., Sun Microsystems Inc. and Palm Inc. in bankruptcy or being forcibly merged out of existence.
Apple has been a trailblazer, of course. But so were the other firms cited above. Why is tech so tough?
Jacks of all trades. Microsoft is so thinly spread across so many realms – from Internet search to smartphones to X-Boxes – that the firm hasn’t be able to gain dominance outside its core Windows and Office franchises. RIM was doing fine with its so-called enterprise niche of business and professional users. Then it took on the vastly larger Main Street consumer market, where margins are lower, rivals more abundant, and brand loyalty weaker.
Too rich for their own good. A Niagara of cash from early success often breeds complacency and discourages a healthy paranoia that someone out there – a passel of Harvard grads, a Korean consumer electronics firm, another cash-rich tech firm – will crash your party. Idle cash also demands to be redeployed, even in the absence of sound ways to do so. Before he was ousted, then H-P CEO Mark Hurd squandered $24.3 billion on acquisitions that led H-P into unfamiliar terrain. That was an echo of John Roth’s $34 billion in ill-fated takeovers at Nortel, and a legacy that current H-P CEO Meg Whitman is hastily dismantling.
When you have money – and Microsoft boasts a cash pile of $50 billion (U.S.) – you try to solve problems not with smarts but by throwing money at them. Nokia has spent $40 billion (U.S.) on R&D over the past decade – four times’ Apple’s outlay – with no blockbuster products to show for it. After a 14-year run as global mobile-phone leader, Nokia was eclipsed last year by Samsung, a comparative newcomer to mobility. Microsoft has spent about $10 billion to achieve a measly 15 per cent of the search market, still owned by a Google that has more than half the market.
Arrogance. Successful pioneering in one field tends to imbue tech CEOs with an imagined omniscience, when it’s humility that’s called for. (See paranoia, above.) RIM cofounders Mike Lazaridis and Jim Balsillie, understandably proud of their streamlined, limited-use BlackBerry, dismissed as clutter the multi-functionality of the new generation of smartphones now threatening RIM’s existence. Turns out RIM’s financiers, lawyers, doctors and other enterprise users, quite apart from Main Street mobility consumers, crave Web-surfing and “Angry Birds” after all.
Microsoft for decades has insisted that new ideas conform with how PCs are designed and used. This has doomed countless bright ideas to emerge in firm’s Redwood, Wash. Labs. They get contorted beyond the recognition of their inventors and fail in the market, or take too long to re-engineer to conform with the Microsoft PC culture that they hit the market long after rivals have gained an insurmountable lead.
Bill Gates and his Microsoft successor, Steve Ballmer, couldn’t conceive of users inputting data with a stylus or finger, rather than a PC-world keyboard. So for the longest time Microsoft rejected touch-screen devices. Today, the touch-screen iPhone alone generates more revenue than Microsoft Corp. in its entirety.
Analysis paralysis. Tech firms that meet with success quickly become bloated. Nortel nearly quadrupled its workforce in three years, and soon employees were managing their careers rather than hatching new must-have products and monitoring a fickle market. Headcount bloat begets more memos, meetings, and warring fiefdoms. The culture is poisoned by internal sabotage by ladder-climbers and those simply intent on survival.
At Nokia, “You were spending more time fighting politics than doing design,” Alistair Curtis, Nokia’s design chief in the late 1990s, told the Wall Street Journal. At Microsoft, former product manager Marc Turkel recently told Vanity Fair, “If you don’t play the politics, it’s management by character assassination.”
The CEO of Qualcomm Corp, a leading chip supplier to mobility firms, noted that his client Nokia spent five or six months strategizing market opportunities until they disappeared, exploited instead by nimble rivals. Nokia’s engineers had an iPhone prototype and a wireless, touch-screen tablet computer very like today’s iPad in the works a decade ago. But a risk-averse Nokia culture rejected them.
Similarly, Microsoft blew early tech leads in e-books and smartphone operating systems that it was slothful in bringing to market. Its Zune music player arrived five years after the iPod, the same five-year eon it took Microsoft to develop its also-ran Bing challenge to Google in search. Zune, with its 4 per cent market share to the iPod’s 71 per cent, was finally discontinued last October.
Among its options, RIM can sell itself in whole or in part, breaking itself up as sad-sack rival Motorola Inc. did and H-P is now doing. A poorly thought out growth strategy got RIM into this bad place. And about the only certainty in RIM’s future if it survives is that the Waterloo, Ont. firm will be a much smaller and more focused business.
Wanton growth has crippled tech giants and the likes of General Motors Co., Gap Inc. and Krispy Kreme Doughnuts Inc., as well. The curse of undisciplined growth is well-known. It was more than two decades ago that a PepsiCo. Inc. CEO warned that “Growth for its own sake is the logic of the cancer cell.”