Why do successful companies fail? One reason is an inability to let go of a successful product. Read that again – the issue is not about an inability to innovate but an inability to let go of successful products so as to allow newly developed superior ones to take their place.
An example of how to do it right is Apple and the iPhone. Apple’s turnaround at the turn of the century began with computers. The iPod was a hit and provided much-needed diversification for Apple. In late 2007, when the iPhone was launched, Apple faced a pivotal moment.
The iPod sold 50 million units worldwide in 2007. To use the language of the industry, it was a killer product. The problem was that the iPhone would cannibalise part of the iPod market. Indeed, the iPhone was basically an iPod with a GSM chip implanted.
Most executives would have been terrified to introduce a new product that ate into the market share of a highly successful existing product. But why? If one product took sales from another product, the actual revenue to the company would arguably be the same. In the case of the iPhone versus the iPod, since the iPhone was more expensive, any cannibalised sales would actually generate greater revenue.
To understand the situation better, the contrasting experience that Coca-Cola had when it introduced Coke II is instructive. The company had a hit in the original drink. It believed that it had a better product in Coke II. The mistake here was that it killed one product and simultaneously launched its replacement.
In particular, where Coca-Cola failed was in discontinuing its successful product. What it should have done was to have been prepared to let it go. Instead of killing original Coke it should have introduced Coke II and, if there was demand for it, allowed Coke original to die a graceful death.
Introducing a natural successor into the market and allowing natural market forces to select the winner and weed out the loser in a capitalistic Darwinian process is the way companies can successfully transition from one product to another.
What happened with Coke? Well, these things always have many explanations and trying to decide what exactly happened would be futile. But it does not take a leap of the imagination to envision a discussion based on the cost of running two products. Would it not be better to just deploy a single product?
This type of thinking, focusing solely on cost, always leads to disastrous decisions. The company might not always pay for the bad decision, but that would be due to luck and not skill.
The first takeaway of this article is that when you develop a new product, do not force an either/or situation on your clients. Give them a choice. Cost risk can be managed with a limited launch of a new product or a limited reduction of the existing one. Coca-Cola could have simply decided to maintain the same production cost in total, reducing original Coke 10 per cent and introducing Coke II using the savings.
An example at the opposite end of the spectrum, when a company refused to allow the launch of a superior product so as to protect the incumbent product is Microsoft and the OS/2 operating system.
OS/2 was a joint effort between Microsoft and IBM. As with all projects, OS/2 suffered from technical and internal political issues. However the product was generally viewed as superior to Microsoft’s Windows operating system and the future for Microsoft and IBM.
In 1990 Microsoft abandoned OS/2 for version 3 of Windows, because at that time it was far more successful commercially and it did not want to cannibalise sales. In 1995, just before Steve Jobs returned to Apple, Microsoft’s market cap was $54 billion, more than 10 times Apple’s $4.5bn. Today Microsoft’s market cap is less than half of Apple’s $745bn. A large part of the abysmal relative performance is Microsoft’s inability to let go of revenue-generating but dying products, even with better products in the pipeline.
In the GCC the dominant position of family companies means that products currently deployed are near and dear to the founder. This can create a dangerous blind spot as founders close their minds to the growth opportunities of a new product suite as they naively cling to the original product suite that formed the foundation of their success.
It is not an either/or decision. You do not have to ditch the past, just keep the door open for the future. Free your mind, and the rest will follow. With apologies to En Vogue.
Sabah Al Binali is an active investor and entrepreneurial leader, with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com
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