What we can learn from Kodak & Nokia

During a recent discussion with the group chairman one of India's most respected conglomerates, the demise of Kodak and Nokia came up, yet again! This prescient septuagenarian, whom I look upon as a mentor, started to describe the fall of these iconic firms in much the same way as we have all heard it ad nauseam in the media. As it goes, these companies were caught flat footed at the time of a huge technology shift and this lead to their fall. It is something we get to hear in newspapers & magazines in roughly the same script whenever firms fall on the way side. Being a student of companies, I somehow felt this did not explain the whole affair and seemed a bit too simplistic. What I narrated to this senior leader about the deeper forces at work at the leadership levels of Kodak & Nokia is what follows.

In both cases, we had dug deeper and spoke to former board members/CFOs of the firms (in 2012/13) and they gave more colour to the quality of decision making in the board room.

In Kodak's case, the firm had most of the patents/R&D capability in digital photography 15 years ahead of rivals like Samsung or Apple!  Even so, the senior team decided to push film products as it delivered superior net profit margin (close to 70%) compared to digital (45% net profit margins). They chose to back the superior short term profit margin film for 12 years till bankruptcy despite knowing  that the digital strategy was being impaired allowing up-starts to gain advantage. This is simply because the 'Value' they were chasing was market capitalization and quarterly numbers which were liked to their pay & incentives. There was no one inside the firm to stand up and question these flawed assumptions and frame a Long-term Value thesis for digital. In Nokia's case again they had the IP/technology for smart phones years ahead but the organisation built for conventional phones ensured that that the lateral agility required to take smart phone tech to market was sapped.

If one goes beneath the surface of the recent troubles at IBM, HP, TESCO there is a common thread of short-term profit focus trumping Long-term value creation. This inevitably happens at the expense of powerful soft assets like brand, culture, IP & innovation. This is a wide spread problem inside firms across sectors globally. And yet, well meaning people often ask me 'can one prepare for such a situation?'

It our firm belief that the Long-term Value implications of most firms is left to intuition and gut feel of owners/CEOs who sense these imbalances. However, they do not have any formal process to surface it and the tidal wave of near term performance metrics & KPIs ensures such a deeper discussion is sidelined.  Even if firms have a bias toward long-term planning like the Kodaks of the world, Long-term Value remains untested. There is a fundamental difference between Long-term plans and Creating Long-term Value. It remains obfuscated until a crisis erupts.

A regular litmus testing of Long-term Value Potentials (Non-linear Upside/Risk) tied up to the quality of leadership hinge assumptions should become central to corporate strategy and performance. Devoid of this understanding a strategy & execution could be quite easily speeding up the demise of the firm!  

The next time you see a headline with the run of the mill script, pause for a moment and imagine the nature of decisions the leadership team of that company made by weighing up short-term returns and their Long run implications. You will find a whole world of subtle issues which miss our collective consciousness as we run the treadmill faster & faster.

Dear readers, Please do share your views as I am sure you have witnessed similar circumstances inside firms. Let us speak openly about it and learn from each other!

With Gratitude,