Re-inventing the core

Last week we looked at the issue of core business decline, and being clear if its really dying, or in fact just sleeping. In the latter case, the core product still has relevance but needs refreshing (e.g. big box washing powder, canned soups, frozen food in the UK). In this post, we look at the problem of a core business that really is in terminal decline.

1. When the core business really is f****ed (excuse my French, but no better way to say it)

In some cases core business decline reflects deep problems which are hard or impossible to solve. These problems are often linked to a “disruptive” change in technology which delivers a far superior value proposition, making the established product redundant.

And often the leader brand looses out big time to a new technology, championed by a competitor or competitors. Examples:

– Kodak rolls of film vs. digital photography => Samsung, Sony and Panasonic

– Sony CDs vs. online music => illegal and iTunes

– Sony Walkman vs. MP3 players => Apple iPod and iPhone

РEncyclopedia Brittanica  (20-volume sets of books) vs. CD or Online => Microsoft Encarta

– Blockbuster and video rental vs. home delivery and now streaming => Netflix. Blockbuster recently went bust, as I posted on here.

But how did this happen? And is there a way to avoid the same fate if you core is dying?

2. The leader’s problem: marketing inertia

Kodak is the perfect example of a leader brand losing its core business.

Kodak’s problem wasn’t lack of technology. They invented the first digital camera in 1975. But according to an article in Wired, “Kodak executives were not enthusiastic. Early objections were intellectual.” Kodak’s first digital camera was not launched until 1998. And the focus stayed firmly on the core film business, even though by the early noughties “Not a day went by (at Kodak) when there wasn’t a discussion about when film would be replaced by digital”.

Kodak was so slow to change and failed to drive digital harder and faster not because of “marketing myopia”, which is not seeing the change coming. The issue was “marketing inertia” and being stuck in the old ways:

1. The growth of the new technology was gradual at first, and…

2. … the core business was still growing, up 6.5% in 1999

3. The new technology required investing heavily in new competences, and…

4…. there was millions of dollars and years of blood, sweat and tears invested in the existing business

Kodak and its people have paid a heavy price for their marketing inertia. It has gone from 145,300 employees in 1988 to 19,900 in 2009. Film sales dropped from $3.1 billion in 1999 to $951million in 2006-07: over 2 bloody billion dollars of sales up in smoke.

3. The leader’s imperative : Re-inventing the core

In cases like Kodak’s, refreshing the core business is futile. Its like “re-arranging the deckchairs on the Titanic” as my old boss Mark Sherrington used to say. Leader brands with a terminally ill core need to re-invent the core by delivering the same benefit in a radically new way.

Look again at the brand examples above. In each case the established brand leader had great equity to leverage and become the leader of the future. Kodak stood for “capturing memories”, Sony Walkman for “music on the move” and Blockbuster for “movies for a great night in”.

Re-inventing the core is incredibly difficult, as it requires an acceptance that the established core is going to die. Management needs to go through a proper mourning process perhaps of anger, denial and acceptance?! Also, there may be a need to overcome arrogance about new start-ups to treat them with the respect they deserve.

There are then several ways to go about re-inventing the core:

– One option is to re-invent from within and create the new competences and technology yourself. This is what Tesco did with online retailing, creating its own system for doing this.

– The next step is to create a “spin-off” business, with new management and the freedom to operate in a different way and even have a different culture.

– A third option, which I think has the best chance of success, is to “place bets” on new start-ups that compete with your core. These investments would be small compared to the loss in future revenue. Would Blockbuster have done better by buying a share in Netflix in the early days, rather than half-heartedly launching its own DVD by post service?

To give Kodak some credit, they have made some strides to re-invent their core. For example, their Kodak Gallery online photo storage system has 75 million users. It is an example of them using option 3 above, by buying a stake in and then 100% of a start-up, in this case Ofoto. However, it may be too little too late. 2010 sales were down 6% and the company lost $58million, after losing over $150milion in 2009.

In conclusion, when your core is under threat from disruptive technology you need to act and act fast to re-invent, either by investing internally or buying stakes in promising new start-ups. Otherwise, you risk “doing a Kodak” or, even worse, going bust like Blockbuster.