Wall Street and the media have spilled gallons of electrons in criticisms of Eastman Kodak, AT&T, and Xerox. All three 20th century icons are fumbling efforts to cross the chasm from slow-growth to high-growth businesses. This year, Kodak stock is down 43%, AT&T is off 55%, and Xerox is off 66%. According to the pundits, it's because the CEOs have bungled their opportunities.
The truth is scarier. Transforming a company when the underlying technology changes is like trying to change a 747 into an F-16--in flight. Even with excellent management, most companies that try it blow lots of shareholder money and fall on their faces. The most prudent choice for Kodak, Xerox, and AT&T may be to heed the market, focus on what they do best, and put the speculative, futuristic parts of their businesses up for sale.
It isn't an easy call, to be sure. When a company's core business starts to tail off because of a seismic shift in technology, it's only natural for the CEO and the board of directors to cast around for a way to grow faster. AT&T sees its fastest growth in broadband networks; Kodak, in digital photography; Xerox, in outsourcing, printers, and high-end publishing. The plans make sense on paper. And no doubt the boards are heartened by the success stories: Corning Inc. made the leap from cookware to fiber optics. General Electric Co. has repeatedly segued out of dying businesses. And IBM figured out first personal computers, then the Internet.
QUITTING'S FINE. Often, though, transformation attempts chew up cash and alienate traditional customers, without much to show for the process. Remember McDonnell Douglas? RCA? Digital Equipment? Lotus Development? Companies need to recognize when they've begun to throw good money after bad. As W.C. Fields said, "If at first you don't succeed, try again. Then quit. There's no use being a damn fool about it."
Again, management is not the main problem here. It's comforting--but false--to conclude that Kodak, Xerox, and AT&T would be fine with better CEOs. The recent leaders have made mistakes, but they're hardly screw-ups. Kodak Chairman and former CEO George M.C. Fisher was hailed as a miracle worker when he was brought in from Motorola Inc. in 1994. Ditto for Michael Armstrong when he took over AT&T in 1997 after an illustrious career at IBM and General Motors' Hughes Electronics. Rick Thoman was brought to Xerox from IBM in 1997 with a reputation as a "change agent." And Xerox veteran Paul Allaire, who reassumed command this past May, looked smart when Xerox was recapturing copier market share from Japan a decade ago.
You can't blame a lack of technological wherewithal at the three companies, either. AT&T Labs has world-class science in broadband networks. Kodak has been working on digital imaging since the 1970s. And Xerox' Palo Alto Research Center--famous for laser printing and Ethernet--is developing such potentially profitable exotica as "electronic reusable paper."
TOO LATE. So why are they having such a tough time? Largely because their corporate cultures prevent them from seizing opportunities that undermine the status quo. According to Harvard Business School professor Clayton M. Christensen, author of The Innovator's Dilemma, companies are crippled by the very things that made them strong: serving their core customers and keeping profit margins high. The key is "disruptive" technologies. In their early incarnations, disruptive technologies aren't good enough for core customers, nor profitable enough for shareholders. So they get ignored. That leaves the field open to unencumbered newcomers, who pick off the marginal customers while gradually improving the technology until it's good enough for the mainstream. By then, it's too late to respond.
You can bet people at all three companies have read The Innovator's Dilemma. But in defying the curse and making bold moves, they are, in essence, fighting with themselves. That's why bold moves so often fail. For what it's worth, Christensen thinks AT&T erred by betting on an old technology for connecting to customers: cable TV instead of digital subscriber lines or wireless. He's more optimistic about Kodak and Xerox because they're betting on digital technologies that he terms "disruptive." The question, he says, is whether they can afford to get their new businesses going while sustaining the old ones. "It's a brutal dilemma," he says.
Brutal is exactly what the boards of AT&T, Kodak, and Xerox need to be. If W.C. Fields were a management consultant, he might tell them to sit down with a few beakers of "spirits frugmenti" and start figuring out what the companies really want to be when they grow up.
Take AT&T. The company's tradition was in manufacturing, installing, and operating a telephone network. It tried repeatedly to get into computers--going so far as to buy NCR Corp.--before finally acknowledging that computers weren't part of its core competence. Now it has spent $100 billion to become the nation's biggest cable-TV company--a strangely tentative spree that takes the company far from its roots and not much closer to its goals. "They've forgotten how to spell entrepreneur," says David S. Isenberg, a former Bell Labs researcher and founder of isen.com Inc., a Westfield (N.J.) consultancy.
Kodak and Xerox have also wandered from their sources of strength in pursuit of faster growth. Kodak's specialty was producing excellent color film and distributing it worldwide in little yellow boxes. Now it's going head to head with Japanese consumer electronics specialists in selling digital cameras--and losing money on every unit it sells. It hopes to make it up eventually on things like online photo manipulation and image output, but no one has figured out a business model that actually produces black ink. Xerox, too, is being pulled in several directions. It's defending its high end from Germany's Heidelberg and its midrange from Japan's Canon Inc. And it's trying to expand in printing, where it sees more potential than copying. CEO Allaire alarmed the Street on Oct. 3 by saying that Xerox has an "unsustainable business model."
PET PROJECT. Maybe it's human nature, or maybe it's those huge stock-option packages, which give execs all of the upside of risky strategies and none of the downside. For whatever reason, the temptation to ransack free cash flow for pet projects is overpowering. That's why it's sometimes best to put the cash out of reach.
The best thing the CEOs and boards of Kodak, Xerox, and AT&T could do now would be to expose their dreams of growth to the scrutiny of investors who don't have their egos invested in their success. Put up parts of the companies for sale, or spin them off, or put them into minority-owned subsidiaries. If the futuristic projects really do show promise, they should have no problem getting financed. Amazon.com raised money, right? As for those old, slow-growth businesses: Milk them. Pay fat dividends, or do a leveraged buyout and use the cash to pay down debt.
No question, splitting slow- and fast-growth businesses means giving up on synergies such as shared brands and sales channels. But it deprives CEOs of the opportunity to gamble with free cash flow. It frees promising new technologies from being choked to death inside big companies. And it increases overall market value by giving shareholders a choice of investments--slow but steady, or fast and risky. For instance, Gibboney Huske, who follows Kodak and Xerox for Credit Suisse First Boston Corp., predicts there would be enormous market interest in a company representing Kodak's consumer digital business.
So far, Kodak insists on keeping its film and digital photography businesses intertwined. But both AT&T's Armstrong and Xerox' Allaire are weighing major sales and spinoffs. It's the right thing to do. Too bad it happens only under duress.