Feature

Dramatic Industry Shifts: What Can You Do to Survive Major Transitions?

From the advent of the Internet to PCs and digital phones, smart business leaders hedge their bets by taking strategic risks on new technologies.

By Adrian J. Slywotzky

July 06, 2007 — CIO — In today's rapidly changing world, almost every industry is bound to experience, sooner or later, a time of dramatic change—a shift from a familiar technology or business model to a new one that disrupts the old ways of operating and threatens companies that refuse to change.

It happened in IT when mainframes and minicomputers gave way to PCs—then happened again when the Internet emerged as the dominant source of software and data. It happened in the steel business when old-style integrated mills were replaced by mini-mills, in photography when film was supplanted by digital technology, and in movie rental when storefront outlets gave way to online home-delivery services.

Fortunately, there's a proven technique for surviving such transition upheavals. It's called double-betting. It's a large-scale variant on the familiar strategy from games like blackjack and horse racing where a gambler hedges his bets by putting money on two or more outcomes, thereby boosting the odds of a winning payoff. Or, as Yogi Berra said on more than one occasion: "When you come to a fork in the road, take it."

Microsoft double-bet in the wake of Bill Gates's famous Pearl Harbor Day speech in 1995, when he announced that it was time to take the advent of the Internet seriously. Microsoft didn't jettison Windows—it continued to develop products and services in support of the operating system franchise—but it double-bet by investing heavily in Web-based applications as well.

Why doesn't every company facing transition risk employ double-betting as its insurance policy? What stands in their way? Two contrasting stories provide a big part of the answer.

In 1997, Motorola faced one of those critical forks in the road. The company faced a simple question: "Should we stick with analog cell phones or shift to digital?" Nokia, which had just shed all of its non-cell phone businesses (lumber, rubber, hotels, etc.) to focus on cell phones, was shifting to digital and doing it very quickly.

Many people at Motorola knew they had to make the shift, but the leadership of its cell phone business resisted. They'd invested too much money in analog (where Motorola was the big leader), and perceived too much uncertainty about digital. These factors made it tremendously difficult for Motorola to double-bet in 1997.

Moreover, by any measure, Motorola was looking extremely successful. From 1993 to 1997, the company was on a tear. Sales, earnings and stock price were all growing rapidly. Everyone was productively busy—and when you're really busy, you don't have much energy to think of other things, even if they're the things that matter most.

So the managers at Motorola who knew that they should make the double-bet didn't raise enough of a ruckus to force the issue. And when you don't raise enough of a ruckus, inertia wins. Inertia won and Motorola lost. By 2000, Nokia was the world's cell phone leader.

The Motorola story shows that strategic risk is highest when your success is greatest. That's precisely the point where you are least able to see the risk and least inclined to do anything about it.

Lotus was in a similar position in 1992. After a tough spell in the late 1980s, Lotus was back. Its new version of Lotus 1-2-3 was taking the spreadsheet market by storm, grabbing 70 percent of the global market. Revenues, profits and stock price could not be doing better. Exactly the moment of maximum risk.