Adapt or die

Companies need to be flexible to remain relevant in a changing environment

Imagine that one night you are having a couple of terrible nightmares. In one frightening dream, the business you manage suddenly loses its most important market. Then in another dream, your core business abruptly becomes obsolete. Now imagine that you wake up and your dream is actually the reality. What would you do?  Could you find a way to save your business? Better yet, could you use such a crisis to reorient your company towards new heights of success?

This scenario underscores the most important strategic priority facing any business today: staying relevant. In an environment that can change in a blink of an eye, you need to continuously monitor your ongoing relevance and be adaptable enough to maintain it. Take to heart the words of General Eric Shinseki, former US army chief of staff: “If you don’t like change, you’re going to like irrelevance even less.”

Let’s look at some real-life examples of how some well-known companies dealt with the nightmare scenario above. Until a few years ago, Eastman Kodak was sitting on top of the world. Or so it seemed. Founded in 1892, Kodak was an iconic American company whose brand was recognised around the world and synonymous with the market segment it dominated: film photography. It dominated to such an extent that Kodak enjoyed 70% margins and 90% market share in the US.

Things started to unravel quickly in 2003. Kodak was caught sleeping as the world transitioned from film to digital photography. The company severely misjudged the speed and impact of this transition and its lifestyle implications. Coupled with the rapid convergence onto personal portable devices, digital photography empowered consumers to create, edit, store and share images instantly.

As a result, Kodak’s core business was on a fast track to obsolescence. The sad culmination of Kodak’s precipitous fall came in January of 2012, when the company declared bankruptcy. It re-emerged from bankruptcy in September 2013, but only as a hollow shell of its former self. The re-structured company will not make or sell any consumer products, but focus only on providing digital printing services to other businesses.

Note the principal lesson here: unless your business possesses ongoing relevance, it is of no importance how good you are at what you do. And if you are only focused on being the best in your current market space, you lose sight of everything outside it. In 2003 Kodak remained the best film photography company in the world, but it no longer mattered. The entire industry was replaced by something more relevant to consumers. As a side note, Kodak actually invented the digital camera in 1975, but did not bring it to market for fear of cannibalising its film business.

Let’s now turn to another example. In 1991, almost overnight, the Finnish company Nokia’s biggest market ceased to exist when the Soviet Union dissolved as an economic entity. But Nokia not only survived this catastrophe, it thrived like never before. At that time its core business centred on the manufacturing of paper, rubber and wood-based products. Its mobile phone unit was a small, peripheral division.

Yet, in the face of the crisis Nokia recognised the potential of this small division as the driver of future growth, and acted swiftly. By 1994, Nokia sold off its industrial divisions and was listed on the New York Stock Exchange as the world’s premier supplier of mobile phones, creating and driving an entirely new market space. And it was able to dominate this space to such an extent that until 2010 Nokia’s share of the global cellphone market was greater than the combined market share of its top three competitors. 

Having successfully achieved this remarkable corporate transformation and established itself as the uncontested leader of a new market space, could Nokia take a brief pause or rest easy?  Not for a moment. Over the past few years Nokia failed to keep up with the pace of evolution of the very industry it helped to create.

The company never established a strong foothold in the US market and was not a leading player in the smartphone arena, the telecom industry’s fastest growing segment. By 2012, Samsung had dethroned Nokia as the world’s biggest mobile phone maker, and the company’s production levels sank below the breakeven point. Finally, Nokia’s mobile phone division was sold to Microsoft in September 2013 for $7 billion — a far cry from its total market value of $77 billion five years prior.

There is another example that highlights the distinction between being relevant and being the best. Coca-Cola has perpetually ruled the carbonated soft drink market space, with Pepsi being number two. Rather than continuing to fight an uphill battle for supremacy within this space, Pepsi instead decided to branch out strategically. It began focusing more on consumer relevance, diversifying into beverages more connected to healthy living. In the process it acquired such brands as Gatorade and Tropicana.

By the end of 2005, Pepsi derived only 20% of its total revenues from carbonated drinks, compared with Coke’s 80%, and its market valuation overtook Coke’s for the first time — even though just 10 years before, Coke’s value was three times that of Pepsi. In essence Pepsi conceded the narrower confines of the carbonated beverage market to Coke, and by doing so it became the more broadly relevant and, therefore, arguably the more successful company during this period.

For our final illustration, let’s reflect on a company that perhaps has a laser focus on broadening its relevance: Amazon. This is a company that rocketed in annual revenues from $4 billion in 2002 to over $60 billion in 2012. What is the philosophy that enabled such growth? “If you want to continuously revitalise the services that you offer to your customers, you cannot stop at what you are good at,” Amazon CEO Jeff Bezos told BusinessWeek. “You have to ask what your customers need and want, and then, no matter how hard it is, you better get good at those things.”

Just look at the progression of Amazon to appreciate how it is continuously re-imagining itself in the pursuit of expanded relevance. It started out by selling new books online; then the company expanded to providing a marketplace for used books, then to cover all kinds of consumer goods, including electronics, beauty and healthcare, clothing and sporting equipment.

Then, in 2007, Amazon jumped from the services platform to a product-service hybrid with its Kindle e-book reader. And it has a major presence in the B2B arena as well, with services such as cloud computing, warehousing and website operation. Along the way, Amazon has been transforming the market spaces it plays in because it does not define itself by traditional industry delineations. Rather, its business is creating the most broadly relevant offerings to customers, blurring industry boundaries.

So how can you ensure the ongoing relevance of your company? I suggest that you continuously ask yourself the hypothetical question of our nightmare scenario: if your core business or biggest market was to suddenly vanish, can you think of new ways for your company to thrive? This mental exercise will keep you alert, and help you to both monitor the underlying relevance of your business as well as its flexibility to adapt in the face of unexpected market developments.