Inertia kills

http://blog.gardeviance.org/
Kodak had inertia (as explained in Simon Wardley’s chapter 5) which it finally overcame in order to invest in exactly the wrong part of the industry. We often think that companies die due to lack of innovation but this appears to be rarely the case. Kodak out innovated most (with digital still cameras, with online photo services and with photo printers) but it was inertia caused by past success in fulfilment and blindness to the environment that caused it to collapse. There are many different examples of how inertia usually amplified by blindness to a change can cause a company to crumble but none is as common as the death spiral and the cause of it is something which at another time is perfectly sensible – cutting costs.

If your industry (i.e. the parts of value chain which you sell) are in a peace era (see the peace, war and wonder model) then cutting costs through efficiency to increase profitability can be a good play, assuming you don’t reduce barriers to entry into the space. There are many reasons why you would do this and often you can clear out a lot of waste in the organisation. However, if your industry has moved into the war then cutting costs through staff to restore profitability due to declining revenue is often a terrible move. The problem is your revenue is eroding due to a change in the value chain and the industrialisation of the activity to more commodity forms. You need to respond by adapting and possibly moving up the value chain. However, by layoffs you’re likely to get rid of those people who were seen to be less successful in the previous era.  That doesn’t sound too bad but the result is you end up with a higher density of people successful in the past models (which are now in decline due to evolution) and hence you’ll tend to increase your cultural inertia to change. In all likelihood, you’ve just removed the very people who might have saved you.

Revenue will continue to drop and you’ll start a death spiral. You’ll start scrambling around looking for “emerging markets” i.e. less developed economies for you to sell your currently being industrialised product into. The only result of this however is you’re laying the ground work for those economies to be later industrialised once your competitors have finished chewing up your existing market. What you of course should be doing is adapting and realising that the tactics you play in one era are not the same as another (peace vs war etc). Now any large organisations has multiple different values chains in different evolutionary phases and you have to see this and know how to switch context between them in order to choose the right tactics. Naturally, most people don’t manage to achieve this, nor do they effectively anticipate change or cope with industrialisation in the right way. This is why big companies often die but at least that keeps things interesting.

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