Sunday, January 15, 2017

Kodak and The Mayor of Rotterdam problem

In The Living Company (one of my favourite business books, highly recommended) Arie de Geus describes the Mayor of Rotterdam Problem, it goes like this.

Imagine you have perfect foresight. You can see the future accurately. It is 1920 and you visit the Mayor of Rotterdam. You tell the mayor about how the events of the next 25 years, specifically about the destruction Rotterdam will suffer during 1940-1945.

de Geus asks: What is it reasonable to expect the major to do?

Think about this for a moment.

de Geus draws the following lesson:

The future cannot be predicted. But, even if we could, we would not dare act on the prediction.

So, I might say “You project is a train crash and destined to fail.” But if you have invested $100million do you dare to act on my information?

I draw another lesson from this story:

There is nothing we can do to change the future, even when one has considerable power.

Most people regard a Mayor as a powerful figure. But what could the mayor do in 1920 to stop Great Depression, the rise of Fascism and the pending war?

And thats assuming people believe you.

Why bring this up now?

Well… increasingly some of our most established companies face exactly this dilemma. The raise of digital business, coupled with disruptive innovation, agile working and new management models place CEOs of some of the largest business in exactly the Mayor’s position.

If you are the CEO of a business with a few million customers and you can see how digital disruptors will steal your business over the next 10 year d you dare act on the information?

Acting now might mean destroying profits for years to come, acting now might mean laying off thousands of workers and dropping millions of customer. Success if very very far from guaranteed. And thats assuming you can persuade people you were right.

There is one company where this has already happened: Kodak.

A recent MIT Sloan Review piece Willy Shih gave an account of Kodak which differs substantially to the commonly received view. Kodak is regularly held up as an example of a company that failed to recognise how digital would change their world and as a result went bankrupt. But…

Shih describes it differently, he says that Kodak managers did understand what was happening - after all they invented digital photography. The problem was: Kodak couldn’t change direction because of their ecosystem and the economics of their business.

Part of the Kodak problem was that had Kodak publicly acknowledged the decline in their traditional market they would have accelerated the change.

Kodak did try use their legacy business as a cash cow did enter the digital market this left a big problem: how do you manage, and motivate, people in the legacy business who will never make the transition?

The question to ask right now is: • What other Kodaks are there out there? - unable to change direction because of their legacy. • Which CEOs are Mayors of Rotterdam? - unable to act on accurate predictions of the future.

If you are the CEO of a Kodak an alternative strategy might be ignore the future, crank up the machine and do even more of the same - whatever your current business model is. Aim in the short run to minimise risk while maximising your personal return. Plan to jump out of the business yourself before it goes bang or just plan to blame the failure to predict the future.