Business lessons from the abyss
By Globe Staff, 6/17/2001
It's hard to imagine them now as technology champions of any era, buried as they are under a thick record of disappointment, piles of debt rated as junk, and the pressing weight of corporate desperation.
American business icons of another day, charter members of the 1970s Nifty Fifty stock market phenomenon, Polaroid Corp. and Xerox Corp. are fully employed in the business of survival today. To put their condition in perspective, consider that both companies' stocks trade today at steep discounts to their values of 1973, when the Dow Jones industrial average stood at 853.
From their New England headquarters, both Polaroid and Xerox rolled out more bad news last week. Polaroid, based in Cambridge, said it would lay off 2,000 people, one out of every four employees, in an attempt to stem operating losses. Xerox, located in Stamford, Conn., said it would lay off more than 1,000 people. It plans to stop making personal copiers and inkjet printers that sit on desktops and lose money for the company.
Our question: Can the stories of these two companies teach today's technology elite anything about the challenge of long-term success?
Polaroid and Xerox share a common heyday and current abyss, but their paths from the 1970s through today stray widely.
Xerox eventually lost its patent stranglehold in the copier business in the 1970s, was pummeled by low-cost Japanese competition, but later fought its way back to become a leader in the field.
It tried diversification into financial services and other areas on a big scale with disastrous results. Xerox also operated a famed research laboratory that invented some of the most important elements of today's personal computer age, but, astonishingly, cashed in on hardly any of it.
Polaroid's decline was slow and steady, in some ways more puzzling. The company held on to its technology advantage in a narrow field, but demand slowly faded as the world became less interested in instant photography and Polaroid had no vibrant alternative business.
Money managers and other people familiar with the companies say those stories have something in common with each other and lesser-known declines. The point: Technology doesn't fail technology companies, management fails them.
''The technology companies that have been the winners over the years haven't necessarily had the best technology,'' said mutual fund manager Fred Kobrick, a longtime growth stock investor. ''It's the best business model, the best marketing.
''I think they've had lousy business models.''
There are some more specific lessons in the stories of Xerox and Polaroid, too. Among them:
Huge monopoly profits create dangerous power inside organizations.
Xerox broke into the copying business, xerography, in 1959 with its model 914. By the time the 914 was retired 14 years later, it had become one of the best-selling industrial products of all time. The machine didn't just put the company on the map, it put Xerox in the dictionary, synonymous with photocopying.
With no competition in sight for years, the 914 earned a 70 percent gross profit margin on a product that seemed to have found its way into every office in America.
Polaroid's invention of instant photography created a new business line that didn't just sell cameras. It charged about $1 for each sheet of coated paper that developed into a photograph before people's eyes. The film sales produced huge profit margins with no competitor to do anything about it.
The problem with such big, unassailable profits is that the managers responsible for them come to hold the power inside companies. They have no incentive to move their business in new and innovative directions. They are paid to not take their eye off the money-making franchise.
''The most common instinct is, `Let's keep doing what we're doing.' How can it be otherwise? Human history tells us that's the way it is,'' said Douglas K. Smith, a business consultant and co-author of ''Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer.''
''The franchise is in the existing way of doing things and exploiting that,'' he said. ''It's not just the company's franchise, it's your job, your route to advancement.''
At Polaroid, technology and product innovation withstood that obstacle for years because founder Edwin Land, a scientist, was running the company. But when he retired in 1982, the picture began to change.
''The technology leadership went downhill very rapidly after Land retired,'' said Peter C. Wensberg, a former Polaroid executive and author of ''Land's Polaroid, A Company and the Man Who Invented It.''
''There was still a huge body of talent in the company, scientific and engineering, but obviously talent needs leadership,'' Wensberg said.
Potential home-run technologies face scale problems inside big companies.
Technology that can generate explosive earnings growth almost certainly has to start small. That means its financial contribution inside a big company will be negligible at first.
Top management is inclined to spend less attention on those ideas, question their value, and devote less corporate support to them, especially in the age of emphasis on quarterly earnings. A big company's best talent won't see very small and risky projects as attractive.
Those small, blockbuster ideas were exactly what came out of Xerox's Palo Alto Research Center, known as PARC, which was opened in 1970. PARC invented or at least had a hand in the creation of such things as the personal computer, its graphical user interface, and even the mouse, as well as laser printers and the Ethernet. Xerox capitalized on hardly any of it.
The irony: Xerox realized it needed to find new engines to keep its pace of growth on track in an ever-larger company during the 1970s. A high-level committee spent roughly a year examining every option under the sun and eventually urged the company to look to developments inside PARC that would start out small but had potential.
When the committee finally made its presentation, the group was met simply with a ''thank you.'' That was it, after all that study, according to Smith. No discussion, no debates. ''It was illustrative of how screwed up they were,'' he said. ''This wasn't a random bad-hair day. It was symptomatic.''
Companies tend to focus on a leading threat to their future, but there are many ways to fail.
Just look at how differently Xerox and Polaroid acted from a common starting point over the last 25 years. One company got tied up in its own bureaucracy and bungled efforts to change. The other never got out of the shadow of its long-gone leader.
Both companies have closely analyzed the threat that digital technology posed to their businesses. Today, the debt they carry is a much bigger risk and could do them in.
''I would give very low odds on Polaroid making it,'' said Richard Dahlberg, a managing director at the Pioneer Group in Boston. ''I don't see anything that brilliant there and no capital base to work from. Xerox could make it, but will it ever be a leading factor again? I think not. Its day has come and gone.''
Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can be reached by e-mail at boscap@globe.com.
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