Sometimes there is no true-north strategy available: period. When a company faces changing competitive technology and that change process is fraught with uncertainty there are three options: 1. do nothing; sounds almost ridiculous but sooo many companies have died as they stuck their head in the sand ignoring emerging competitive products or technologies “hoping they would go away”, 2. place a big bet with a major acquisition or large investments on one of the outcomes, or 3. be smart. Being smart sounds like a good idea; it means thinking two steps ahead, planning on multiple possible outcomes, avoiding picking a winner before you have to, in effect hedging your bets. Applying it usually takes some outside-the-box thinking and creativity; that’s what you’re paid for! Here are two clear-cut examples that demonstrate the wisdom of the third option.
A research department subsequently named Globespan was a throw-in to a larger acquisition from AT&T in 1996. We placed a value of $5M on it. This research department had created an operational version of DSL technology (high speed internet over copper telephone lines). Let’s call Globespan’s offering version A to avoid the cryptograms; it was a combination of hardware and software. On the surface this seemed highly promising; the DSL market was a real hot ticket at that time. However, there were many serious--no daunting--problems. A competing technology, version B was already in existence; several companies had gone public and had in aggregate almost $2Billion of market valuation based on its potential (even though B wasn’t yet operational). With the mega-funds they had accumulated via their public offering, these companies had lobbied, cajoled, entertained, and mystified the entire user industry (telephone companies) into declaring that version B was the one and only standard, the only acceptable product. Version B’s standard position was locked in, totally unassailable. This happens: in the early days of video cassette technology VHS prevailed over a much more robust and better performing Beta technology in roughly the same way. So Globespan faced: (a) being locked out by firmly established standards, (b) a current $0.5M negative cash flow per month which would need to become much, much larger very quickly, and (c) no major customer willing to place even a small order knowing they would have to replace all the hardware when the standard, version B, became operational. In addition, as Globespan was simply a group of homeless researchers; there were other major investments necessary just to be operational. Globespan needed a management team, in-field capabilities, testing facilities, a headquarters building and labs (the research people had been housed in Bell Labs and needed a new place to function). I was a part time-turnaround CEO so we also needed an industry expert long-term CEO. Hiring anyone of caliber would be difficult given the standards problem. This was a lot to do for a company apparently facing a stone wall. Some of the investors felt we should shut the doors (actually at the start there weren’t any doors); and virtually everyone cringed at the combination of the ongoing negative cash flow, required investments and apparently impossible business problem.
But there were believers, me being one. We created a NorthWest strategy, in this case a financial holding pattern while making the necessary investments. By cliff’s-edge negotiations with our major supplier, our potential landlord, our employees and our existing customers, the monthly cash flow out was reduced to about $0.2M even with the additional hires and expenses, without sacrificing significant equity. This was a palatable level of ongoing investment. Although the standards could not be changed, we pummeled the market place with proof that our version A was robust and operational, helping significantly in the hiring process. About 12 months later, the new CEO created a brilliant, now true North strategy, offering our A technology (which worked) in a chip but with software upgradeability to the B technology (when—and if—it ever worked). The customers therefore took no risk when purchasing the non-standard but working technology (Globespan's A). The flood gates opened. Globespan’s version A never got re-programmed to version B. Globespan later went public and peaked at a $8Billion market value.
Technicolor, a manufacturer of the films for movie theatres, also faced a daunting changing-technology challenge. Even in the early 90’s, most projected that digital cinema (movie theaters showing digital movies via DVD, fiber optic, or satellite delivery) would take over and the production of analog films would suffer an inevitable death. Technicolor, following the options laid out above, could either (a) do nothing (which in this case was not so stupid or unattractive when you learn what the second option was), (b) partner with or acquire a satellite company, acquire or partner with a fiber optic distribution company, acquire a digital projector manufacturer, pay for and own fiber optic networks to theaters (all of which placed a large bet and none of which necessarily solved the problem), or (c) be smart. We chose (c), a good idea! but first some background.
After movies are produced, a film laboratory like Technicolor or DeLuxe makes hundreds or thousands of film copies for distribution to theatres across the country and around the world. These copies were shipped like common freight, trucks, air or train, and then through a hodge-podge of local delivery methods including local truck owners, trunks of private cars, you name it. Since the film copy for Friday’s theatre opening generally arrives Thursday after theatres are closed, it was typically hidden at the theatre perhaps behind in the alley, at a nearby all-night drug store, on one of the theatre’s employee’s porch, or in the trunk of a car. If the film happened to show up early, or if it was being moved from one theatre to another, it usually wound up in a little film depot by a railroad siding. Typically the building had broken windows and the film’s identity was recorded on hand-written recipe cards. If you think the year is 1932, think again. It was 1992.
Meanwhile, the movie industry was clamoring about the cost of piracy, testifying in congress, and making speeches at Academy Awards. Piracy can be implemented by one copy of the film being run through a telecine machine using only the time it takes to run the film (roughly two hours). Anyone could “borrow” The Lion King from the all-night drug store lobby for two hours. Within a couple days, hundreds of perfect copies of the movie and hundreds of thousands of Lion King videos would be on the streets in China.
Our NorthWest or holding strategy was to create, let’s say to be succinctly descriptive, a FedEx or UPS type approach; that is, become the studios’ logistics manager, control the film from manufacturing facility to theatre via bar-coding and specific time delivery, make their inventory available on line, etc., all the factors we consider standard for FedEx and UPS today, but remember this was 1992. This logistics business was created from scratch, became highly profitable on its own, and gave Technicolor a strong degree of control over the studio-to-theatre logistics regardless of whether the movie was delivered by film, dvd, fiber, or satellite. Technicolor became the scheduling master, and had the inside track to make investments in or fully participate in the various forms of digital delivery as they emerged. Technicolor subsequently created a digital division promulgating digital projectors to operate in parallel with its film manufacturing business. While the decline of film has been much, much slower than anyone predicted, Technicolor was able to have its cake and eat it too via this hedging, NorthWest strategy.
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