Companies typically try to find a cash cow—a product or service that reliably produces revenues and profits, year after year. Leaders can try out new ideas without worrying about failure because they can rely on the cash cow to keep the business going. They just have to be careful not to mess with the cash cow. A few light refinements, perhaps, but nothing to scare customers away. P&G can depend on Ivory Soap and Tide and a number of similar items that have loyal followers. Toyota got its customers to trust the Camry. H&R Block knows that each year many citizens are going to be defeated in their attempts to compile their own taxes, and will turn to professional assistants as the deadline gets closer.
However, cash cows can also be albatrosses. (Please pardon the mixed metaphors.) Companies can become so dependent on their cash cows that they become afraid to change. They use the cash cow as an excuse for inaction and timidity. The leaders will offer slogans like, “Don’t mess with success,” but they are really trying to disguise their cowardice. They don’t want to take any risks, and they ignore the signs that the cash cows are nearing the end of their relevance.
Two prime examples of this cowardice are Kodak and Encyclopedia Britannica. Neither company got blindsided. Each company had the necessary insight that it needed to change course, but they each lacked the courage.
Kodak knew that digital photography was coming because Kodak filed the first patent for a digital camera. However, Kodak was making so much money from sales of film that its leadership was determined to stick with the status quo.
Encyclopedia Britannica was aware of the threat posed by computer-based media because EB had been one of the first to put an encyclopedia on a CD Rom. But that was Compton’s, a different encyclopedia, not Encyclopedia Brittanica, its cash cow. The company made enormous profits from its paper-based multi-volume Encyclopedia Brittanica. All the top executives had gotten started as salesmen, peddling the paper-based version. Now as leaders they saw no reason to abandon a cash cow that was so lucrative.
We know what happened to each of these companies—they failed. The cash cow turned out to be less reliable than they imagined.
But there is another way to interpret the failure of companies like Kodak and EB. Perhaps they just had the bad luck to be on the wrong side of the digital divide. If they had been more technologically sophisticated, maybe they would have seen what was coming (digital cameras, the end of film, computer-based delivery of encyclopedic knowledge) and tried to adapt.
This explanation kind of makes sense until we consider a new data point: A company that was on the right side of the digital divide. A company that helped to forge that divide. One of the most tech-savvy companies around.
For decades, Microsoft relied on the Windows operating system. Founded in 1975, Microsoft used Windows to overtake IBM twenty years later as the most valuable technology company in the world. Windows became the dominant operating system for desktop personal computers and then was combined with application programs in Office, then expanded into different types of systems like e-mail and databases that ran within Windows. Life was good in Redmond, Washington.
And Microsoft treated Windows the way other companies have treated their cash cows: it protected it against internal as well as external threats. Bill Gates and his successor Steve Ballmer routinely rejected any approaches that might weaken Windows and reduce its dominance. This “strategy tax,” as it was called within Microsoft, throttled many promising innovations. Microsoft had become a cash coward. (For more details, see the article “Opening Windows” in the April 10, 2015 issue of The Economist.)
Unfortunately for Microsoft, cloud computing is fogging up Windows. Cloud computing makes it easier and cheaper to use software built by different developers and delivered over the internet, relying on open standards rather than tightly bundled within Windows. The concept of an operating system is becoming less relevant.
Should Microsoft have seen this coming? Yes, of course, and it did. Microsoft was one of the first companies to spot the potential of cloud computing and rolled out its own cloud computing service (Azure). But it used Azure as a platform for its existing programs. And Microsoft was early to appreciate the potential of hand-held computers (the precursors of smartphones) but, no surprise, it designed these to run Windows instead of developing a more appropriate mobile operating system.
Being on the right side of the digital divide didn’t prevent Microsoft from becoming a cash coward. The principle still holds: organizations suffer, not from a lack of insight, but from the lack of backbone to put the insights into action.