When to be unreasonable

Hey everyone,

The scariest business failures aren't caused by stupidity.

They're caused by smart people acting rationally… in ways that doom the company.

I did a deep dive on Kodak recently. They invented the digital camera in 1976. And they knew exactly when the disruption was coming, with 20 years of runway. 

And they still went bankrupt.

So today, I’ve got three things for you:

Let’s do it.

I’ve written plenty about incentives before, so I’ll keep this brief. 

In the 70s and 80s, Kodak film had 80% profit margins. Digital cameras had maybe 5%.

In the short term, the call was obvious. What’s more, middle managers were bonused on this year's profits. Senior executives needed to hit quarterly targets. The board's job was to protect shareholders today, not shareholders in 2015.

So when an engineer showed them the future they’d invented, it was totally rational to say, “Cute experiment. Keep it to yourself."

This might be happening at your company. You might not even see it. 

Ask yourself:

In my experience, you need at least one person whose job is to think in decades, not quarters. 

It’s not about intelligence. 

If everyone's comp is tied to this year's numbers, you're structurally incapable of betting on tomorrow.

When Kodak tried to adapt (too late), they launched digital cameras and bought a photo-sharing site. 

It seemed reasonable to look for businesses adjacent to what they already did. 

Their competitor Fujifilm took a different angle: "What specific competitive advantages do we have that could win in other industries?"

Fujifilm turned their 80 years of gelatin expertise and knowledge of oxidation into a successful skincare brand. 

Meanwhile, Kodak's healthcare imaging division got sold off for cash.

For your business, that means: When you're facing a market shift, don't ask "what's adjacent?" Ask "what do we actually do better than anyone else?"

Here's a framework:

If your team can only describe your advantages in terms of what you sell today, you're vulnerable.

Fujifilm was willing to accept short-term pain for long-term survival. 

They made hard calls, like shutting down divisions that were still profitable. And the most extreme example (from Wikipedia): 

In 1994, Vice President Juntarō Suzuki announced that the company would stop paying sōkaiya, a type of protection-racket bribe, to the Yakuza. In retaliation, he was murdered in front of his home by Yakuza.

(To be clear, I’m not suggesting that challenging the Yakuza is a prudent business move.)

Contrast to Kodak: the structure didn’t enable long-term decisions. 

There was no founder with a major ownership stake. 

No one who'd be around in 20 years to see the results. 

Just hired-gun managers optimizing for their tenure.

This is why venture capitalists often only invest in founder-led companies. Founders can and do make bet-the-company decisions. Professional managers usually can't.

So how do you build this into your business? 

Make sure the role of long-term thinker is protected.

And a final warning: the window for transformation is always shorter than you think. The Fujifilm CEO admitted he got lucky with timing. If he'd waited another year or two, the 2008 recession would have killed them. 

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So that's my take. Kodak's story isn't about executives being stupid. It's about rational people, acting reasonably, inside a structure that made survival impossible.

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Thanks for reading!

Michael

P.S. Dropping this one more time, in case you forgot: 

I’m looking for a CEO Are you an accounting or audit pro who wants to be a CEO? With equity, salary, and reduced downside risk? And more leads than you can handle? I have a founding CEO role available. Reply to this email for more info!