The growth path for a business is rarely a smooth curve from bottom left to top right. Growth can plateau for a number of reasons, from external market conditions (such as the entry of a big competitor), to internal issues such as lack of capital or a dearth of the right people to scale the business.
By the start of the 1980s, IBM had been one of the largest businesses in the world for decades. It made everything from desktops and printers through to mainframes, and it was at the top of its game. However, during the 1980s, younger and more agile businesses like Intel and Microsoft were starting to eat into the markets and profits. Instead of competing with the newer businesses, IBM made the decision to get out of the hardware market and to restart the business as a services industry.
The turning point for IBM came in 1993, when Louis Gerstner Jr. became the first CEO recruited from outside the IBM ranks since 1914. He came from the B2C sector and decided that the business needed a change of direction. Over the course of the next 10 years, Gerstner Jr. began to sell off parts of the business, reduce the workforce and switch focus from an own-brand hardware business with shrinking margins, to a high-margin, value-added business, selling whatever technologies the client required, even if they were from an IBM competitor. This monumental change had a positive affect on the business: today it’s a service and software business that is a major player in the IT sector.
Think outside the business
Recruiting from outside and taking on people with different ways of thinking is just one way to restart your business but it’s by no means the only one. Cutting and refocusing is quite a drastic way to restart, and this can only really happen if everyone in the company is committed. Restarting through diversification is an easier sell, especially if you can share costs with another business, or if you can create another, standalone, business that won’t bring down the original company.
One impressive example of a restart through diversification is Apple. It moved away from its traditional core model of producing computers for the creative industries, to a business that took over the portable music and mobile phone markets.
A bite of the Apple
In 2001, the portable music market was in disarray – there were MP3 players and portable CD players, but no dominant brands – and it was into this market that Apple launched the iPod MP3 player. At the time, it was a radical departure for Apple, a company that had never produced a mass-market consumer product before, let alone one that represented a huge departure from their IT comfort zone.
Despite only being available to Mac users, the iPod became the fastest selling mp3 player to date and by 2004, sales of the iPod were outstripping CD Players, with the iPod enjoying a 70 per cent share of the portable music market. By 2007, Apple had sold 100 million iPods and the devices contributed 26 per cent of Apple’s $6.22 billion quarterly revenue – more than desktop sales of 19.22 per cent and just behind laptop sales, which made up 30.69 per cent.
Diversification was now in Apple’s blood and the company went on to launch the iPhone in 2007. Total worldwide sales for the iPhone in 2007 amounted to 1.46 million units but figures for 2012 look to top more than 100 million devices sold in total, with revenues in excess of $83 billion.
However, the Apple success story also demonstrates the potential drawbacks of diversification. The introduction of the iPhone seriously damaged the revenue from the iPod, as the two devices competed for continued market share, with the iPhone chipping away at iPod sales.
As with IBM, the turnaround for Apple was spurred on by a charismatic CEO. Steve Jobs was the inspiration and driving force behind the decision to start producing these mainstream consumer products. Like Gerstner JR, Jobs was customer-focused and had spent time outside of the business.
A model business
Another way of restarting is to change the business model. Back in 1991, a small loss-making Irish airline sent finance and tax expert Michael O’Leary to investigate what could be learnt from low-cost airline operators in the US. He returned with a completely new way of thinking, and over the next few years he started to incorporate these ideas into the airline.
O’Leary changed the business model from a high-cost service aimed at the business community, to a ‘no-frills’, low-cost service. Flights were scheduled into regional airports, which offered lower landing and handling charges than larger established international airports. This small, loss-making airline is now Ryanair, one of Europe’s largest carriers with over 8,500 members of staff, revenues of £2.4 billion and profits of £271 million. Michael O’Leary is now CEO.
While there are many different types of restart, the key to any successful turnaround is having someone in the business with a vision; someone who can see the writing on the wall and react effectively. If you take the people in the business with you on the journey, and inspire the board and the public, then your chances of success will be improved immeasurably. It’s a tall order but it is possible, as the examples here prove.