In 1939, John Steinbeck introduced America to the Joads, a family of tenant farmers driven from their Oklahoma home as a result of the economic hardship created by a series of unexpected transitions in the agricultural industry.
The Grapes of Wrath derived its epic scope from the way that Steinbeck used the story of the Joad family to portray the plight of thousands of Dust Bowl farmers. He captured the dehumanizing impact of an industry in transition. Farms torn down, families displaced and dreams forever lost under the grinding forces of a system being driven by an impulse no one saw coming – not the farmers, not the eviction officers, not even the bankers. Caught in a hopeless situation, the Joads – along with hundreds of thousands of “Oakies” – set out for California, Oregon and Washington, seeking jobs, dignity and the possibility of a new future.
Another Industry in Transition
At the close of 2005 six major vendors comprised the competitive landscape which essentially defined the mobile phone industry: Nokia, Motorola, Samsung, Siemens, Sony Ericsson and LG. I can still remember walking through the exhibit halls at Fira de Barcelona on a cold February morning in 2006. 3GSM World Congress – in its inaugural year in Barcelona – was being hailed as the biggest mobile show on Earth, drawing some 50,000 attendees from across the mobile industry.
As I navigated my way through the packed exhibit booths, I remember thinking to myself: “wow, these vendors and their phones are all starting to look alike.” What I failed to recognize that morning, was the vendors whose booths I was visiting were already on the endangered species list. To be fair, I doubt that few of us in the industry did.
At the start of 2006, most of us were still caught up in the excitement and hype surrounding industry growth. The number of mobile subscribers had just surpassed the 2 billion mark. Motorola’s RAZR was completing a four year, 130 million unit run, becoming the best-selling clamshell phone in the world. Nokia was finalizing the acquisition of Intellisync for $430 million. Sony Ericsson had recently agreed to become the global title sponsor for the WTA Tour in a deal worth $88 million over 6 years. (In fact, the women’s pro tennis circuit was renamed the Sony Ericsson WTA Tour.) Nokia and Motorola, with a combined market share of nearly 50% were believed to be unstoppable.
Like the Oklahoma wheat farmers in 1931, few of us realized that a major industry disruption was lurking on the horizon. An external impulse that would kick off a new S-Curve trajectory, transferring momentum to new entrants, leaving the likes of Nokia, Motorola, Sony Ericsson and RIM to agonize in an extended period of economic uncertainty, much like the characters in Steinbeck’s novel. Between 2006 and 2011, a total of 14 mobile phone vendors exited the industry, merged or were acquired.
In the 1930’s, hundreds of thousands of displaced farmers set their sights on the West Coast in hope of a finding jobs, security and a new life. Ironically, Motorola and Nokia are retracing that path. In February, Nokia announced plans to cut some 20,000 jobs, far and away the largest structural change Finland has ever seen in the technology sector. Today, the promise of a new future for both companies lies west. For Motorola, it’s the Mountain View headquarters of Google. For Nokia, it’s Microsoft’s campus in Redmond. And, like the future of the characters in Steinbeck’s novel, the ultimate fate of both companies remains unclear.
As human beings, our initial tendency was to blame the Dust Bowl on the drought. In truth, the conditions in the agriculture industry precipitating the event were sowed long before the drought of 1931 hit. The drive to continuously increase profits led farmers to adopt mechanized farming techniques. More than 5 million acres of previously untilled land was plowed between 1925 and 1930 alone, producing record crops during the 1931 season. The overproduction of wheat coupled with the Great Depression led to severely reduced market prices and razor thin profit margins.
Unable to earn back production costs farmers expanded their fields, replacing the natural drought-resistant prairie grasses with more wheat. Unplanted fields were left bare, exposing precious topsoil to the winds of change. By 1934, an estimated 850 million tons of life giving topsoil was blown away from America’s heartland, along with the dreams of thousands of tenant farmers.
In 2005, 810 million mobile phones were sold, a 20% increase over the previous year. But quarterly earnings from Nokia clearly pointed toward the cloud on the horizon – lower prices and narrower margins. Motorola gained 2.6 points of market share, but a third of the phones it sold were RAZRs. When anxious market analysts and investors suggested it was time for Motorola to rotate the crops, CEO Ed Zander said: “The year of 2005 was the RAZR and the year of 2006 is more RAZRs.“
In 1995, Clayton Christensen identified the most consistent pattern in business as the failure of leading companies to stay at the top of their industries when markets transition. The fundamental reason he proposed was the management dogma of “staying close to our customers.”
We have a term for that in physics. It’s called inertial mass: the overwhelming tendency of human beings to want to keep doing what we’ve been doing. We have a knack for sowing our own Grapes of Wrath.