Square Pegs and Round Holes

Volume 8 Letter 11

Xerox roots go back to the late 1940’s when a photographic paper supplier, the Haloid corporation, developed the process of xerography. It would take another decade before the idea was fully commercialized and the first Xerox machine, the 914, was rolled out in 1959. Over the next 25 years two hundred thousand 914’s were built, growing Xerox to a one billion dollar per year corporation. The 914 Box became so much a part of Xerox’s identity that Xerox employees became known as “Box” people.

In 1970 Xerox invested some of its profits in a small research centre in Palo Alto California. It was here in 1973 that they developed “Alto”, the first personal computer. Alto had a graphical interface, icons, pages on screens and the first mouse. Xerox had about a five year head start on the personal computer competition. Back in Connecticut, the “Box” guys in HQ wouldn’t take the risk to properly launch the product. They couldn’t think “outside the box” (yes that’s where the term came from) and many of those brilliant engineers moved on to HP, Apple, Microsoft and others. Just as square pegs don’t fit in round holes, Xerox couldn’t launch the personal computer using their current business model. To make the personal computer business successful would have meant abandoning many of the rules that had made Xerox successful.

In contrast Dow Corning, which sells and provides technical assistance to a multitude of industries using silicone based products, needed to address a growing problem. In early 2000 after many profitable years Dow Corning was starting to stagnate. Many product variations had flooded the market and customers experienced in silicone applications no longer required, nor valued technical services provided by Dow Corning. These “Experienced” customers needed basic silicone products at a low price!

The “Experienced” customers represented a significant growth opportunity but Dow Corning’s culture and business model was built around high priced innovative products. The question became can we get the current organization to sell both – the answer for Dow Corning (and for most organizations) was a resounding NO!

To Dow Corning’s credit they recognized that the current business model could not support a high end/ high service strategy AND a high volume / low cost /no service strategy. So in 2002 Dow Corning formed a new business unit called Xiameter to focus on “Experienced” users of silicone products who wanted a lower unit cost.

As the new Xiameter team started to work on their strategy for “Experienced” users they quickly determined that the price of their basic products would have to come down 15%. They also realized that eliminating services alone would not cover the 15% discount. To deliver the product at such a dramatically reduced price would require a very different business model where speed and volume were two key components to success. To sell more volume faster they invested heavily in an IT system that automated the buying process and reduced overhead. Xiameter also developed a strategy of accepting only larger order volumes with fixed credit terms. Services were charged separately and orders required longer lead times. Xiameter would not have survived within the Dow Corning mothership as the new strategy was breaking all the rules that made the original Dow Corning so successful.

Recognizing when it’s time to form a new business model to launch new products separates the strategists from the managers! So when is it the right time?

Form a new business unit and develop a new business model / strategy when:

    • Old rules and profit formulas won’t work for the new venture.

 

    • A different level of Risk Taking is needed that the traditional company may not be comfortable with.

 

    • New relationships and market channels must be established to sell the product.

 

    • The segment is big enough to warrant the investment.

 

Many new products fail in the market not because of poor design or function but rather because the current business model does not support the new product or the segment it’s targeted to serve. Xerox never did really play in the personal computer market while Dow Corning’s investment in Xiameter paid back in three months

Ask yourself; “Do we have good products that are failing due to our business model?” Square pegs don’t fit in round holes!

1. The Ten Commandments of Business Failure, Donald Keough, Pengiun books 2008

2. Reinventing Your Business Model, Mark Johnson, Clayton Christensen and Henning Kagermann HBR Dec 08 pp51 – 59

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