Snapchat shows why being a product company is a dangerous idea

In 2014, unbridled optimism swept through Canon’s headquarters. Six years since the launch of the first iPhone by Apple in 2007, the Japanese camera maker made record breaking revenues in 2013. Despite the threat from smartphone manufacturers, Canon doubled down on its focus on high-end digital single-lens reflex cameras (DSLR).

That strategy had paid off. Even when Sony’s point-and-shoot compact cameras were fast becoming irrelevant, Canon’s DSLR reigned supreme among professional buyers. Canon’s camera business alone, was raking in more than US$14 billion, following a three-year streak of consecutive growth.

That success didn’t last long. As Samsung and Apple aggressively upgraded product functionalities, many professional photographers also began to use smartphones. Sales of DSLR soon plummeted. Last Friday, Snapchat put another nail in the coffin.

The mobile app startup, best known for self-destruct videos and pictures, has unveiled pair video-capturing sunglasses, aptly named Spectacles. The Specs, for short, can record circular videos with a 115-degree field of view and send snaps to the mobile phone app to be viewed. Priced at US$130, Specs are affordable enough for anyone willing to try.

The camera industry, pioneered by Eastman Kodak more than 120 years ago, is definitively giving way to smartphones and wearables.

Fortunately for Canon, this won’t be the end. For a long time, Canon and Nikon have leveraged their core research in optical science and branched into fields such as lithography – the industrial printing process of microprocessors that power our laptops and smartphones. On that side of the business, Canon and Nikon are selling multimillion-dollar machines to Intel, IBM, Samsung and the like. Why Canon didn’t move faster into this area is anyone’s guess. But ideas popularised by Wall Street and business schools certainly share part of the blame. Chief among them is the concept of conglomerate discount.

Conglomerate discount emerged and rapidly gained popularity in the 1970s when private equity was in full rage. Big, lacklustre and publicly listed companies were taken over one by one, often unwillingly, by activist investors. They streamlined, split and diced the newly acquired companies into simpler, leaner and smaller descendants, with each focusing on fewer businesses. With sweeping changes of top management teams, and through the use of highly incentivised compensation, many of the companies were reborn agile and regained market leadership in their own right, and in the process unlocked shareholder value.

That wave of leverage buyouts, hostile takeovers and divestment proved to be so powerful that the idea that complicated businesses are always bad took root in the financial markets. Other than exceptions like GE and Johnson & Johnson, companies that don’t have a narrow focus are punished with a discount on their stock price. If Wall Street analysts can’t pigeon hole a company, it is probably a bad company, the thinking goes.

But this idea has outlived its usefulness. In the age of big data and machine intelligence, industry boundaries have blurred, now shaped and disrupted more often by newcomers from outside, than by incumbents. Uber, Airbnb, Tesla, and Amazon were all once outsiders. In this light, the prescription that a company should focus on its core competencies and current business line in order to achieve a stock premium look downright ludicrous. Kodak did have a singular focus and look what happened.

Canon and Nikon made the heroic effort to win the camera battle by upgrading their DSLR, but ultimately lost the digital war. All products have limited life-spans. But, organisational capabilities do not. In a turbulent business environment, managers must focus not only on what industries they are currently in, but on what existing capabilities can be repurposed, and look at applying technologies to new areas.

Theodore Levitt, the legendary marketing scholar at Harvard Business School, recalled that the railroads, “let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business.”

Companies thinking about themselves as being in the business of making products is indeed a dangerous idea.

Howard Yu is professor of strategy and innovation at IMD Business School in Switzerland