“Throughout the late 90s, HMV’s single biggest mistake was a lack of investment in its online offering. Unfortunately it’s a mistake Fox continued to make. He chose to try and diversify into electronics (a business that was already failing on the high street) and entertainment through venues such as the HMV Apollo, which are now being sold off to pay down debt.
…Hubris, arrogance, a feeling of invincibility. Companies fail for many reasons and there was probably a bit of all three involved with HMV…”
PHILIP BEECHING, www.guardian.co.uk (15 January, 2013)
When I first went to London as a student, I soon discovered that one of the happening places for people of my age was the HMV store on Oxford Street. This place sold records, tapes, CDs and videos, and it was ALWAYS full of young people. The cash tills rang incessantly, and with a nationwide presence and growing global footprint, HMV was one of the most powerful retailers in the UK.
HMV floated on the stock exchange with a market valuation of £1 billion in 2002. It appeared invincible.
Ten years later, HMV has joined the walking dead.
A few days ago, the company’s directors handed the company over to administrators. It is estimated to have a residual value of less then £15 million, and no future.
What happened? Philip Beeching, a marketing expert, wrote a revealing piece, reproduced by The Guardian and excerpted above. In it, he recounts a meeting with HMV’s managing director, Steve Knott, soon after the stock market listing. Beeching pointed out that the biggest threat to HMV’s business would come from “online retailers, downloadable music and supermarkets discounting loss leader product.”
To his amazement, the CEO reacted with anger: “I have never heard such rubbish”, he said, “I accept that supermarkets are a thorn in our side but not for the serious music, games or film buyer and as for the other two, I don’t ever see them being a real threat, downloadable music is just a fad and people will always want the atmosphere and experience of a music store rather than online shopping.”
I’m repeating this here to make sure the fundamental point is noted by all readers of this column. Whenever a dominant business collapses somewhere, someone in authority has been displaying hubris: the arrogance that prevents the obvious from being seen and much-needed change from being made.
That is why management thinker Jim Collins, in his seminal work on corporate collapse (How The Mighty Fall) pointed out that the first stage in the sequence of decline is always hubris. Too much success is the biggest cause of big businesses running into problems. Why? Because business leaders have a well-documented tendency to become wedded to a single ‘formula’ of success; of believing they know it all; of dismissing any contrarian views; of rubbishing any dissenting voices. And all it takes to create this amazing arrogance is a few years of revenue and profit growth.
HMV’s collapse was of course precipitated by the very factors identified by Philip Beeching and his team a decade ago. Supermarkets and Amazon wiped out the healthy margins HMV enjoyed; and iTunes provided a whole new way to obtain and enjoy music. The customer applauded, as HMV, Tower Records, Blockbuster and others bit the dust.
There is a deep lesson to be learnt here. Dominant companies are not brought down by external disruptions like technological change or transformation of consumer tastes. They are brought down by their own inability to detect the currents of change and accept the forces of evolution. If HMV had woken up to the new realities in its core markets, it would have led the migration to online retailing and digital customer experience.
Hubris and denial create a fatal combination. Sadly, that combination is most often found at the very top of the organization.
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{ 5 comments… read them below or add one }
“…people will always want the atmosphere and experience of a …”
Music store? [vs online]
A record? [vs cassette > CD > MP3]
A physical book? [vs ebook]
Seems to be a lack of understanding [or acceptance?] that tomorrow’s consumer is different than today’s.
We may, today, get nostalgic about the formats we grew up with and still buy them but tomorrow’s consumer knows little of these old formats and has no sentimental attachment to them and will adopt whatever is convenient and makes the most logical sense at the time of purchase.
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Sunny Bindra Reply:
January 29th, 2013 at 8:56 am
Chandesh:
Also, an emotional attachment to the winning formulae of the past. Accepting they’re gone means self-negation to some…
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The point you put across in this article is indeed true as can be seen by the likes of Dell, Kodak and as is increasingly becoming obvious Nokia.
But I can’t help but wonder where does one draw the line between what you term as arrogance and confidence in your business model? I mean, at that time, computers were only accessible to the elite few, mobile penetration was barely as huge as it is now and affordable smartphones were unthinkable. Surely a business leader cannot adopt a reactive strategy and respond to EVERY apparent threat.
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Sunny Bindra Reply:
January 29th, 2013 at 8:58 am
Kevin:
Certainly true. But to keep the head in the sand is more dangerous. Those trends were predictable, if only the eyes were willing to see…
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Just goes to show the futility of valuations based on the prospective incomes of the business in the future, when considered in isolation. The people element is almost always missing; I guess whether in business or in politics, the importance of evaluating people is just lost on us. We are more cautious when selecting our barbers than in preserving our capital and selecting our leaders. Hopefully, shareholders can begin to learn that most companies’ flotations are usually unwarranted promotions intended to benefit the underwriters and other insiders who’ll probably be the first to exit their positions, in light of the rich valuations. Think facebook or Groupon.
I have resigned myself to the fact that in this current global environment, with all the economic headwinds and ongoing technological changes, discerning what is real has become painstakingly difficult and nowhere is this more evident than in our business world. I would venture a guess that had one focused on the balance sheet alone, one would probably been caught unaware of the impending fall from grace of companies like Blockbuster and HMV. In a financial world such as ours, with balance sheets becoming opaque “black boxes”, it becomes incumbent upon us to understand our limitations in our efforts to preserve our capital in this volatile climate. Though, you wouldn’t know it from observing the markets, which in my opinion have become totally disconnected from reality the world over, people occupy an even more important role than they did before, especially now more than at any other time in our generation. Unfortunately, this period of frenzied finance has fomented a lot more hubris on the boards and managements of companies, and most probably laid the seeds for a lot more companies joining the ranks of HMV and blockbusters. Good honest management, who think like owners have unfortunately become a minority in our world, but only they stand the best chance of protecting and preserving our hard earned capital and steering away from the epidemic of hubris. Too bad, they don’t advertise.
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“To his amazement, the CEO reacted with anger”
Why bother hiring a consultant when what you really want is an echo chamber amplifying your preconceived notions?
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Sunny Bindra Reply:
January 29th, 2013 at 9:00 am
Muigai:
Indeed so. And why react with anger anyway? React with curiosity and challenge the proposition, don’t rubbish it.
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Reminds me of per minute vs per second billing for mobile talk-time, we all know how that ended….Things have since moved on to Skype type apps that nearly eliminate expensive billing. No wonder a certain company is now focused on data as the next big thing, then the next cycle after this will begin
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