Change Business Directions to Ride Out the Downturn

Last Updated Oct 24, 2008 11:41 AM EDT

Every company looks at changing course when its business gets sour. In such a downturn of one, when a company sees its market position wobble, changing course may become its only option. We've seen companies like Apple, IBM and Nintendo survive their own downturns of one, do something creative and then come back better than they'd been in years.

Which is why in a downturn of everyone like today's, you're probably already thinking about how to change your business. After all, it worked for Google, which was able to find success when it stopped being a search company and started being an advertising company. But beware: changing direction is often harrowing, and demands rose-colored contact lenses. Here are three examples of firms that changed direction that highlight what it takes:

I recently finished reporting and writing a piece about a CEO who had built a profitable small business that was growing nicely, despite entrenched and formidable competition. But he realized that if he kept his course, his company would probably become acquisition bait at best, and at worst would see its market sucked up by a larger rival. So he went through the difficult process of turning his firm from a service bureau to a software provider. He did this not long after the 2001-2002 downturn, and while he was not necessarily exposed to the tech downturn, it was still a challenging time for a new direction.
BRACE FOR BUMPS. Worse, after two years of work, he found that his project was a failure. He might have quit â€" he knows of at least two similar firms that were trying to do the same thing and gave up when their first effort failed. But he persevered, and was able to make the project work the second time. The result has been a tripling of his growth rate, the ability to hire more effective executives (he's replaced himself as president, though he kept the CEO title) and, earlier this year, a nice round of venture capital for expanding his markets. He has done this without losing control of his firm, or his vision.

NO QUICK FIXES. We like to think that changing direction happen quickly, but they don't. Even large companies with no good options, like IBM or Apple, needed a certain amount of time to devise and implement their strategies (and we often forget that Apple's iPod was no savior. It played second fiddle to other MP3 players for about a year, until the company developed iTunes). The same holds true for smaller firms, despite their nimbleness. The founders of PianoDisk, which makes computerized systems that adapt grand pianos into player pianos, decided that getting into the piano business itself would help their main business. The founders bought Mason & Hamlin, a grand name in grand pianos that had faltered under a series of owners and had gone into bankruptcy. They thought the deal would improve PianoDisk's reputation, given the esteem piano cognoscenti gave to Mason & Hamlin's. What they didn't do was the proper due diligence, and it turned out that they got a piano company with a factory that wasn't capable of making pianos. That could have been disaster. But the brothers who run PianoDisk truly loved the piano, and their passion attracted very good people, both from the old Mason & Hamlin and from what's left of the U.S. piano industry. They were able to get the factory up and running and, over the past decade, have turned Mason & Hamlin into a profitable company again. They say that restoring Mason & Hamlin to its past glory has also boosted PianoDisk, as they'd hoped.

STANDING ON SHIFTING SANDS. Let me repeat that changing a business model is challenging. For an established business, you could alienate your customers. You could also fail, and get a black eye for your troubles. But a small business risks everything. Here's a scarier story of a directional change that didn't work: I've written about gaming as a phenomenon that was bound to spread into general business culture and product development. One of the companies I wrote about was Entellium, a supplier of customer relationship management software that had rewritten its product to make it feel more like a video game. For instance, salespeople could win points from the system for entering data into the system. The reasoning was sound, at least on the basis of stereotypes â€" salespeople are competitive, and would respond to the interface by actually using the software, rather than leaving it on the shelf. Plus, with so many people under 40 being active video game players, it tapped into what looked like an ongoing trend.

It was a bet-the-company strategy, and Entellium approached me several times after that, to tell me how well things were going and to see if I might write about it again. It never worked out, which is just as well: It turns out that the change of direction failed. The company make little headway against the Siebels and Salesforce.coms of the world. But the CEO allegedly told investors growth was much, much higher, cooking up a fake set of books to prove it. And it is alleged that a good deal of the money they then invested was siphoned away from the business.

If the allegations are true, Entellium's CEO and CFO will do jail time. It's puzzling to me to see this play out the way it is. The market might have come round to them. A small software firm like Entellium could have shifted direction again. Even if it had been swallowed up in the sands of shift, the executives had done something creative. They would likely have been rewarded with plum positions someplace. Instead, it looks like the corner cellblock is the best they'll do.

You may be forced to change course during this downturn. Remember that it only looks easy after it's worked, and you won't know that until it happens. In the meantime, don't forget those rose-colored contacts.

  • Michael Fitzgerald

    Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.