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Will Heinsian economics work?
Once considered to be at the forefront of innovation, Research In Motion (RIM) is today scrambling for cover. To set things right, COO Thorsten Heins has been elevated to the top job. But with the Canadian smartphone maker losing its grip over the market, can Heins fix the problems for RIM?
Issue Date - 16/02/2012
Darwin’s famous maxim written way back in 1874 - “It is not the strongest of the species that survive, nor the most intelligent, but the one that is most adaptable to change” - now seems to apply to a lot more things than just human evolution. Technology is one. Think about it. A bunch of crazy people believe they have the idea and can pull it off. That’s how you get your good’ol garage story (think Steve Jobs, Bill Gates). Their ideas help break new ground and the founders become billionaires. The CEOs of these companies continue to invest in innovation of the sort that made them successful in the first place. But staying ahead of the curve is not just about ideas and innovation but about execution, implementation and forward planning as well. Because today, once an innovation plays out well in the marketplace, there are a lot of gimlet-eyed companies waiting to copy the innovation with their own ‘me-too’ products. And customers are generally not complaining as they have access to a lot of similar products (which come cheap too). In no time, a rash of new garage start-ups are already out with the next big thing. In a few years, it’s too late. Experts and spin doctors hold forth on what went wrong despite the company launching some of the most innovative products of its time and voilà, we’re back to Darwin’s maxim.

Look around and one comes across a lot of good companies that launched great products but then slowly went out of steam. Atari, Palm, HP, Yahoo! - there are plenty of them for their times. The latest one to meet the same fate (almost) happens to be Research In Motion. The Waterloo-based handset maker founded by Mike Lazaridis and Jim Balsillie, which started operations in 1984, went on to become the leading smartphone company in the late 1990s. For years after, there was no MP3 or camera on BlackBerry handsets. But what they did have was a never before seen push mail feature. That was revolutionary. It became the darling of Wall Street not just because the stock was going through the roof but because Wall Street executives couldn’t do without a BlackBerry. However, Mike and Jim believed that a superior speakerphone and network quality was all that was required to sell BlackBerry for years on end. What they didn’t realise was that gradually BlackBerry had made a transition from just selling to the corporate segment to also selling to the consumer market. The founder CEOs didn’t budge and the rest, as they say, is history.

From a high of $145 in 2008, RIM stock has stumbled to $16 today. In 2011 alone, the stock lost 80% of its value after a continuous 12- month decline. Since June 2008, the company has eroded a monumental $74 billion in shareholder wealth (the largest amongst communication equipment manufacturers). Generally, tech companies take years to witness such a decline. What is surprising, however, in case of RIM is the fact that all this happened within a matter of a few years. In 2008, BusinessWeek released their Info Tech 100 list, which ranks companies based on growth, innovation and industry relevance. RIM was ranked #3! Come today and it’s being referred to as scrapped hardware, equipped with an OS which belongs to the dinosaur age. Speaking to B&E, Michael Holt, a senior stock analyst at Morningstar, says he is unconvinced that Research in Motion has a credible plan to reverse its declining relevance in the smartphone market, making it a classic value trap. “If RIM does not turn the tide quickly, it may not have a strong enough grasp on its existing customer base to survive the next few years with material market share.”

It’s puzzling to figure out why the company couldn’t reinvent even when it called the shots in the market for many long years. Most fingers point to the very management structure that drove RIM for almost 28 years - its co-CEOs. The concept of shared leadership is fundamentally flawed and in almost all cases ends up destroying shareholder wealth. In a study undertaken by three professors at the Marquette University in 2008 titled It Takes Two: The Incidence and Effectiveness of co-CEOs, the authors analyse the effectiveness of co-CEOs in publicly listed US firms and suggest that, “The presence of co-CEOs, might result in sub-optimal or disjointed decision-making by the firm.” Co-CEO arrangements are plagued by coordination problems and interpersonal conflicts. The inability of co-CEOs to compromise can cause loss of corporate focus and conflicted decision-making. That more or less explains what kept brewing between Mike and Jim for over two decades. After consistent pressure from shareholders, the co-CEOs finally decided to step down on January 22, 2012. Former Siemens executive and COO of RIM since 2007, Thorsten Heins was given the reins. Generally, Wall Street reacts positively to new CEO appointments even at companies as messed up as Yahoo! and HP. But with RIM, it did the opposite. The stock fell by 9.1%. Investors were expecting a change that would bring in a new growth strategy. But the very fact that as COO, Heins was a part of the current strategy implies that the situation will remain more or less the same.

The company plans to abandon its legacy BlackBerry OS and roll out new devices equipped with the QNX operating system early this year. Further, sales outside North America amount for more than 50% of RIM’s revenue. These are the only two areas RIM can bet its hopes on. The new CEO will need to strategise a blockbuster product launch and create anticipation to kindle demand. But even if that comes to pass, there are significant downsides. BlackBerry’s share of the smartphone market declined from 19.9% to an embarrassing 11.6% in just a matter of eight quarters. Its tablet strategy has backfired and it shipped a meagre 200,000 of those devices compared to 9.3 million iPads! Even if the QNX-based devices do well, BlackBerry will suffer a financial shock arising out of consumer price sensitivity and rampant competition. Worst of all, RIM doesn’t even make for a lucrative takeover target. Competitors like Nokia have gone for an OS tie-up with Windows while Google has acquired Motorola, giving it a bagful of valuable mobile-phone patents.

But the situation can still be salvaged if CEO Heins works hard towards turning RIM into a consumer products company. It has a strong balance sheet with $1.4 billion in cash (and investment against no debt) that can be put to good use. But if that doesn’t happen, it could well result in a countdown to bankruptcy.

Amir Moin           

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