WEBVTT

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Prof: While we get
settled, in our,

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as usual, gradual fashion,
I'm going to turn on one of the

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videos involving the last two
CEOs of Polaroid,

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and then after that,
we'll get into our normal

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routine.

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What did you think of those
guys?

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Did you like them?

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Student:  Yeah.

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Prof: Great.

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We're going to see part of each
slide--there we go.

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We've got two cases this week,
Polaroid and Enron.

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They are two cases of dramatic
success and then dramatic

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failure.

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In understanding capitalism,
think back to everything we've

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done so far.

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The idea of abrupt change,
of equilibrium always being

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dislodged,
equilibrium always disrupted,

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and the cardiothoracic systems
case from the end of last week

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was exactly such a story,
and Polaroid is very much such

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a story.

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Enron has a darker cast to it.

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It entails the darker side of
the human soul.

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And we'll hear about that from
Jim Alexander,

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who lived right through the
middle of it,

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on Wednesday.

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This is a tracing of the sales
volume of Polaroid from 1957

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until the firm's demise.

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One of the things you can--that
is of interest about this

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diagram, is that the sales at
death were not dramatically

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below their all time peak.

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So sales alone don't tell you
enough to understand what

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happened.

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This is the stock price,
and this is--what are stock

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prices about?

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What are the drivers?

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I'm not asking for anything
fancy here.

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What are the drivers--yes,
back left.

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Student:  It's expected
future dividends.

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Prof: Okay,
expected future earnings,

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along with some special sauce
having to do with future

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strategy to maintain share
price.

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Student:  Interest rates.

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Prof: How would interest
rates play into this?

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Student:  Basically,
formulaically,

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the expectations--
Prof: Okay--just for

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those of us who are from
Illinois, spell it out a little

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at a time.

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Who's from Illinois here?

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I apologize.

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Hell, I should have said
Indiana, I'm from there.

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Okay, spell it out for us.

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Student:  A lower
interest rate will yield a

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higher stock price because there
will be less of a tradeoff

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between spending today and what
you get tomorrow.

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Prof: Well, sort of.

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Jim do you want to help with
that?

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Jim Alexander:
They really are a

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projection of future cash flows
to the shareholders,

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it's just that it used to be in
the 1950s,

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1960s, and 1970s,
dividends that were the bulk of

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those assumptions,
and today it's a rare company

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that makes more than 1% or 2%
dividend yield on the stock

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price.

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So really it's a projection of
earnings which is encapsulated.

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When you look at that chart,
what you see is the typical

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problem with a lot of growth
stocks and that is people buying

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onto a whole new paradigm and
then extrapolates for decades

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and you end up with a stock
price that really bears no

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resemblance to current earnings.

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Prof: And an increase in
interest rates,

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how would that view--
Jim Alexander:

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That would--
an increase in--all of the

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things being equal--
an increase in current interest

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rates would lower the stock
price because you would have to

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be compensated for the extra
time value of money involved.

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Prof: Thanks.

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Sales, this is a curve in red
that we saw in the first slide,

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with long term debt superposed.

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Sales reads on the left axis
and debt reads on the right.

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Anything learned from that
slide?

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Come on guys,
this is not a curve ball.

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Student:  Polaroid
didn't have any debt until

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relatively recently in the last
second.

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Pretty much starting during the
recession of the recession of

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the 1980s
Prof: Was the debt

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likely to be important there
toward the end?

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Student:  Well,
yeah, because they filed for

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bankruptcy.

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Prof: They did.

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And what was the precise event
that caused them to file?

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It's the 10Q filing in the
case, did anybody notice that?

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Student:  A takeover
attempt.

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Prof: No.

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Student:
>

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Prof: Seaconch.

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Student:  9/11.

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Prof: Not really.

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It was related to 9/11.

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What happened was,
they failed to make a scheduled

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payment on the debt and that
triggered an avalanche of

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adverse results,
drove the stock price close to

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zero,
and how does the firm end up?

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What becomes of it?

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It gets--sold?

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Student:  Sold to the
private equity companies.

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Prof: Sold to private
equity, and how much of its

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value do you think is--of its
peak value is there at the end

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when it's sold to private
equity?

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You don't have to give me a
number, just give me a lot/a

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little--
Student:  I think 20%.

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Prof: I think less,
it sold for $265 million at

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that end stage.

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Now what was the value
proposition?

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I guess that's a hint.

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What would have caused
you--here is a Polaroid Pronto,

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which hasn't made a picture in
a lifetime,

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what would it have cost--I
probably bought over the years

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three or four of these cameras.

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I was never terrifically happy
with them.

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Any of you ever own one?

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You're all way too
young--almost all.

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Tell us--
Student:  Yeah,

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I got one as a birthday present
as a novelty for like,

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three months.

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Prof: How old were you?

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Student:  I was eight.

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Prof: So you probably
didn't have an independent

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account for buying film?

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Do you have any memory of how
the film's price compared--well

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you didn't buy the camera.

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Student:  No,
I didn't know anything about

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the pricing.

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I just liked that it came out
instantly.

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Prof: Okay,
did anyone own one at an age

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older than eight?

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Back center--
Student:  I had my

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grandmother's old one.

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I was 11.

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Prof: I can guess what
you paid for the camera.

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Student:  I mean it was
a hand me down,

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and I took, like,
ten pictures,

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and I asked my mom to buy more
and she was like,

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"No, we're just going to
get a disposable."

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Prof: Okay,
so the sales metaphor in the

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case, anybody remember what
analogy do they draw in the

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marketing strategy?

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Student:  I think it was
razor and blade.

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Prof: Razor and blade,
help us understand that.

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Student:  Yeah,
basically the current interest

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of the company that sells
razors,

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they're not making that much
money on the actual price of the

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razors,
some could argue that they can

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even give that to you.

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Their profit really comes from
that people have to buy blades

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in order to use the razor.

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Prof: Okay, great.

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Can we think of any other
analogies in marketing

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strategies?

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Here in the alligator shirt.

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Student:  Printers and
ink cartridges.

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Prof: Printers and
cartridges.

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You've noticed that the
printers sell for nothing,

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and the cartridges cost your
firstborn child.

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It's not a bad strategy because
most of us try to minimize the

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initial cash outlay when we buy
something and then you get hit

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in the back of the head by the
maintenance of it.

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And that was the strategy for
Polaroid, and it was in some

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periods a very successful
strategy.

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What's the value proposition?

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We get two dimensions here,
let's put them together,

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actually.

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The quality dimension,
I think this is 1948;

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this is the first Polaroid
camera on the retail market.

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It was much too--I was nine at
the time, so I can empathize

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with you guys,
but I was nowhere near rich

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enough to purchase a Polaroid
Land camera.

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It was a very upscale,
fancy idea.

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But I did see pictures made
with it, and they were sepia

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tone and muddy;
very low contrast.

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They were very bad compared
with what could be produced by

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conventional photography.

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The question was--let's think
about three kinds of consumers,

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and this was largely a consumer
product.

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It had scientific and business
applications,

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and industrial applications,
but from Land's point of view

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all the way the real darling was
the amateur photographer.

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Let's use indifference curves
in this space,

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so we've got speed on the
horizontal dimension and quality

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on the vertical dimension,
and a person who says,

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"I'm indifferent between
all these outcomes,"

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how would we describe that
person's preference?

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Student:  A professional.

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If he's indifferent to speed;
there's a

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>

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of quality.

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Prof: I'm unable to
locate you.

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Where are you?

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Wave.

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Oh, hi.

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It would be a professional or
perfectionist.

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The model might be Ansel Adams,
somebody who makes wonderful

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pictures and is willing to wait,
and is virtually indifferent to

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the time dimension,
so that person is trying to

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climb in this direction,
indifference curve over

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indifference curve.

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This person--Tim what's this
person up too?

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They're trying to go out that
way as fast as they can.

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Student:  They're trying
to get faster and faster

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pictures.

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Prof: Yeah,
cheap thrills,

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just like our friend back here
when he was eight.

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All they want is speed.

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How many customers do you think
fit either of these

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descriptions?

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A few fit the first
description, a few fit the

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second description,
but most are more like this.

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They have a tradeoff,
which I've simplified with

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straight lines,
they probably would actually

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bow in toward the origin like
this,

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but these people want some
combination of speed and

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quality.

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The central drive for the
Polaroid Land Camera from 1948

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all the way to the end,
was to do as well as possible

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in competing for the business of
these people who were trading

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off the two dimensions.

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The SX-70, which was in some
ways, the high point of

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Polaroid's history and in other
ways the low point.

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Anybody remember what was wrong
with the SX-70?

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Student:  It had battery
problems.

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Prof: It had--how--do
you remember from the case how

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the battery was related to the
thing?

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Student:  Not really.

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Prof: I think Jim
Alexander and I are the only

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people here who ever experienced
this.

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The battery was included in the
film pack, and for the first

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couple of years they made it,
about half the batteries were

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no good.

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If you spent a premium for the
film pack and the battery

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wouldn't make the camera run,
you were likely to be an

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unhappy customer.

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They had a very high complaint
rate about that.

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Does anybody remember what they
did to resolve the battery

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problem?

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Student:  They
manufactured their own

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batteries.

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Prof: Yeah,
they went into the battery

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manufacturing business,
which is as we'll see in a

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minute, is an integration move,
where they reduce their

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reliance on outside suppliers
but create a whole set of new

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problems for themselves,
because it turns out it's not

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very easy to manufacture
batteries well.

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The Polaroid SX-70 had gained
enormous ground on conventional

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photography on the quality
dimension.

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It was a lot better than the
old Polaroid,

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but it was still--nobody drunk
or sober would argue that the

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pictures produced by the
Polaroid SX-70 were as good as

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those produced by a conventional
single SLR,

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single lens reflex 35mm camera
with competent processing.

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They were in a position where
they had a deficit on the

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quality side,
which they never actually

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overcame.

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They did better and better on
picture quality but they never

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really got to where they matched
conventional photography.

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The--I've drawn this so that
they're on a higher indifference

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curve for this particular
consumer than the conventional

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photography.

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There were several problems
lurking in that.

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One of them--how could this
have happened?

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Without any improvement in
either the film or the camera on

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the conventional side,
the conventional photographic

23:53.748 --> 24:00.618
technology gained ground on the
speed dimension and a gained a

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lot of it.

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Student:  With the
advent of the one-hour photo.

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Prof: Okay,
so the one photo processing

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took three days,
or five business days,

24:17.490 --> 24:21.200
and brought it down to an
errand.

24:21.200 --> 24:23.750
You drop the film off,
go have a cup of coffee,

24:23.750 --> 24:29.540
come back, so that conventional
photography with no internal

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improvement was closing the
speed gap,

24:33.558 --> 24:39.078
and diminishing total demand
for instant photography.

24:39.078 --> 24:46.768
Now there's an incident about
this stage between Polaroid and

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Kodak.

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Anybody remember how that goes?

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How had--had Kodak played any
part in Polaroid's business?

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Any cooperative part in the
early years?

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Student:  It
manufactured the camera.

25:07.118 --> 25:12.368
Prof: Yeah it--Kodak was
manufacturing for Polaroid.

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As it manufactured it learned
the secret sauce and then went

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into the business,
competing and competing

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effectively against Polaroid
with a tricked up

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reconfiguration of Polaroid's
technology.

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Polaroid responded with a
lawsuit.

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They won the lawsuit.

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They nonetheless got screwed.

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How could that be?

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They win the--they get a
billion dollars in damages,

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or just a little short of a
billion dollars in damages,

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and yet Polaroid's theft is all
but lethal to them.

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Student:  I think it
took them a lot of time and

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effort to fight that case,
and when they finally got the

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reward,
it wasn't as much as they

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expected.

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Then there was also this
comment later that they kind of

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wished that Kodak had--
that they had merged with Kodak

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and that didn't happen,
and that is because Kodak did

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not--had too much of an ego.

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Prof: Both sides had a
lot of ego.

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That's a--you got it.

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What was needed was an
immediate intervention.

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The case went on almost fifteen
years and while it was going on,

26:39.080 --> 26:44.930
Kodak was eating into the
competitive position occupied by

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Polaroid.

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There's, of course,
something else going on here

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and that's the emergence of
digital.

26:52.348 --> 26:57.018
Digital photography,
with one important asterisk,

26:57.017 --> 26:59.057
trumped everything.

26:59.058 --> 27:02.868
It didn't stand still,
it traced a path,

27:02.869 --> 27:07.759
and it's still on that path of
virtually continuous

27:07.756 --> 27:09.316
improvement.

27:09.318 --> 27:17.728
A $200 digital camera now is as
good as a $10,000 digital camera

27:17.728 --> 27:19.728
a decade ago.

27:19.730 --> 27:24.820
The--hands up if you use a
digital camera?

27:24.819 --> 27:27.689
Yeah, everybody.

27:27.690 --> 27:33.710
On average my guess is that
your digital cameras are about

27:33.711 --> 27:34.981
like that?

27:34.980 --> 27:38.890
They're tiny,
are they hard to work?

27:38.890 --> 27:42.290
Do the batteries fail?

27:42.288 --> 27:47.628
There's only one thing they
don't do very well and what's

27:47.632 --> 27:48.302
that?

27:48.298 --> 27:50.408
Student:  Take pictures
in the dark.

27:50.410 --> 27:53.760
Prof: Well,
they actually do that better

27:53.759 --> 27:57.689
than conventional cameras,
but no camera does that very

27:57.693 --> 27:58.353
well.

27:58.348 --> 28:02.608
What's--my mother hates them,
why would a ninety-five year

28:02.611 --> 28:04.181
old--
Student:  They don't

28:04.178 --> 28:04.428
print.

28:04.430 --> 28:05.620
Prof: They don't print.

28:05.618 --> 28:09.218
Her idea of a photo is
something you hold in your hands

28:09.222 --> 28:13.562
and it's not a real photo unless
she can hold it in her hands,

28:13.558 --> 28:16.398
put it on the coffee table,
show it to her friends from the

28:16.404 --> 28:20.344
coffee table,
and Edwin Land actually agreed

28:20.336 --> 28:21.486
with that.

28:21.490 --> 28:29.170
It was--part of his infatuation
with the original Polaroid idea

28:29.171 --> 28:35.261
was that you make the picture,
wave it for a minute until it

28:35.258 --> 28:37.508
dries,
and hand it to the people who

28:37.511 --> 28:38.511
are in the view.

28:38.509 --> 28:46.339
Now we're going to go back to
the case in this informal way in

28:46.337 --> 28:50.227
just a minute,
but I'm going to talk about

28:50.228 --> 28:54.238
integration here,
because vertical integration is

28:54.238 --> 28:57.498
a huge part of the Polaroid
story,

28:57.500 --> 29:04.030
and it's an important part of
most corporate stories.

29:04.028 --> 29:11.108
Vertical integration is
the--think of the dimension that

29:11.107 --> 29:17.797
starts with raw product ore
coming out of a mine,

29:17.798 --> 29:24.518
sugar cane coming out of a
field, bananas coming out of a

29:24.519 --> 29:26.199
rain forest.

29:26.200 --> 29:32.030
And then there is a progression
toward a manufacturing or

29:32.029 --> 29:36.089
processing plant,
or perhaps a series of

29:36.090 --> 29:38.590
manufacturing steps.

29:38.588 --> 29:42.678
Then the distribution of the
product to wholesalers,

29:42.684 --> 29:47.104
and from wholesalers to
retailers, and from retailers to

29:47.103 --> 29:48.873
the family picnic.

29:48.868 --> 29:55.128
And a full story of vertical
integration looks like this;

29:55.130 --> 29:59.960
everything is in the corporate
box from beginning to end.

29:59.960 --> 30:05.570
The plus of that is obvious.

30:05.568 --> 30:13.018
The trouble you might have with
your suppliers is completely

30:13.016 --> 30:20.836
eliminated, and the ability to
direct the details of every step

30:20.842 --> 30:24.252
is seemingly unlimited.

30:24.250 --> 30:29.590
The downside--there are at
least two obvious downsides.

30:29.588 --> 30:33.178
One is a lot of companies are
good at the front end without

30:33.182 --> 30:34.982
being good at the back end.

30:34.980 --> 30:39.380
If they go from the front end,
from marketing a retail product

30:39.378 --> 30:43.488
all the way back to the first
steps of its production,

30:43.490 --> 30:49.130
they may well screw up because
it's just not what they do well.

30:49.130 --> 30:51.760
That's one difficulty.

30:51.759 --> 30:55.249
Another difficulty is
governance.

30:55.250 --> 31:01.120
The management of a vertically
integrated company is a very

31:01.121 --> 31:04.631
complicated process,
and it tends,

31:04.628 --> 31:08.438
as with the railroads we saw a
week ago,

31:08.440 --> 31:11.330
it tends to bloat the
administrative apparatus,

31:11.328 --> 31:16.368
make it have many dimensions
from top to plant floor,

31:16.369 --> 31:19.879
and presents serious challenges.

31:19.880 --> 31:23.240
Now that's only half the story.

31:23.240 --> 31:26.790
The other half of vertical
integration has to do with

31:26.792 --> 31:27.342
ideas.

31:27.338 --> 31:32.128
There's a--what I just talked
about has to do with physical

31:32.125 --> 31:34.185
stuff, material things.

31:34.190 --> 31:39.100
There is also an intellectual
track or ideational track,

31:39.098 --> 31:44.148
which starts with dreams or
ideas drawn on the back of a

31:44.151 --> 31:47.621
napkin,
and then invokes science and

31:47.615 --> 31:50.605
engineering,
and design, and a marketing

31:50.607 --> 31:50.987
plan.

31:50.990 --> 31:57.860
It is in effect the brains
behind the lower box and with

31:57.855 --> 32:03.595
Polaroid you had a fully
integrated company.

32:03.598 --> 32:05.118
Now they didn't do mines and
fields,

32:05.118 --> 32:10.658
but you had a high degree of
vertical integration in the

32:10.664 --> 32:15.354
ideas process,
and almost as high a degree of

32:15.353 --> 32:19.023
integration in the material
process.

32:19.019 --> 32:24.709
So you end up there.

32:24.710 --> 32:32.490
Now why did this company fail?

32:32.490 --> 32:42.770
Let's start with--I've got warm
calls.

32:42.769 --> 32:49.259
Amed, why do you think the
company failed?

32:49.259 --> 32:55.209
Student:  They failed
because of the capabilities and

32:55.205 --> 33:00.845
beliefs of the 1980s that
influenced their strategies.

33:00.848 --> 33:04.698
They couldn't--they were more
technology driven and not market

33:04.701 --> 33:07.921
driven, and reasons,
and so forth--because of senior

33:07.922 --> 33:08.872
management.

33:08.868 --> 33:14.218
Prof: Okay,
who was this Edwin Land guy?

33:14.220 --> 33:18.270
Student:  A scientist
who--

33:18.269 --> 33:19.739
Prof: He was scientist.

33:19.740 --> 33:22.260
When does he get his start as
an inventor?

33:22.259 --> 33:24.329
Does anybody from remember the
case?

33:24.329 --> 33:25.619
Student:  It didn't say.

33:25.619 --> 33:27.049
Prof: Pardon.

33:27.049 --> 33:28.089
Student:  Harvard.

33:28.088 --> 33:30.928
Prof: Harvard College,
he's an undergraduate,

33:30.928 --> 33:32.818
and he invents Polaroid
filters;

33:32.819 --> 33:35.699
clever lad.

33:35.700 --> 33:41.650
He gets fixated,
I think, on a certain view of

33:41.648 --> 33:48.258
how you do wonderful things and
it focuses on long,

33:48.259 --> 33:53.019
costly, time consuming
research.

33:53.019 --> 33:58.979
Lindsey Jackson,
anything to add to that?

33:58.980 --> 34:01.760
Student:  About Land?

34:01.759 --> 34:04.169
Prof: About Land or
about the causes of failure.

34:04.170 --> 34:07.510
Student:  Well,
I could just go off of

34:07.506 --> 34:11.066
Land's--it was genius what he
was able to do.

34:11.070 --> 34:16.290
He was so technology driven,
and he was able to create such

34:16.289 --> 34:19.419
a successful company,
and at a certain point he

34:19.418 --> 34:22.398
didn't have any competition--
or no real competition--

34:22.400 --> 34:24.050
Prof: No direct
competition.

34:24.050 --> 34:26.590
Student:  And because
this technology was driving and

34:26.594 --> 34:29.424
proved to be successful,
as the company grew older they

34:29.418 --> 34:32.458
got fixated onto something that
technology was going--

34:32.460 --> 34:35.590
result in and drive them,
so they were hesitant change.

34:35.590 --> 34:36.870
Prof: That's terrific.

34:36.869 --> 34:41.819
So we combine an initial
fixation on a very

34:41.818 --> 34:46.058
intellectualized R&D
process,

34:46.059 --> 34:52.509
which is very slow and mildly
contemptuous of marketing,

34:52.510 --> 34:58.030
and we combine that with a
wildly successful market product

34:58.034 --> 35:03.084
which was not designed by
careful analysis of consumer

35:03.083 --> 35:05.373
indifference curves.

35:05.369 --> 35:12.259
It was designed by Edwin Land's
passion for this product.

35:12.260 --> 35:15.990
He correctly guessed,
he lucked out,

35:15.990 --> 35:21.640
he correctly guessed that it
would command an enormous

35:21.641 --> 35:25.051
consumer market,
and sure enough,

35:25.052 --> 35:26.442
it did.

35:26.440 --> 35:32.860
We've got a kind of path
dependent story there.

35:32.860 --> 35:35.860
Ben Chu?

35:35.860 --> 35:40.040
Is there anything left to talk
about on this,

35:40.036 --> 35:41.646
or are we done?

35:41.650 --> 35:45.340
Student:  When Polaroid
was developing its newer

35:45.338 --> 35:48.278
technologies,
it's important to realize that

35:48.275 --> 35:51.755
it's not that they were stuck in
the Stone Age.

35:51.760 --> 35:54.700
They were trying to
develop--they made forays into

35:54.699 --> 35:59.009
digital imagery,
but they still were--they were

35:59.007 --> 36:05.657
still shackled by the idea of
making money with razor blades,

36:05.659 --> 36:09.819
marketing strategy,
and really making money with

36:09.824 --> 36:11.514
printing on film.

36:11.510 --> 36:13.440
Prof: Absolutely.

36:13.440 --> 36:15.390
There's a wonderful quote
toward the end of the piece you

36:15.393 --> 36:16.513
guys read, do you remember it?

36:16.510 --> 36:24.650
Here it is.

36:24.650 --> 36:30.590
They're talking about what a
wonderful and highly marketable

36:30.594 --> 36:37.294
device the digital camera is,
and the--this is a marketing

36:37.291 --> 36:42.131
person talking to a senior
executive,

36:42.130 --> 36:44.930
and the senior executive's
response is,

36:44.929 --> 36:46.829
"Where's the film?

36:46.829 --> 36:49.289
That's where the money is."

36:49.289 --> 36:52.349
Of course there is no film,
and there is no money in film.

36:52.349 --> 36:54.389
All the money is in the
hardware.

36:54.389 --> 37:00.009
That was a hard idea for
Polaroid's top management to

37:00.007 --> 37:05.837
square with the initial model
based on razors and razor

37:05.840 --> 37:07.030
blades.

37:07.030 --> 37:12.760
There's another idea that
appears in--this is one of the

37:12.760 --> 37:16.720
papers cited at the end of the
case.

37:16.719 --> 37:19.719
There's another idea there that
may be important and it's called

37:19.721 --> 37:20.771
bounded rationality.

37:20.768 --> 37:26.198
Hum if bounded rationality is a
familiar concept.

37:26.199 --> 37:28.799
We should stop and talk about
it.

37:28.800 --> 37:33.910
Edwin Land, let's say his IQ
was 290,

37:33.909 --> 37:38.199
since they divide by age I
think he would have had to be

37:38.202 --> 37:42.502
about age three when it was
measured for that to be even

37:42.496 --> 37:47.326
logically possible,
but let's suppose he's the

37:47.333 --> 37:50.413
smartest guy in the world.

37:50.409 --> 37:56.459
He nonetheless thinks in
bounded rationality.

37:56.460 --> 38:00.290
What that means is in order to
get started thinking about

38:00.288 --> 38:03.908
something, you have to
explicitly or implicitly make a

38:03.911 --> 38:05.621
bunch of assumptions.

38:05.619 --> 38:12.319
Those assumptions are typically
arbitrary.

38:12.320 --> 38:17.130
You can't examine every aspect
of every assumption and ever get

38:17.132 --> 38:19.542
anything done intellectually.

38:19.539 --> 38:22.199
It's a true statement.

38:22.199 --> 38:30.949
The task of managing a company
is exceedingly complex.

38:30.949 --> 38:39.979
Edwin Land and Mack Booth and
the other people--

38:39.980 --> 38:45.910
you have this very messy chart
here that I took down from the

38:45.909 --> 38:49.659
case--
none of these senior executives

38:49.657 --> 38:55.287
was ultimately able to think in
a way that was effective,

38:55.289 --> 38:59.469
because the bounding
assumptions prohibited it.

38:59.469 --> 39:06.229
What's so hard about this?

39:06.230 --> 39:13.380
What would make it hard to run
Polaroid or Ford Motor Company?

39:13.380 --> 39:20.270
What--yes--
Student:  Because the

39:20.273 --> 39:24.203
assumptions that they--
Polaroid to begin with was

39:24.195 --> 39:25.575
basically a research driven
company,

39:25.579 --> 39:28.639
and the assumptions that they
were making the benchmark,

39:28.639 --> 39:31.049
was that Polaroid is a research
driven company,

39:31.050 --> 39:33.180
which in effect,
was not correct,

39:33.177 --> 39:35.837
because as the markets were
changing,

39:35.840 --> 39:39.610
it sapped all flexibility to be
nimble and respond to the

39:39.608 --> 39:41.088
competition instead.

39:41.090 --> 39:42.210
Prof: Okay, great.

39:42.210 --> 39:46.110
Is there an analogy in what
happened to them in anything

39:46.112 --> 39:48.952
about the cardiothoracic systems
case?

39:48.949 --> 39:55.849
What was the--I thought Karen
did a--Sharon did a fabulous job

39:55.847 --> 39:57.767
of teaching it.

39:57.768 --> 40:04.128
Why was it that the two-artery
strategy for cardiothoracic

40:04.125 --> 40:07.465
systems had to be abandoned?

40:07.469 --> 40:11.239
Do you remember?

40:11.239 --> 40:13.059
Some of you said it.

40:13.059 --> 40:18.069
Well it is this,
that the companies who were

40:18.074 --> 40:24.144
making the devices for
non-surgical intervention,

40:24.139 --> 40:26.339
the stints, and the little
balloons,

40:26.340 --> 40:29.620
and all that stuff were what
kind of companies?

40:29.619 --> 40:33.389
Huge, well-funded companies,
which were not going to let

40:33.387 --> 40:37.637
somebody come in and take market
share without developing a new

40:37.635 --> 40:39.755
step of competitive device.

40:39.760 --> 40:44.150
One of the very hard things
about running a big company is

40:44.154 --> 40:49.014
that you have to be aware of all
the other players out there who

40:49.012 --> 40:52.792
may be doing something to damage
your market.

40:52.789 --> 40:57.819
They probably aren't even
trying to damage your market;

40:57.820 --> 41:01.750
they are probably not even
thinking much about you,

41:01.751 --> 41:06.241
but instead trying to develop
their own boundedly rational

41:06.235 --> 41:08.275
idea of their company.

41:08.280 --> 41:14.860
In this case Polaroid was badly
bitten,

41:14.860 --> 41:22.810
both by one hour film
processing and by digitals,

41:22.809 --> 41:26.459
and in the case of the one-hour
film processing,

41:26.460 --> 41:31.090
it wasn't even the processors
so much who were in competition

41:31.088 --> 41:39.568
with Polaroid,
but the conventional film

41:39.565 --> 41:46.155
people, such as Kodak.

41:46.159 --> 41:49.979
Part of the story then is
bounded rationality;

41:49.980 --> 41:54.390
part of it has to do with
drawing the wrong lessons from

41:54.387 --> 41:55.667
early success.

41:55.670 --> 42:00.720
Part of it has to do with
something totally irrational,

42:00.722 --> 42:05.122
which was the commitment to a
founder figure.

42:05.119 --> 42:09.279
Is it generally the case that
brilliant engineers run huge

42:09.284 --> 42:13.674
companies which produce the
products based on their ideas?

42:13.670 --> 42:17.680
It's not generally the case.

42:17.679 --> 42:22.179
I mean, we can all name cases,
but in general,

42:22.179 --> 42:29.279
the engineers who create
devices are forced out of top

42:29.282 --> 42:37.462
management and replaced by
people who are general managers.

42:37.460 --> 42:43.140
That's what happened at
Polaroid, but it happened too

42:43.143 --> 42:43.913
late.

42:43.909 --> 42:46.949
It happened much too late.

42:46.949 --> 42:50.499
Now if you were going to save
Polaroid,

42:50.500 --> 42:55.340
let's say in the 1980s,
let's suppose you are Mack

42:55.338 --> 43:01.558
Booth and it's your task to give
this company the best chance of

43:01.559 --> 43:06.299
preserving its value going into
the future,

43:06.300 --> 43:07.660
what would you do?

43:07.659 --> 43:11.799
What they did do was a hell of
a lot of R&D on a long

43:11.804 --> 43:14.324
string of projects which failed.

43:14.320 --> 43:18.240
Some of them were artistic or
engineering successes,

43:18.242 --> 43:21.552
but none of them were economic
successes.

43:21.550 --> 43:27.020
Polar Vision was a disaster,
Helios was actually a really

43:27.021 --> 43:30.731
good product,
but they didn't manage to

43:30.733 --> 43:33.473
recoup their investment.

43:33.469 --> 43:37.219
What would you have done?

43:37.219 --> 43:42.549
If your--are you ready?

43:42.550 --> 43:48.610
Student:  I'm actually
visiting.

43:48.610 --> 43:53.040
Prof: I'm going to cold
call you anyway.

43:53.039 --> 43:58.889
The nice thing is you don't
have anything at risk.

43:58.889 --> 44:04.299
Well you didn't read the case,
so that's unfair.

44:04.300 --> 44:08.370
Are you--
Student:  I am in the

44:08.371 --> 44:08.781
class.

44:08.780 --> 44:10.520
Prof: Okay, good.

44:10.518 --> 44:12.368
What might you have done to
save this company?

44:12.369 --> 44:15.209
Student:  I really do
agree with what Booth said.

44:15.210 --> 44:17.550
He said that he would have
probably merged with Fuji and

44:17.554 --> 44:19.264
kind of use the best aspects of
both,

44:19.260 --> 44:21.850
because Fuji was moving
forward, hopefully digital,

44:21.849 --> 44:23.989
and they were still kind of
doing instant photography.

44:23.989 --> 44:26.239
Because one of the things that
they were still,

44:26.239 --> 44:28.219
I think, fixated upon was
instant photography,

44:28.219 --> 44:30.369
what the founder founded,
so they were--

44:30.369 --> 44:33.179
because that kind of cult,
and if they weren't really

44:33.181 --> 44:36.051
moving on towards other things
and improving on it.

44:36.050 --> 44:37.980
Prof: Okay,
so a merger might well have

44:37.978 --> 44:38.878
been the best play.

44:38.880 --> 44:42.480
Now why would it--what would
make it hard to do?

44:42.480 --> 44:45.940
Student:  I think it's
the culture of the company that

44:45.942 --> 44:48.002
they would--
it's the whole ego trip thing,

44:48.003 --> 44:50.043
they don't really--
kind of like they had to cheat

44:50.041 --> 44:52.571
and the vertical integration was
part of the reason they were so

44:52.568 --> 44:53.168
proud of it.

44:53.170 --> 44:55.410
Prof: Oka,y so part of
it is culture.

44:55.409 --> 44:59.459
I think that debt of theirs
would have weakened their

44:59.456 --> 45:01.166
bargaining position.

45:01.170 --> 45:08.460
Yes.

45:08.460 --> 45:09.940
Student:  Rather than
mergin a company,

45:09.940 --> 45:12.750
I think that Polaroid could
have done something along the

45:12.751 --> 45:16.051
lines of what IBM is doing now,
become a completely research

45:16.050 --> 45:18.010
based company,
cut out their marketing,

45:18.005 --> 45:19.525
cut out their consumer
processes,

45:19.530 --> 45:22.690
and just research for Fuji,
research for,

45:22.690 --> 45:26.140
conduct new research designs
for other companies who are in

45:26.139 --> 45:27.389
the consumer field.

45:27.389 --> 45:29.609
So cut down on your vertical
integration.

45:29.610 --> 45:32.470
Prof: Okay,
that might actually--that makes

45:32.465 --> 45:33.975
a certain kind of sense.

45:33.980 --> 45:36.980
Talk a little more and defend
the idea.

45:36.980 --> 45:39.340
Student:  Because at the
end of the day,

45:39.340 --> 45:42.210
the whole company culture was
driven towards cutting edge

45:42.213 --> 45:42.883
research.

45:42.880 --> 45:46.070
A lot of their successful
products were because they were

45:46.068 --> 45:49.308
able to invent and create
products that were successful on

45:49.311 --> 45:51.861
lines of,
not success of marketing,

45:51.856 --> 45:54.506
not successful marketing
strategies,

45:54.510 --> 45:57.980
but they were able to create
products which were ahead of the

45:57.983 --> 45:59.783
curve in terms of technology.

45:59.780 --> 46:02.910
Since the whole market,
the industry was moving towards

46:02.907 --> 46:06.187
the addition of platform,
perhaps they could become

46:06.193 --> 46:09.993
leaders of developing these
technologies with the improved

46:09.987 --> 46:12.247
digital products in the future.

46:12.250 --> 46:15.330
Prof: Okay,
that's a very interesting

46:15.329 --> 46:16.259
suggestion.

46:16.260 --> 46:18.190
Yes.

46:18.190 --> 46:23.480
Student:  I still think
that the merger wouldn't go well

46:23.481 --> 46:28.181
because of the vertical
integration that Polaroid had in

46:28.175 --> 46:29.025
place.

46:29.030 --> 46:32.790
They had huge facilities and
machines designed for peak times

46:32.788 --> 46:33.538
and sales.

46:33.539 --> 46:37.449
And these fixed costs would
have been a big problem for

46:37.454 --> 46:41.084
Kodak, so I think they wouldn't
merge with them.

46:41.079 --> 46:46.989
Prof: That might well be.

46:46.989 --> 46:51.459
I mean they might have
liquidated those through private

46:51.456 --> 46:54.266
equity and kept intact the rest.

46:54.268 --> 46:57.648
Student:  I think they
were specialized on the films of

46:57.650 --> 46:58.260
Polaroid.

46:58.260 --> 47:00.480
Prof: Yeah, okay.

47:00.480 --> 47:03.830
Let's turn to Enron now.

47:03.829 --> 47:08.549
Enron is another innovation
company.

47:08.550 --> 47:11.770
Jim, can you come up for just a
second?

47:11.769 --> 47:14.189
I didn't warn him about this.

47:14.190 --> 47:18.490
Jim, as I said to those of you
who were here at the beginning

47:18.485 --> 47:23.665
of shopping period,
Jim was Chief Financial Officer

47:23.672 --> 47:28.222
of Enron Global Power &
Pipeline,

47:28.219 --> 47:35.009
and saw the process from the
beginning.

47:35.010 --> 47:39.620
He came from a long career in
investment banking before that.

47:39.619 --> 47:45.849
Culture of innovation at Enron,
was it important from day one

47:45.846 --> 47:50.616
when you were arrived there as a
consultant?

47:50.619 --> 47:55.579
Jim Alexander:
Yes, it was a culture of

47:55.581 --> 48:01.731
innovation that was impressed
upon the organization by Ken

48:01.728 --> 48:04.778
Lay,
because he was trying to avoid

48:04.775 --> 48:08.855
the mindset that was typical of
natural gas pipelines at the

48:08.856 --> 48:11.346
time,
which was very much a monopoly

48:11.351 --> 48:15.061
rate based rate of return,
it doesn't matter if you make

48:15.061 --> 48:18.711
any money kind of a mindset,
and he went way overboard in

48:18.706 --> 48:19.626
reversing that.

48:19.630 --> 48:23.610
Prof: Okay,
was Ken Lay a famous manager,

48:23.610 --> 48:27.330
and was Enron receiving prizes,
for example,

48:27.329 --> 48:29.939
from The Harvard
Business School as the best

48:29.943 --> 48:31.463
run company in the country?

48:31.460 --> 48:34.500
Jim Alexander:
Yes, I've always thought

48:34.503 --> 48:36.823
that--
Prof: Jim is a graduate

48:36.820 --> 48:39.580
of Yale College and HBS,
so we whipsaw him here a

48:39.576 --> 48:40.146
little.

48:40.150 --> 48:42.470
Jim Alexander:
One of those things I've

48:42.465 --> 48:45.585
always thought people ought to
do though is in terms of looking

48:45.585 --> 48:48.605
at industries in decline is to
look at plaudit's from HBS and

48:48.606 --> 48:51.926
the percent of graduates from
HBS going to a given industry.

48:51.929 --> 48:57.149
Prof: Okay,
so the case for Wednesday is

48:57.150 --> 49:00.780
"Innovation
corrupted,"

49:00.782 --> 49:04.852
it's an HBS case,
and it was in that packet of

49:04.851 --> 49:06.651
three which you got a week ago.

49:06.650 --> 49:09.090
Please read it with care.

49:09.090 --> 49:14.610
Jim and I will do this
interrogatively;

49:14.610 --> 49:17.050
we'll sit together and talk it
through, and turn to you

49:17.048 --> 49:19.348
intermittently for help in
solving Enron's dilemmas.

49:19.353 --> 49:22.113
I'd like to meet briefly with
the graduate students who are in

49:22.108 --> 49:23.598
this course at the--at now.

49:23.599 --> 49:28.999