Your idea of a novelty robotic toy is sweeping the world. After years of toy making obscurity, people are forming an orderly queue – and sometimes disorderly – to get more of your products in their stores.
What to do? Managing a windfall successfully involves a number of key elements. These, then, are the lessons from the Hogwarts School of Business:
Bring in the harvest: The first rule of windfall economics is that you have to rise to the occasion. Windfalls create huge immediate demand. This has to be met. A windfall quickly hits the buffers if stock isn’t in the shops.
Consider Osborne Computers. In June 1981, Adam Osborne showed off the Osborne 1 computer for the first time. The computer was groundbreaking – it came complete with “bundled” software and, weighing in at 24lbs, was “luggable”. The Osborne 1’s price tag was an alluring $1,795. Sales flooded in. In 1981 8,000 were sold. In 1982, windfall economics kicked in and Osborne sold 110,000 units. The Osborne 1 and Osborne himself seemed to be at the forefront of the technological revolution.
The confident and cheerfully opinionated Osborne appeared to be a man of his times. “From brags to riches” read one magazine headline. It was a fleeting glimpse of what might have been. Osborne couldn’t deliver. The windfall blew over.
During 1982 Osborne Computer reported losses of $8m and there was a 25-month backlog of orders for the Osborne 1. Osborne then announced the imminent arrival of his new model. This ruined the market for the Osborne 1. Osborne Computer Corp declared itself bankrupt in September 1983.
In another example a medical devices company produced a windfall product. This kept arteries from collapsing during heart transplant operations (which killed more people than organ rejection). The demand was immense. So much so that the company failed to keep the top surgeons in world-renowned teaching hospitals supplied. They had to wait in line as supplies were rationed and premium prices charged. The result? Heart surgeons had no loyalty to the company. As soon as an acceptable alternative appeared from a competitor, the most influential customers jumped ship.
Calm euphoria: The second key to windfall economics is to stay calm. This sounds easy but can prove difficult when the phone is red hot with orders, factories are at full capacity and you’re wanted on CNN in 10 minutes.
One of Bloomsbury’s key weapons when it hit the publishing jackpot with Harry Potter was CEO Nigel Newton. Newton was the founder of Bloomsbury. But, crucially, the Californian had acquired the English capacity for downplaying success. He was as likely to trumpet how much money Potter has brought Bloomsbury as he was to fly down the Charing Cross Road on a broomstick – Nimbus 2000 or any other.
Windfalls need ego-management. Getting carried away by the merest scent of success can lead to failure. Corporate history is littered with the broken dreams of people who believed themselves to be on the verge of a windfall.
Pro-actively manage spin off products: The temptation with any windfall is simply to sit tight and count the money as it rolls in. But becoming reactive rather than proactive is a dangerous game. Who, after all, wants to be a one-windfall wonder?
Pro-active management is essential to maximize the windfall effect. Spin-offs, in particular, involve a delicate judgement between market satisfaction and market saturation.
Selecting the best opportunities requires the commercial equivalent of the Hogwarts’ Sorting Hat. Spin-offs can quickly take companies into alien territory. Indeed, sustaining and maximizing the windfall requires that it is repackaged into different media – a best-selling book becomes a movie, a video game, toys and is used to endorse various products. The challenge is to repeat this cycle as long as possible.
Among the most astute of Bloomsbury’s moves was the unusual decision, taken early on, to produce two product lines for the books – one for children and another with a more sophisticated cover for Harry’s adult fans. The insight that adults didn’t want to be seen reading a children’s book was a valuable one.
Manage the brand: In branding terms the trick is to leverage the windfall without becoming identified solely with it – the corporate equivalent of type-casting.
The mold can be broken. Oreo cookies were a windfall for Nabisco but the company retains a strong, separate brand identity; similarly Walt Disney built a family entertainment business on the slender back of Mickey Mouse.
Invest in the future: With cash pouring in, windfall businesses no longer have to worry about short-term cash flow. They can then either find new ways to spend the money – palatial new headquarters and a corporate jet – or build for the future.
Again Bloomsbury provides a useful example. Armed with its Potter windfall, Bloomsbury could have sought out the world’s best-selling novelists and tempted them with large advances. It did not. One of Bloomsbury’s strengths has been in identifying new authors, such as Michael Ondaatje (The English Patient),
David Guterson (Snow Falling on Cedars) and JK Rowling, rather than bidding for established stars. Bloomsbury sought to add stability to its business portfolio by investing in some of the hardy perennials of publishing. It bought A&C Black, publisher of Who’s Who, Black’s Medical Dictionary and the Blue Guide travel books among other things. This is a steady traditional business with in excess of 70 percent of sales coming from existing customers renewing orders or buying from the backlist. Bloomsbury also moved into reference works to offset what would otherwise have been a lop-sided portfolio.
Stick to the knitting: If a widget-maker stumbles on a windfall product that isn’t a widget there is the temptation to abandon widgets altogether. But the shrewd beneficiary of a windfall does not re-organize around the successful product. It does not instantly abandon its core business. Instead, it seeks to manage the windfall as best it can while using the proceeds to nurture its competencies and core markets.
Think of Polaroid with instant photography, Xerox with the copier, IBM with the 360 series and Apple with the Apple Mac. In these cases the company developed a new product that came to dominate the industry. Seduced by their windfall, the companies then tried to reconfigure their entire operations around the windfall. IBM, for example, built specialized component production facilities to feed the 360 system and moved from being a systems integrator to manufacturer. After the success of the Mac, Apple replicated the manufacturing layout and new product development process for every subsequent process.
In the 1980s the media company Thomson invested in North Sea oil and reaped a windfall. Crucially, however, Thomson wasn’t seduced by the easy money. It recognized that the windfall was just that – a short-term source of profit. It didn’t try to become an oil company by plowing the profits back into the oil business. Instead, Thomson executives recognized the cash flows from the oil would not last forever and redeployed the cash flows to finance acquisitions of businesses in specialized information which they saw as the company’s future. They were also ready to sell the oil business when they got a good enough bid. There was no emotional attachment.
Manage the human harvest: Windfalls create stars. Managing stars often means offering them a substantial part of the windfall. JK Rowling, for example, retained the movie rights to Harry Potter as well as various other licences.
In many industries repeating the initial success is often elusive. Diminishing returns can easily set in. Keeping people motivated internally is also a substantial challenge. The windfall company needs to make everyone feel that they are a part of the success. Whatever actions are being taken for those who are directly part of the windfall should also be taken for those who are not.
Learn from other windfalls: Many a runaway success hit the buffers because the driver became intoxicated with his or her own success. When windfalls occur, hubris is never far away. Yet remaining connected with the terra firma is tough when your feet don’t touch the ground. Success breeds confidence and that can easily turn to arrogance. Mastery of windfall economics requires a solid knowledge of the business but also the humility to recognize your good fortune when a windfall lands in your lap.
As Bloomsbury’s Nigel Newton observed: “Great publishing is about taste, judgment, marketing, business acumen and good luck. The greatest of these is good luck.” Some, of course, would prefer to see it as wizardry.
DD Everest, Archie Greene and the Magician’s Secret, Faber, 2014
This was originally published in What we mean when we talk about innovation by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).