Even B2B companies must focus on consumers, eventually

Why the world’s num­ber four music record com­pa­ny got it wrong, was taken over by its len­der and final­ly sold to its com­pe­ti­tor: EMI’s reti­red CEO tea­ches us two les­sons in how to chan­ge a big company’s stra­te­gy befo­re cla­shing with the ice­berg:  Focus on your cus­to­mers ins­tead of your inter­me­di­a­ries, even in a B2B busi­ness. And second­ly: Trans­for­ma­ti­ons need time – it’s bet­ter to start a small one now than try a big one when it’s too late. 

Lon­don-based EMI used to be the num­ber four record com­pa­ny. Then it got into trou­ble. With lots of dept, it was acqui­red by Citigroup in 2011 and sold on to San­ta-Moni­ca-based Uni­ver­sal Music Group, which its­elf had been acqui­red by Paris-based Viven­di in 2000. Its for­mer chief exe­cu­ti­ve says his big­gest les­son is they should have focu­sed on their cus­to­mers sooner.

Roger Faxon joi­ned EMI in 1994 to head busi­ness deve­lo­p­ment and stra­te­gy. He beca­me chief exe­cu­ti­ve in 2009 and step­ped down at the end of 2012.

As the Finan­cial Times reports, Faxon says one of his big­gest les­sons from EMI is:

Becau­se music exe­cu­ti­ves re­lied on retail and radio inter­me­di­a­ries to tell them what con­su­mers lik­ed, they fai­led to under­stand how cus­to­mer beha­viour was chan­ging – and to chan­ge pro­ducts and ser­vices accord­in­gly. “How many times,” he says, “have you tried to open a CD and said ‘who in God’s name desi­gned this?’ ”

Accord­ing the Faxon, mana­gers at EMI belie­ved that, becau­se they were so big and con­trol­led dis­tri­bu­ti­on for so many records, the chan­ges in the media indus­try could not hurt them.

That was, of cour­se, not so long befo­re they found that the buy-out led by Pri­va­te Equi­ty firm Ter­ra Fir­ma did not work out as plan­ned: The inte­rest char­ge on the money lent by Citigroup sur­pas­sed ear­nings, and the high divi­dends they paid (as expec­ted by share­hol­ders) drai­ned their cash resour­ces. So their money len­der Citigroup bought them. And then sold them on to Vivendi.

A year befo­re the break-up, in 2010, Faxon star­ted to imple­ment his new stra­te­gy, trans­forming EMI into a «glo­bal rights manage­ment» com­pa­ny. The first results see­med to point into the right direc­tion, as repor­ted by the Finan­cial Times:

“The shi­ning light in this thing is that [EMI] deci­ded to real­ly take serious­ly under­stan­ding the con­su­mer,” he says. Its con­su­mer insight team hel­ped launch hits from artists inclu­ding Lady Ante­bel­lum, David Guetta and Tinie Tempah.

But, for EMI, it was alrea­dy too late.

Our les­sons from this are:

1. Focus on your cus­to­mers, even in a B2B business

Even if you are in a B2B busi­ness, you must ack­now­ledge that, if the­re are con­su­mers at the end of the value chain you are a part of, you are in the game for them. So you bet­ter stop igno­ring your con­su­mers and start focu­sing on cus­to­mer needs in the first place. Faxon expli­ci­tly men­ti­ons that EMI exe­cu­ti­ves lis­tened to inter­me­di­a­ries rather than con­su­mers and mis­sed out on the big shifts in their indus­try – and the cor­re­spon­ding stra­te­gic opportunities.

2. Trans­for­ma­ti­ons need time – it’s bet­ter to start a small one now than try a big one when it’s too late

Faxon beca­me CEO in 2009 and, only in June 2010 did he publicly announ­ce his new stra­te­gy. Had EMI star­ted to think about and expe­ri­ment with new busi­ness models around 2000 – the time ever­y­bo­dy, inclu­ding EMI, sued the likes of Naps­ter and its users  – they would have pro­bab­ly found a tried and tes­ted stra­te­gy worth belie­ving in for the key exe­cu­ti­ves a few years later and could have star­ted to exe­cu­te it many years ear­lier. Think about this: Record com­pa­nies sued their cus­to­mers for down­loading music at a time when Apple thought about iTu­nes, which they laun­ched in 2001!

By the way, Faxon is pro­bab­ly going into hig­her edu­ca­ti­on. Reco­gni­se how his les­son app­lies the­re, too?

Update, 8 Febru­a­ry 2013: 

The Finan­cial Times reports that War­ner Music suc­cee­ded in acqui­ring parts of for­mer EMI labels (Par­lo­pho­ne, e.g., the label behind the likes of Cold­play and Pink Floyd) for £487m.