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.