10 Great Companies That Lost Their Edge

How to avoid three traps that ensnare even breakthrough companies.

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Quick quiz: Name a leading company today that was just as dominant 25 years ago.

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There are a few, but many of the world's top companies in 1985 have foundered, shrunk, grown obsolete, or been acquired by rivals that grew stronger. General Motors and Ford, the world's two biggest carmakers in 1985, spent the last decade in a dizzying tailspin, bleeding cash, losing market share, and struggling to turn themselves around. Venerable industrial firms like ITT restructured and drifted down the Fortune 500, while Wal-Mart, Verizon, banks, and technology firms displaced them. Digital Equipment and Wang Laboratories, once leading computer firms, disappeared completely. Even resurgent titans like Apple and IBM stared into the abyss of irrelevance and made painful changes before clawing their way back to the top.

Most companies, of course, never get to the top, and the few that do find it daunting to stay there. Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business and co-author of The Other Side of Innovation, says successful companies tend to fall into three traps that make the glory days fleeting. First is the physical trap, in which big investments in old systems or equipment prevent the pursuit of fresher, more relevant investments. There's a psychological trap, in which company leaders fixate on what made them successful and fail to notice when something new is displacing it. Then there's the strategic trap, when a company focuses purely on the marketplace of today and fails to anticipate the future. Some unlucky companies manage a trifecta and fall into all three traps.

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With today's rapid technological change, companies rise and fall faster than ever before. The list below represents 10 companies that were once the most innovative in their industry, then lost their edge. It's no Hall of Shame—most of these firms remain able competitors that might innovate their way back to greatness one day. Rather, their stories illustrate the way missed opportunities and tunnel vision can send even a mighty enterprise off-course. The lessons apply to many firms, whether large or small. Here are 10 firms that enjoyed enviable success, followed by unenviable stumbles:

Blockbuster. This video-rental chain survived the transition from VHS to DVD just fine—but then failed to adapt to the next big change. Blockbuster remained flat-footed when Netflix started sending videos through the mail, cable and phone companies started offering video-on-demand, and Redbox started renting videos for a buck a night through vending machines. Now that video streams through computers and phones, Blockbuster's conventional retail outlets seem hopelessly outdated. The firm is closing hundreds of stores, working off debt, and copying some of its competitors' moves, with a fighting chance to catch up. But it's now chasing its industry instead of leading it.

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Dell. Back when IBM and Hewlett-Packard still sold most of their products through stores, Dell had a different idea: Cut out the middleman and sell directly to consumers. When the Internet arrived, Dell took off and competitors got whiplash trying to keep up with its skyrocketing sales. But a decade later, Dell faltered as mobile devices began to displace PCs, cheap Asian machines cut into profitability, and big customers began to demand end-to-end service, not just hardware. Dell has countered with mini-laptops, smartphones, and other trendy products, but it's now following the pack.

Eastman Kodak. For nearly a century, no company commercialized the camera as successfully as Kodak, whose breakthroughs included the Brownie camera in 1900, Kodachrome color film, the handheld movie camera, and the easy-load Instamatic camera. But Kodak's storied run began to end with the advent of digital photography and all the printers, software, file sharing, and third-party apps that Kodak has mostly missed out on. Since the late 1980s, Kodak has tried to expand into pharmaceuticals, memory chips, healthcare imaging, document management, and many other fields, but the magic has never returned. Its stock price is now about 96 percent below the peak it hit in 1997.

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Microsoft. It helped give the PC mass-market appeal, and still dominates much of the software industry. But Microsoft has also fumbled or passed up many great ideas that others capitalized on, like Web TV, E-books, smartphones, and the tablet PC. "Why didn't they commercialize any of this?" Govindarajan asks. "The problem is execution." Sticking to one business line can be risky, especially in an industry as fast-changing as technology. And sure enough, the market is shifting away from the PCs that Microsoft's software is designed for.

Motorola. Its first big success came with car radios, which led to two-way radios, which eventually led Motorola to build and sell the world's first mobile phone. Motorola dominated that business as recently as 2003, when it introduced the trendy Razr, the biggest-selling mobile phone ever at the time. But Motorola failed to focus on smartphones that can handle E-mail and other data, and rapidly lost share to newcomers like Research in Motion, Apple, LG, and Samsung. Motorola was vanquished so swiftly that its cell phone division became a perennial money-loser and the firm announced plans this year to spin it off into a separate company, allowing the core Motorola to focus on networking equipment and a few other areas.

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Sears. Many people still call it the Sears Tower, but Chicago's tallest building is now officially the Willis Tower, named after a British insurance broker that is one of its main tenants. Sears moved out long ago—and also surrendered the spirit associated with such an architectural landmark. In earlier days, Sears put catalogs on the map, sold suburban Americans many of their household belongings, and introduced sturdy, affordable brands like Craftsman and Kenmore. But later in life, Sears stood flat-footed as competitors like Wal-Mart, Target, and Amazon chewed up its turf. Sears has dabbled in insurance, financial services, real estate, Internet service, and many other business lines as it has tried to find its way. Yet it's still looking for a winning strategy, and is now paired with Kmart in a kind of faded-glory holding company. Analysts think a Web strategy might ultimately save the firm as stores continue to vanish.

Sony. Not long ago, the Walkman was as ubiquitous as the iPod is today, and Sony dominated the market for TVs, cameras, video recorders, and many other consumer electronics. But as Sony became a huge conglomerate with film and music divisions, it lost leadership in many of its core product lines. What tripped up Sony and some of its competitors was the move from hardware to software, which put the emphasis on the brains of the device rather than the circuitry. As a result, faster-moving competitors like LG, Samsung, Vizio, Apple, and the various makers of cell phones—which of course come with cameras these days—have outpaced this old-school innovator.

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Sun Microsystems. Lucky timing only lasts so long. This computer startup began building high-end servers just as the computer revolution was revving up, and it foresaw the virtues of networking and universal software that could run on any computer. Its Java programming language, introduced in the mid 90s, became an industry standard just as the Internet arrived, helping make Sun an industry giant by the late 1990s. But the dot-com bust wiped out many of its customers and changed the way companies meet their technology needs. As PCs became more powerful, fewer big customers needed Sun's costly servers, and Sun spent most of the last decade downsizing and retrenching. With Sun's market value just a fraction of what it had once been, Oracle bought the company earlier this year.

Toys "R" Us. This retailer thrived in the '80s and '90s, as its concept for specialty megastores aligned with a surge in American consumption. As it went national, Toys "R" Us drove many competitors out of business and gobbled up others. Then the tables turned, with the once-mighty toy giant suddenly bested by discounters like Wal-Mart and Target, online sites like Amazon, and smaller merchants with better quality and service. Toys "R" Us has been in turnaround mode since 2004, when private investors bought the company. The rehab has involved store closings, layoffs, and downsizing, with the owners hoping a public offering this year or next will help raise cash to pay down debt taken on back when the firm was rapidly expanding.

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Yahoo. When Web search and aggregation were still virgin territory, the pioneering Yahoo tried to charge for services like E-mail and file sharing, while upstart Google offered everything for free. Customers flocked to Google, which surged to a commanding lead in search that it still holds. Yahoo still grew into a huge Web portal, with strong sports, financial, and news coverage that generates billions in advertising revenue, but it also drifted into job-hunting services, video streaming, original entertainment, and other ventures it has since sold or folded. And Yahoo's snub of a $45 billion buyout offer from Microsoft in 2008 now looks like a huge gaffe, since Yahoo's market value has fallen to a scant $19 billion or so. CEO Carol Bartz arrived in 2009 with a mandate to clarify the company's focus and amp up profitability. One of her first moves: a partnership with old suitor Microsoft meant to increase revenue for both firms without the tension of a buyout.