rise from obscurity to market dominance was driven by interwoven hacks. Schwinn studied the market conditions and was able to see demand taking off for two-wheelers. After a massive surge in demand to over a million units, a slowdown actually provided Schwinn with a clever opening. As other companies struggled through the downturn of 1905, Schwinn took the oppositional view and used it as an opportunity to profit from the weakness of his foes. Voraciously gobbling up limping competitors, he built a modern factory enabling him to mass-produce low-cost bikes. While this sounds obvious today, it was a bold and creative move in Schwinn’s pre-World-War-I era.
Innovation continued for decades in all aspects of the business. In 1933, Schwinn Bicycles, now run by Ignaz’s son Frank W. “F. W.” Schwinn, introduced a radically new concept: a bike that looked like a motorcycle. The Aerocycle had chrome fenders, an imitation gas tank, a shiny headlight, and a push-button bell. Instead of milking the company’s cash cow, F. W. and team pioneered into uncharted territory. The Aerocycle, also known as the “cruiser” or “paperboy,” quickly became the industry standard, driving the company to new heights of growth and profitability. Schwinn revolutionized all aspects of the bike, driving major breakthroughs in tires, seating, handlebars, gears, brakes, and design. They were anything but static.
By the 1950s, Schwinn was the industry leader – they not only pioneered new products, they upended traditional distribution approaches. At the time, most bikes were sold to mass retailers and private labeled (a Sears Supreme or a Woolworth’s Racer). Schwinn, taking an opposing approach, insisted their name and guarantee appear on all bikes. In exchange, they sold to a vast network of distributors, ultimately letting the retailers capture far more profit-per-bike than was possible with the entrenched model. Since retailers and distributors made more cash by selling Schwinn bikes than anything else, you can easily guess which ones they recommended most aggressively to customers. Schwinn was at the innovative forefront of bicycle racing, manufacturing, retail and distribution, branding, and product design. Ironically, it was this very success that led to their undoing.
A shift occurred in the subsequent decade, transforming the firm from a company of hackers to one of protectors. The company squandered their energy fighting to raise tariffs on foreign competition, taking their battle to the courtroom instead of the marketplace. In an effort to maximize profits, they squeezed their distribution network and pressured them to dump competitive products. This led to a decade-long battle with the Department of Justice, ending in a gut-wrenching decision by the U. S. Supreme Court finding Schwinn guilty of restraint of trade and unfair trade practices.
It’s easy to think such a shift wouldn’t happen to you, that you’d see it coming and never fall victim to such an obvious trap. But shifts of this nature happen in small increments. They are not launched as company-wide initiatives, complete with t-shirts and battle cries. Instead, they happen one shortsighted decision at a time. Little acts of neglect leading to big holes of eroded value over time. In the same way the frog that enters the warm water, which increases by only one degree in temperature at a time, doesn’t realize what’s happened until it’s too late, Schwinn’s decay went largely unnoticed until the cascading effect of hundreds of bad decisions ultimately led to ruin.
A glimpse of hope shined through with Schwinn’s invention of the Stingray, a bicycle design representing a low-rider motorcycle with a low-slung banana seat and raised handlebars. But the innovation was easily copied and discount competitors walked away with the lion’s share of profits. In the same way the company was built through a succession of innovative hacks, it fell through a string of bureaucratic blunders. Shifting from pioneer to protector, Schwinn largely missed out on or played copycat to new industry trends such as the 10-speed, BMX, and mountain bike crazes. With declining revenue and a void of innovation, the company shifted to cost-cutting mode to salvage near-term profits. Accordingly, they didn’t modernize their manufacturing plants, and in an effort to extract every drop from their products, they ran into combative labor relations issues as they overworked and underpaid employees. Unable to compete, the once high-quality company outsourced all manufacturing to the lowest-cost source they could find in Asia.
The hits continued as Schwinn’s decline accelerated into a free fall of despair. By the time the company filed for bankruptcy in 1992, the brand was a shell of its former self. The company’s name was sold to the highest bidder, a financial firm that cared only about numbers and not a lick about bikes. Predictably, the company was bought and sold several more times over the next two decades, today being an asset of a holding company owned by another holding company.
Stories like this are far too common. Once-great leaders and organizations become intoxicated by their own successes. They fail to adapt, fail to hack, fail to innovate, and then simply fail. In the Harvard Business Review, Martin Reeves defines the ‘Success Trap’ as “Companies that over exploit their current business models yet and fail to explore future growth opportunities.” From Blockbuster Video to Compaq, PanAm Airlines to Oldsmobile, the success trap has been the death knell of hundreds of previous market leaders. For most of us in the business world, this is common sense, even cliché. Common sense, unfortunately, is not always common practice. Leaders fail, and more often than we’d like to think.
Why don’t more organizations embrace hacking as a long-term strategy? “Unfortunately, these firms are rare – most follow a path towards lower exploration and risk falling into the success trap,” explained Reeves, Senior Partner at the Boston Consulting Group and author of Your Strategy Needs Strategy:
Why does this happen to large companies with a legacy of success? Paradoxically, doing so often seems like the right choice. Fine-tuning the established, successful model provides higher immediate rewards at low risk. Over a five-year period, one in three companies makes that mistake. This comes at the cost of lower growth, which jeopardizes the company’s future. Fast forward a few years, and lower growth means fewer interactions with new, demanding customer groups and less inspiration to innovate. Eventually the company is likely to be out of touch with changing market requirements. At that point, it is often too late to course-correct. Once in the trap, it is difficult to escape: seven out of ten fail to leave it in the next five years and get back onto the path of higher exploration.
Hacking mindset #3 – Nothing Is Static – is your primary weapon to fight this trend toward complacency. Hackers understand that the only constant must be our ability to learn, grow, and adapt. They understand that innovation is a continuous process, not a once-a-decade initiative. In these turbulent times, embracing this philosophy is no longer optional; it has become mission-critical to sustainable success.
QUANTITY IS A FORCE MULTIPLIER
As the stock market crumbled in 2007, a loose gang of six Russian hackers were raking in profits. According to federal prosecutors from the U. S. Department of Justice, the hackers “used sophisticated hacking techniques to steal more than 160 million credit and debit card numbers, target more than 800,000 bank accounts, and made off with at least $300 million.” Not only were the targets large in numbers, so were the breach points. The criminals obtained their rewards not through a single infiltration, but by penetrating dozens of retailers, banks, and payment processors. From 7-11, to Nasdaq, to Global Payment Systems, Inc., multiple entry points were exploited.
Unlike a typical heist involving a single devious strike, these attacks occurred over a seven-year period between 2005 and 2012. Due to the massive number of small, individual attacks (estimated in the millions) the crimes went largely unnoticed for years.
In contrast to a typical criminal structure, or commercial enterprise for that matter, the
