EMI – advantage lost

This case study examines how, despite an initial tachnological advantage, EMI was unable to sustain its position in the medical equipment industry.

The British firm EMI had long been considered a technology pioneer, having developed the first commercial television system that the British Broadcasting Corporation (BBC) adopted in 1937. EMI had product lines in advanced electronics and in the movie and recording industries, where its success with artists such as the Beatles, the Rolling Stones and other top recording artists put it in a strong financial position as it entered the 1970s. Concerned, though, about the fickle nature of the music business, EMI decided to extend its technological prowess and encourage innovation that might lead to opportunities outside of its current businesses.

Godfrey Hounsfield, an EMI senior research engineer, had been carrying out pattern-recognition research. This research and subsequent clinical work showed that something called computerized axial tomography – (CAT) could generate and display a cross-sectional view of the human body or parts thereof. Hounsfield’s discovery, which was subsequently hailed as the most significant advance in radiology since the X-ray and would go on to win a Nobel prize in 1979, led to EMI’s 1973 entrance into the medical products industry.34 In its first three years, EMI won a 75 per cent share of the global market for scanners, generating £42 million in revenue and £12.5 million in pre-tax profits. The future looked bright.

As the EMI story went on, however, things quickly unravelled. Despite firstmover position in the large and lucrative US radiology market with a cutting-edge product that hospitals needed, and despite patents to protect Hounsfield’s technology, within six years EMI had lost its market leadership position. By year eight, it had dropped out of the business entirely. How could such a promising start have gone so wrong?

Patent protection

EMI secured patents on its technology, but patent protection only covers that which is patented. As we saw with Zantac and Tagamet, where Zantac’s slightly different chemical composition enabled Zantac to go to market despite Tagamet’s earlier patent, EMI’s competitors went to work. General Electric Company (GE), the leading producer of conventional X-ray equipment, began a crash programme to develop a similar scanner, without infringing on EMI’s patents. Others did likewise. By late 1974, competing CAT scanners hit the American market. In 1975, GE announced its CAT scanner, which it began shipping in mid-1976. EMI’s patents had not provided an enduring defence.

Competitors were not only finding their way into the scanner market; they were also finding ways to make improvements in scanner technology. Initially, EMI’s scanners had a speed advantage over its competitors. But competitors’ machines soon leapfrogged EMI’s speed; some could even scan the entire human body, whereas EMI’s scanner scanned only the head. In response, Hounsfield developed a second-generation machine, the CT 5000, which offered improved image resolution and could scan the entire body. Would a better machine save the day?

Organizational capabilities and processes

EMI’s competitors, all established medical equipment makers, enjoyed significant experience manufacturing medical products, had established marketing channel access and capabilities as well as service and support systems, and benefited from an in-depth understanding of the hospital system in the USA, the largest market for scanners. GE, for example, at the time of its scanner introduction in 1976, had a 300-person salesforce and a service network of 1200 people.

EMI had to learn and develop all these capabilities from scratch. The challenge proved too great. EMI, besides lacking sufficient patent protection, lacked the organizational systems, processes and capabilities to compete with its better-established rivals. In 1978–9, plagued by production problems and technical bugs in its scanners, EMI’s performance tumbled and its scanner business lost $23.5 million pre-tax. EMI sued GE for patent infringements, but it was too little, too late. The debacle was so severe that EMI was forced into a merger with Thorn Electrical Industries Ltd in December 1979. Thorn EMI then agreed to settle the lawsuit by selling GE the scanner business for a pittance.

In six short years, EMI had gone from an innovative leader in a huge and growing market to exiting the business entirely. Why?

• Its patent protection proved insufficient.
• It failed to build the necessary organizational processes and capabilities to enable it to compete with its better-established competitors.

EMI had an undisputed advantage at the outset. But it was unable to sustain it.

Lessons learned from EMI

While EMI’s CAT scanner was the first of its kind, the patents it received were not broad enough to ward off imitation. Don’t assume that a patent means protection. Further, EMI lacked the organizational capabilities to remain at the forefront of CAT scanning technology, and its lack of medical marketing and service capabilities put it at a significant disadvantage to its more established competitors. Within six short years, it lost its market leadership, and in eight years it had exited the market entirely.

Thus, entrepreneurs should never assume that their superior, patented product – even one destined to win a Nobel Prize – is sufficient to ensure long-term success. Zantac trumped Tagamet, and GE trumped EMI.

The EMI story is also a poignant reminder that first-mover advantage is often tenuous. Where is VisiCalc, the first spreadsheet software for PCs? Where is Osborne, the first portable PC? Both long gone. Why are Palm Pilots everywhere, while the earlier Apple Newton failed? Why doesn’t anyone use Sinclair or Commodore computers any more? Most often, it takes something more than patent protection, and something more than a product or service that’s new and better, to win in the long term. It takes organizational processes, capabilities and resources that can keep the business at the cutting edge. It takes sustainable advantage.