Going Beyond Past Success: Learning to Survive in Changing Markets
My firm gets paid to find patterns in the world. It’s what our clients come to us to help them do, so they can find the stories that work for their brands.
Lately I have been overwhelmed with sightings of a business pattern where leaders focus on the tried and true, and avoid the risks of the new and unproven.
But the context of that activity is deadly when the marketplace is in a state of upheaval and disruptive change. While the details within each industry are different, these events are happening in nearly every mature industry: banking, automotive, advertising, real estate.
B-school students all read Clayton Christensen’s first book: The Innovator’s Dilemma, an analysis of leading companies that go out of business a decade or two later, despite having been run by smart managers who seemingly made all the right decisions. In every case, those industry leaders were disrupted by low cost, low quality innovators. And rather than take steps to experiment with and evolve their own business in response the changing market, the leaders chose to focus on their best strengths until the market was no longer willing to buy those services and they were forced out of business.
How and why does it happen, over and over again?
As Mr. Christensen explains, the people responsible for new products often do propose innovative offerings to explore ways to create new customers. But in every case, the finance department evaluates the best use of investable resources and concludes that investing in well-established, high-margin business produces lots of cash in the near term, whereas new product introductions are unproven and require years of investment before becoming profitable. They chose to invest in their Cash Cows and Rising Stars, the proven categories rather than uncertain growth markets.
A risk-averse culture
A culture of profit-driven decisions sounds smart. And profit is critical–but not as the only strategy, and not if there are other forces at work that make the decision more complicated. If you are the market leader in a mature category, surely some resources can be allocated to R&D and test markets (big companies can’t innovate, but they can set up teams and processes that are somehow separate from the operations and culture of the mother ship).
Christensen shows over and over how market leaders disappear because of their focus on maximal profit and minimal risk. Digital Equipment Corporation. Wang Computers. The entire steel industry. The entire pulley-driven heavy equipment industry.
There has been much discussion and debate about Christensen’s ideas. What I find valuable is the consistency of his work since that first book in 1997, and continued publications that he puts forth with an effort to bring new awareness to industry leaders.
The pattern persists
What I also value is the availability of a well-defined theory to explain what I seem to see all around in business. Currently we are working with a technology firm that serves community banks. The entire community bank industry has been declining since the 1980s and is on track to disappear except for the few (20%?) who have the drive to engage in strategic planning and product innovation. Our challenge as a marketing company is to find ways to communicate this imperative to community banks who as a whole are focused on providing products they understand and expectat that if a branch is opened, customers will come. They must change with the changing market. The skills they will need to change in a disrupted industry will only emerge with a willingness to embrace the challenge. They’ll need to be ready to develop strategic planning processes and skills, and to create a culture of entrepreneurship, risk and innovation. We know they won’t all make it. And it's a pretty good bet that limits on risk-taking will be set by the CFO and decisions will be made to engineer the finances for greater profit–rather than find new customers or develop new products.
Where are we in all of this?
No business manager is exempt from the pace of change and disruption, regardless of industry. I’ve got my own challenges in my business. What are yours?