Written by Costas Papaikonomou
The following story is true for any business enviroment, whether it's CPG/FMCG, B2B, services, software, anything. It is most true for industry leaders. This is about your bread & butter having become a commodity and you being on your way out of business.
When you lose on price, you are in fact experiencing the consequence of something that happened much earlier and you're probably in even more trouble than you are aware of. What may appear like a stroke of bad luck could well be the sign of a deeper, more structural problem.
Of course, Blue Ocean Strategy and The Innovator's Dilemma have covered similar territory (read the books, they're great). Yet I wonder if there's not another side to their story. Imagine the following snapshot - or re-live it because there's a significant chance you've already experienced it 'live'.
One of your customers has chosen to switch to a competitor's product, effectively taking a large chunk of your business away. A chat in the hallway of your company may then well sound like this:
A: Dude, why the long face? What's happening with that big [client] contract I heard you were bidding for?
B: Not good, it's over. I just heard we lost to [competitor]. A damn disgrace after 5 years of good business with [client].
A: What, you mean [competitor]? The amateurs who've been knocking off bad copies of our [product]?
B: Yes, the &*$)$@£ b**tards undercut our proposal by almost 40%. There was no way we could match that.
A: But their quality is appalling! I thought [client] was anal about quality?
B: They were, but not this time.
A: Surely that will get them in trouble, there's no way [competitor] can produce anything close to our standards. Our quality is FAR better, make that GALACTICALLY better than theirs.
B: I know, I know. Of course [client] will be back in six months, but that's still a lot of revenue gone. Not to mention my bonus.
A: Yeah, they'll be back. You just wait 'till they've really experienced the importance of quality when it comes to [product].
Feel free to insert you own favourites for [client], [competitor] and [product]. What has gone so wrong for these poor people? What to do now? Well, depending on who you are (or whom you ask), you may be considering one of the following:
- You're confident [client] will come back soon, so you'll just lower capacity for 6 months, fire some folks in manufacturing and wait.
- You consider manufacturing more effeciently, invest more in Six Sigma, Lean and DFE to get that cost down.
- You'd rather lower your margin to keep the business, shareholders never have enough anyway.
- You could lower your quality standards and simplify your manufacturing process.
- You now have time to improve quality even further, making [client] return even sooner.
- You spend the next twelve months planning a hostile takeover of [competitor].
- You put your R&D at work to develop [product]-LIGHT, the cheap alternative.
- You'll take [competitor] to court for infringing copyrights or patents.
There are many more things you could do, the problem is none of them will do you much good unless you start repairing some of the damage done way before you lost this contract. So here's another way of looking at the situation, which highlights your real problem.
Imagine you are now [competitor] and you're celebrating your first win over the industry leader. You proudly stroll through your rickety old factory where you've been knocking off countless copies for years, shaking hands as you go around. What are you going to do with this new revenue stream you've just secured?
- Buy a Ferrari, build an extension to your condo and finally take that holiday to the Bahamas.
- Invest in new machinery and get rid of the old crap you used to call assets.
- Put a quality control system in place, because you know [client] can be a little anal.
- Hire a colleague for your lonely engineer and get them to work on [product] v2.0.
- Hire a production manager, a marketeer and a sales director, to free up your time for chasing more [client]s.
Obviously everyone should do something fun and silly like that first point, but as long as they back it up by one or more of the others they can only win. They simply re-invest. They are on the first step of a tricky (but rewarding) road past the original industry leader(s). They already know how do produce efficiently, they're not burdened by the hassle of developing from scratch and they operate in a mature market well developed by the leaders. According to Blue Ocean Strategy that was a bad place to be... well, that's not so true if you're the underdog. There's a wonderful example in this Dutch newspaper article from June '09 about Chongquing (©2009 NRC). As one of China's new megacities, it has a population of 32 million, of which 100,000 are entrepeneurs. The article covers two stories, one is that of mr Yin Mingshan. He started is motorcylce business Hongda (yes, he had nerve) in the 1980's, knocking off copies of indeed, Honda. His break came in the early nineties, when he was allowed to export out of China. Soon Africa and the Middle East were all buying his cheap motorcycles. This allowed him to upgrade and move up into manufacturing cars. Now, he's investing in factories in Peru, Algeria and Iran. He's developing his first hybrid and he's attracting foreign investors, including Americans.
Now this is not a pamflet to promote counterfeit products. The point is that when enough businesses start copying the success of an industry leader, legally or illegally, at some point some will be smart enough to surpass the original. Look around and see how virtually all current industry leaders started as the underdog. Whether it's Google, Reckitt Benckiser, the iPod+iTunes, mr Mingshan's Hongda or the whole of Japan, they all started in mature markets with big industry leaders. But without the burden of having to invent a wheel.
So where does that leave the current industry leaders? Is there no hope? Up in the ivory tower of quality premium goods, looking down onto the bogs of low-cost copy-cats, they can become overly concerned about keeping the tower intact. That is indeed hopeless. The trick is to realize how to modify the tower.
Firstly, you can make your tower taller. Evolutionary innovation. Easy and rational as that may sound, many brands and businesses get this as wrong as the example at the top of this page and end up losing to [competitor]. Evolutionary development is usually not about making your product better at what it already does, the performance or quality pitfall. After a couple ofyears, it's probably good enough already. Nor is evolutionary innovation about adding feature upon feature. This is 'The Innovator's Dilemma': are 7-in-1 dishwasher tablets really 7x better? Your market probably likes the features already. Good evolutionary innovation is about adapting your features to the changes in your market, acknowledging shifting contexts and making small tweaks to accomodate for them. This requires patience and restraint, simply not to run ahead of your market's needs. Like the athlete Sergey Bubka, who beat the pole vaulting world record by a centimeter at a time, for 35 centimeters. He could leapt it all in one go, but then his sponsor would only have paid him once.
Secondly, you can add branches to your tower: brand stretching or line extensions. This is trickier than the previous as you have an even bigger risk of running ahead and losing connection to your core brand or product, alienating the market that loves your product. There are plenty of reasons imaginable for branching out, though it makes more sense to aim for a new group of users rather than the friends you already have. Keep friends with the small incremental evolutions from the previous paragraph.
Thirdly, you can exploit the view and look for other towers. Game changers. New markets where your proposition would in fact be the underdog, but one that can provide a smart solution to conundrums your original market has already dealt with. Mature markets with a flaw they weren't aware of, yet. Most often the flaw is a poor price/quality ratio, which is exactly what [competitor] is doing to your business right now. The many examples from Blue Ocean Strategy (Yellow Tail, Southwest) play this key conundrum. The oceans are blue but not empty (a common misunderstanding), entering these will almost always involve tearing down competing towers.
Last but not least, you can create a new market and a new business, with all its opportunities and risks. That's probably happening in a shed next door to your company right now and unless it's your own skunkworks, there's really nothing you can do. Choose one of the other three first.
In the end it's quite simple - when others start moving IN, you need to plan moving ON, or they will catch up with you.
©2009 Costas Papaikonomou