On the Origin of Companies
When published, in November 1859, “On the Origin of Species” stunned a bewildered and reluctant public with its audacious claim: Life was not created in its present form but is a result of gradual evolution. In the book Charles Darwin described a natural selection process favoring individuals and species who, due to a lucky collection of redeeming features, were better suited to their environment than less fortunate peers. Being a product of a harsh yet practical Victorian upbringing Darwin aptly termed it: The survival of the fittest.
By comparison, the concept of survival of the fittest in the corporate world is much less mysterious or controversial. Neither is it governed by chance alone. Companies who choose to act decisively, can adapt to shifting business environments at will. They innovate.
Similarly to the natural world, weaker and ill-suited companies will prosper during good times, roaming the markets, making profits and gathering fat. But as clouds loom over the horizons, the difference between the strong and the weak companies emerge. They differ in their culture, openness to change and new ideas. Their processes and ability to drive innovation and validate assumptions. And most importantly by strategy. The ability to provide and drive a coherent message and make painful choices.
Choice, in particular, is a double edge sword. A wrong choice can prove more damaging than doing nothing at all. Fortunately, companies have excellent methodologies at their disposal, to safeguard them from such harm. In this post I will explain how the disruptibility curve, described in my previous blog posts, could be used for the same purpose.
If you read my previous posts, you can look away now (or rather skip to the next paragraph). The disruptibility curve maps a company on two axes: The Natural Monopoly and the Customer responsiveness. Though it may appear crude, the confluence of these parameters plots the company strategic power. The Natural monopoly axis measures the degree of which a company is shielded from competition. This could be the product of regulations, strong brand, unique service offering, relationship, channels etc. Customer responsiveness measures the degree of unique value provided to customers. Being strong on one axis alone is a sufficient, though unimaginative, survival strategy. Most companies combine some strengths over both axes. Thus, as elaborated in the previous post, a company should strive to remain above the equilibrium curve, which runs reverse diagonally through the graph. (See more here)
But as the business environment changes, the solid position a company was holding could begin to wobble. New technologies, competitors, regulations and social trends have a nasty habit of diminishing competitive advantages so laboriously accumulated. To survive, companies must remain vigilant and continuously assess the impact of the changes: How will they affect the company’s Natural Monopoly, and Consumer Responsiveness? It should be noted that the measures are in relative terms: an entry of a more customer responsive competitor, for example, will erode the company’s score.
As an illustrative demonstration of this method, consider a run-down-the mill fashion retailer. The advance of web retailing has been detrimental to the company’s business model. Being an intermediate between manufacturers and consumers, its main strengths as an incumbent retailer were its relationships with suppliers, its assets (shops), cost structure and knowledge of the consumers. (see illustration above for lever of Natural Monopoly). Web retailers hit them on almost every point. To add insult to injury, web retailers beat the incumbents in most coveted customer responsiveness scores as well. (levers for Customer responsiveness are also provided in the illustration). They offer superior pricing, choice and convenience. If our traditional retailer made this analysis back in, say, 2004, when web retailing was still in its infancy, it should have recognized that it’s disruptibilty score, was, well, disrupted. (See in the illustration below)
How should this traditional retailers respond? There are many options (Not least, joining the league of webshops), but for the sake of the argument, let’s concentrate on just two.
Option 1: Fight on price: Scale down fanciness, Optimal use of floor space, More stock at store, Less staff
Option 2: Double down: Focus on ‘Experience’, Fancier stores, Less choice, Professional staff and stylist advice in store
Note again that the analysis is mainly speculative. Assume that option 1 makes small improvement on Natural Monopoly (improved cost structure) which is mostly passed to consumers. Hence also small improvement to Customer Responsiveness. Option 2 on the other hand, improves customer responsiveness on vanity and action points. It also improves the Natural Monopoly score for processes, Insight and promotion. While option 2 is clearly riskier, it offers a potential of remaining competitive. Option 1, based on this analysis only delays the inevitable.
Needless to say that several such companies chose option 1 at their peril.
Similar consideration should assist companies choosing between different innovation project, providing insight whether the innovation improves the company overall prospect away from the maligned red ocean competition and into blue skies.
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