Here is an interesting list. Cirque du Soleil, McDonald’s, Amazon, Southwest Airlines, Dell and Netflix. Can you guess what common thread connects them? Each one invented a new business model that destroyed long established competitors.
Cirque du Soleil used to be a struggling traditional European 3-ring circus business before they reinvented themselves into the Las Vegas phenomenon you see today, and forever changing how we think of a circus.
Amazon destroyed the brick-and-mortar book sellers like Borders and Barnes & Noble by conveniently delivering books first online and then in an electronic format on their inexpensive Kindle e-reader.
Netflix did something similar in the movie (DVD) business when it invented a new way of delivering movies by mail (and ultimately by streaming) movie content to people’s homes. This, of course, was debilitating to brick-and mortar distributor Blockbuster.
Dell caused mighty IBM to fail in the computer business (ultimately selling off their struggling computer assets to Lenovo) and for HP’s margins in the computer business to drop by nearly half over four years. (HP ultimately acquired Compaq and cut nearly a billion dollars in people and facilities over the next three years as it struggled to find synergies in their PC business.) Dell did this by inventing a new format (mass-customization instead of mass-production) and new way of selling (direct to users instead of through an expensive network of warehouses mass-merchandisers and computer shops.)
Another upstart, Southwest Airlines, created a new low-cost airline model with its point-to-point network, simplified flight ops format, and single airplane model, that ultimately drove most legacy air carriers into bankruptcy.
Next, there was McDonald’s that revolutionized the way Americans eat on the run as they invented the “fast food” industry. If you don’t remember the story, Ray Kroc was a 58-year-old salesman of multiple-spindle milk shake mixers (sold normally to soda fountains and ice cream parlors). In 1954 he got an order for 8 units from one new customer. Curious, he went to San Bernardino California to witness what Dick and Mac McDonald had created — arguably the first super-efficient fast food concept restaurant in America. When he visited, Kroc saw something the McDonald’s brothers probably did not . . . that this was an idea Americans everywhere would fall in love with. He saw that this was an idea that had scope, and was scalable. He bought out the brothers and proceeded to create the hamburger giant we know today, helping launch the $120B QSR (quick service restaurant) industry food segment.
If you think about it, at the instant in time when Kroc had his flash of insight that made him want to develop this new idea, he effectively sealed the fate on tens of thousands of small sandwich shops, diners, drive-in’s, lunch counters, and soda fountains who continued to provide their brand of “slow food” at higher prices. My guess is that lots of these business owners lost their homes and their “family fortunes” as their sales gradually declined over time. My bet is that most of them didn’t see it coming.
Here is another interesting example described by Jeremy Gutsche of the decline and fall another of an iconic company known the world over —
What is interesting to me about all these examples is WHY it is that these new entrepreneurs could see the way to create their new business models and the people in long-established companies couldn’t? Think about it, the companies that were destroyed were well established, had strong and well-regarded brands, had extensive experience, were well-funded, and had every reason to remain on-top of their respective industries . . . but didn’t. These upstarts should never have succeeded against all odds . . . but did. Here are at least some of the reasons I see:
Arrogance. Sometimes I think the worst thing you can be is successful. It breeds both complacency and arrogance. You start to believe your own press clippings and can turn a blind eye on what’s happening right in front of you. Who was Michael Dell? He was a virtual nobody, with no real expertise in the PC business at all. While a freshman pre-med student at the University of Texas at Austin, Dell started an informal business putting together and selling upgrade kits for personal computers to make some extra money in his room of the Dobie Center residence hall. Can you imagine any reason why seasoned execs at IBM or HP would fear anything that this guy dreamed up? I bet they dismissed him as some fringe lunatic right up until the time their sales fell off.
Failing to Recognize that Every Strategy Has an Achilles Heel. Even mythology teaches that it is possible to have a deadly weakness in spite of one’s overall strength and it can actually or potentially lead to downfall. IBM, Compaq and HP all had committed themselves to a mass production strategy. In their ideal world they saw that limited product offerings, sold in high volumes with few options, no engineering changes, and a sales system that kept pushing inventory into the distribution channels was a potential path to lower costs and higher quality. Their strategic bias is to automate facilities, and vertically integrate (IBM, for example made its own integrated circuits). While this strategy had merit, as they walked down this path, the companies became more inflexible, and prone to argue against any diversification that did not fit the business model to which they had now committed themselves. Failing to recognize this truth (see “Arrogance” above), can have dire consequences.
The Lack of Willingness to Fail. We like being good at things like being the best typewriter company in the world. We build our careers on it. That’s how we get promoted, earn large bonuses, and make our share price go up. Our past success breeds an unwillingness to branch out into things that are new, that we aren’t as good at, or might fail at. These things cost money, harm quarterly results, and can cause personal embarrassment. So we mostly have a bias to stay with what we know best. Growth often comes from failures. These crucible events teach us and propel us to adapt and strive for more. Think about all of the things America developed the ability to do, only after a stunning failure in preparedness at Pearl Harbor in 1941? While we don’t like it, failure is an awesome catalyst for change.
Defining Their World Too Narrowly. Harvard’s Michael Porter argues this is the most common strategy mistake companies make. They don’t define themselves correctly. Usually they choose too narrow a definition and thus preclude themselves from seeing the changing world with a broad enough lens. If Borders saw themselves as a “provider of book content” rather than as a “bookstore”, they would have been more likely to recognize the looming threat from Amazon. As you saw in the Smith Corona story, they saw themselves as the best typewriter company in the world. Even a slightly broader mandate to be the best at processing human thoughts, or facilitating communications might have made them reach out to consider other related computing technologies.
. . . So my best advice is that you check your egos at the door, and have the courage to consider a longer time horizon. Start with the premise that whatever way you think about your business . . . you just might be wrong!