The economist Joseph Schumpeter is famous for saying that capitalism is a process of creative destruction. Actually I think the concept goes back to Karl Marx. The point is essentially that in a free society, human ingenuity will lead to new products, services, and ideas. Many, if not most, of these novelties will die, but many won’t, and eventually they overtake the products, services, and ideas of existing companies and organizations.
Just last week, Publicis and Omnicom, two of the largest advertising firms in the world, decided to merge in order to fight off the aggressive inroads of Google, Facebook, and other tech companies that provide highly variegated yet precision information to advertisers. The ability to gather detailed data on the habits and preferences of individuals can be transformed into precision-strike ads for their screens. The same process is occurring in digital cameras. According to the Wall Street Journal, sales of low-end point-and-click digital cameras by Japanese manufacturers are down about 45% in the last year. This is obviously due to the inclusion of still and video camera capabilities in smart phones, along with the ability to upload and transfer the images immediately.
But it’s not just new products and services that can be disruptive to incumbents. One of my clients has been facing a downturn in purchasing in its industry for close to five years now, with little end in sight to the belt-tightening. An acquaintance of mine in a completely unrelated industry is facing lengthening timelines on payment, with very large clients squeezing their suppliers and forcing them to finance their cash flow. A former client is in the financial industry. She works for a very profitable and growing company that is cutting budgets in order to increase profits and hoard cash. Finally, several insurance executives have told me that continued low interest rates have a major impact on the profitability of their business. All of these phenomena impact on business just as much as new competitors, substitute products, or new technologies.
We have to be constantly ready to recreate and reinvent ourselves whether things are going well or going poorly. Obviously, it’s best to make our own products, processes, and services obsolete before others do, especially when we have the wherewithal to do so. But it’s all the more important when in difficulty. IBM is one of the most successful at this process of reinvention over the decades. Throughout this evolution, IBM always built on its existing businesses and expertise in order to transition to new capabilities and markets. Meanwhile, companies like Dell and HP, while making significant gains in IT services, are struggling with their large dependence on hardware, particularly desktop computers.
How does a company make the transition from current business to future business? This is not an easy process, but there are a few principles that can guide in the evolution:
• Build on successes and strengths. This is what IBM has done well over the years. Google is also masterful at offering new products and services that build on dominance, for example, the Android operating system, which incorporates features and usability that exploit its dominance in search and precision-strike advertising.
• Proceed by trial and error. Google exemplifies this principle, with its constant experimentation, innovation, and extension of existing concepts and services. Most of the company’s innovation is generated as a result of private initiatives that compete internally for investment and reinforcement.
• Reward and reinforce individual initiative. Revolution and evolution from above rarely if ever work. They are inherently unpredictable and percolate from the bottom up.
• Stop what isn’t working. Obviously, we have to be persistent when something doesn’t work at first, but there comes a time when we have to ask ourselves if further investment in time, energy, and money will lead to growth of the initiative. A rule of thumb I use is that an initiative has to show at least some level of success when it is first mooted. For instance, if I introduce a new service as a consultant and nothing happens, then that is a good indication that it won’t work, no matter how much energy and resources I pour into it. On the other hand, any interest, no matter how small, shows at least some potential that can be built upon.
• Revive and resuscitate. The Newton was Apple’s first attempt at a handheld computer, but it never really took off. Despite that, the company learned a lot from the experience. When technology evolved to the point that the concept could be explored anew, it led eventually to the iPad.
• Offer new products and services to existing customers. This may be obvious, but I find that companies often put themselves through agonies to develop completely new products for markets that they’ve never touched before. This is very risky, as there is not only the risk associated with new products and everything that can entail in terms of suppliers, operations, distribution channels, marketing and advertising, but then you have to enter a market that you have very little knowledge of. You’re doubling the risk but no necessarily the reward potential.
I could go on with this list, but the point is to be willing to explore new possibilities. This entails accepting that your best successes and strengths of the past and present may not continue on into the future. We should all be constantly questioning our assumptions. This is something that I learned in my 26-year military career, and as a student of military and business history. All successes eventually become the source of a downfall, unless they are used as a springboard to continuous evolution and revolution.
Richard Martin is a consultant, speaker, and executive coach. He brings his military and business leadership and management experience to bear for executives and organizations seeking to exploit change, maximize opportunity, and minimize risk.
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