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The One Year, Thirty Minute Challenge :: Week 34 :: Strategic Planning :: Creative Destruction

Someone else would like to take your customers. Any time an industry, company, product or service attracts a crowd (and the revenue the crowd generates), there will be host of fast followers who show up and try to siphon off some of that revenue for themselves or try to grow the size of the market so they can have a piece of the market share and revenue.

Those fast followers have a few options – create a better version of the original product or service, create a cheaper version of the product or service, create a product or service that is complimentary to the original product or service or re-solve the original problem in a radically different way – rendering the original product or service obsolete.

Let’s illustrate with personally curated portable music. For years, portable music took the form of radio. Other than choosing a station that played the genre of music you liked, you were unable to curate your own listening. Then, in the mid-1960s, Bill Lear (of Learjet fame) invented the 8-track tape player (I had one in my first two cars). You were able to choose albums produced by your favorite artists. It was subsequently replaced by cassettes (again complete albums), then CDs (still complete albums), then downloadable digital songs (on iPods and similar MP3 devices) and now streaming online music (the latest two both offer choices of mingling genres, albums and individual songs). Each of these successor technologies destroyed the commercial viability of the previous technology. Companies that failed to embrace the successor technology became irrelevant and, in some cases, closed their doors.

Recent history is loaded with companies that failed to re-invent their value creation proposition and paid the price – Blockbuster, Kodak, Polaroid, MySpace, Yahoo, Blackberry – just to name a few. These all have a tech component but there are plenty of non-tech related companies that have failed to remake their value creation activities – Toys R’ Us, Sears, Radio Shack, Borders, Circuit City.

Joseph Schumpeter popularized the term “creative destruction’ in his 1942 book Capitalism, Socialism and Democracy. According to Schumpeter, the “gale of creative destruction” is the “process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. This is what makes capitalism an engine for creating wealth for those who identify a problem and find a commercially viable solution to that problem. At the very same time, those who cling to solutions that are no longer commercially viable will find their ability to create wealth wiped out.

Let’s jump into this week’s One Year, Thirty Minute Challenge. I have three goals for this week’s exercise –

  • I want you to examine your value creation activities for your existing product or service.
  • I want you to ponder successor products for your existing products or services.
  • I want you to examine the competitive landscape for someone who is introducing a product or service that poses a threat to your existing products or services.

Value Creation for your Existing Product or Service

Your existing product or service might be in demand and effectively solving a customer’s problem. That’s great. But what if a competitor could introduce a similar product, but at half the price due to a new manufacturing technology? Not all creative destruction means retiring or remaking an existing product or service. It might mean destroying and remaking the methodology for creating or delivering your product. Are there new technologies, new contract manufacturers, new materials or even streamlined processes that would allow you to manufacture your product or service faster, with higher quality or cheaper? Are there new delivery channels or options that would allow you to get your product or service in the customer’s hands faster, cheaper or with a better customer experience?

Successor Products or Services

When you’re pondering creative destruction, the goal is not always a better mouse trap. Before cars were introduced, people just wanted faster horses. They never envisioned a “horseless carriage”. You’re after a better solution to the problem you’re solving for your customers – think digital camera vs traditional film or Netflix vs Blockbuster. Is there a better way to solve the same problem for your customers? Can you piggyback on other infrastructures or technologies? Can you partner with another company to create something that neither company could do on their own? Is there a methodology from another industry that’s never been used in your industry, but could be leveraged to solve your customer’s problem?

Surveying the Competitive Landscape

The worst place to be in the world of creative destruction is behind the curve. Someone else has already solved your customer’s problem in a better way and they’re already eating into your customer base. The early adopters have switched to the competitor’s product or service and it appears to be going well. One quick warning – the scrapheap of failed businesses is primarily populated by companies who got to this point and stuck their head in the sand – “Nobody wants a computer in their house”, “The internet is just a fad”, “People want real pictures they can hold in their hands”. Don’t be that company. Take competitive threats seriously. So, what do you do as you survey the landscape? If you’re still strong and the successor product is just getting out of the gate, they might be an acquisition target. In the right circumstances, you might be able to buy them outright. If they’re undercapitalized, they might need some cash to grow and you might be able to buy a significant stake and ride the elevator up with them. In other cases, you might be able to create a competitive product and leverage your brand, bigger war chest and existing customer base to beat back the new entrant.

The big idea in this week’s exercise is to never be lulled into complacency. Great companies earn it every time they go into the marketplace. They reexamine their products, services and delivery methodologies to make sure they are always solving the customer’s problem in the best way possible.

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