Definition
One of the most interesting strategic consulting issues we deal with is what we term “Competitive Discontinuity”. By that we mean an external competitive event that turns the existing marketplace upside down and displaces the former market leaders. A current example is the iPad, which appears to be bringing (more) competitive discontinuity to the games console business (Sony, Microsoft Xbox and Nintendo). People weren’t willing to think of the iPad as such an engaging games platform that might replace some games console volume.
Existing market share leaders need to take the actions to anticipate these external events, but this doesn’t necessarily happen. Often they are satisfied that the existing business is thriving. A company in this position might look like:
• Healthy, growing business funded by one particular product line or service that is the golden goose (probably 50+% of total profits and substantially higher gross margin)
• Significant emphasis and spending on innovation, adding line extensions or services, growing new accounts that will add “another leg to the stool” – but not really thinking laterally
• Focus on the few, weaker, direct competitors that contribute to an overall picture that they are winning the market share battle
• Not keeping their eyes on the external competitor who wants to change the rules of competition.
It is incredibly difficult as market leader to keep an eye on potential competitive discontinuities. There are too many distractions, and there is little desire to “eat one’s own” when things appear to be going well. Companies tend to be risk averse. This is when a bit of consulting help can anticipate what might happen and help you do something about it before it is too late.
Case study of doing it right – FedEx
Let’s start with an example of someone who has dealt with competitive continuity well – FedEx. They were/are not perfect, but as they say in business, “If you right more than half the time, you are ahead of the game”. Here’s a broad timeline of the FedX story and some competitive discontinuities:
At FedEx, the golden goose was the overnight delivery business. From its rapid-growth phase in the 1970s, it was maturing in the early 80s. The first competitive discontinuity was the introduction of Zap Mail in 1984. For those of you who don’t remember, this was the idea that FedEx could get you a document same day using a fax machine. The concept of coming up with something better than overnight was correct, but they missed the advent of the home and business fax machine – to the tune of a couple of hundred million dollars invested in this failed enterprise. The rest of us might have made the same mistake, but credit to FedEx for trying. As someone said, “If you don’t fall, you aren’t trying hard enough”.
The second competitive discontinuity was the introduction of their ground service (put aside the fact that they already had freight services) in the early days of internet B2C ecommerce. Again, this was a risk to overnight delivery, but this time FedEx hit it right. Rather than cannibalize the overnight business, they caught the internet wave and extended overnight because of the addition of choice (have it your way – 3-5 day, 2-day or overnight depending on how fast you need it).
The last discontinuity was the purchase of Kinko’s which again had some risk of cannibalizing delivery but instead brought a whole new range of services under the FedEx umbrella. As a result FedEx is a lot more diversified and successful business than before. Willingness to take prudent risks, no sacred cows, lateral thinking – all seem to be among key characteristics of successful enterprises like FedEx.
Here are a couple more examples of famous competitive discontinuities:
• Low-cost airlines – started long ago with Freddie Laker, Texas Air and People’s Express and eventually dominated by Southwest Airlines. These companies rewrote the books on hub-and-spoke flying versus point-to-point, no frills, standardized equipment, etc. etc. Thirty years later, they are still winning. Global carriers never figured out how to effectively compete
• Steel mini-mills – the notion that steel was a scale-driven business died with the mini-mill – smaller and able to process scrap steel. There has been a rebirth of larger mills over the past couple of decades, but one wonders if the original large companies could have figured out how to reinvent themselves.
Dealing with Competitive Discontinuity
The key to anticipating competitive discontinuity is a robust business review with lateral thinking and inquisitive minds. Having diverse talents in the room helps avoid group think and missing potential insights.
At Faculty Partnership we tend to start with the basics – understanding where a business actually is. There must be some unwritten law that says that accounting systems be appropriate for accounting but not necessarily for understanding actual performance from one end of the supply chain to the other. Do this analysis over a 3-5 year period and you will definitely get some insight. We find ourselves doing this often just because a client doesn’t have the time to devote the necessary energy to getting it done. As a result you will usually spot certain business “truisms” – the 20% of your business generating 80% of the profit, the slow decline in the core business, the need to increase business development in order to make the top-line grow, the idiosyncrasies of certain line expense items, etc. etc.
Understanding the lay of the land the team has to start thinking about the things that could really be game changers. Too often managers see this as boilerplate “risk management” scenarios, but this has to be more of a strategic look at all possibilities. Basic marketing segmentation is a good starting point – looking at all aspects of who, where, why, when, how, how much relating to your product/service, competitors’ and potential competitors. Where are the gaps and opportunities?
This stage is what is fascinating about the 2010 iPad introduction. To most it was this tablet product that fits between laptops and personal devices with Amazon Kindle as the relevant competitor. As they do with so many things of late, the Apple team was ahead of the rest of us. Courtesy of Nicole Lee, Sr. Editor of CNET, here is her features comparison from January 2010:
Features Comparison – Amazon Kindle vs. Apple iPad
Source: Nicole Lee, CNET
Buried in here among features is the games discussion – not necessarily a big deal at the time but evidently now a source of major concern to games console makers. How many of you who have seen iPad users at work see them playing games? It’s pretty addictive.
Once you’ve spotted these potential game-changing scenarios, the organization has to kick into gear to figure out what the best strategy is for prosperity. Here is where the passion of a project team comes into play in pushing for the right course. Remember that the top of the organization is often more conservative than the middle, so a cogent, data-driven argument, backed with personal passion is a good starting point for making your case. Bringing competitive discontinuity into the discussion provides an excellent context.
Conclusion
The conclusion is pretty simple. You may need to do things to your own business so you don’t have others do it to you. Good ongoing analytics, understanding of key business drivers, creative/robust lateral thinking – incorporating these things into your everyday business model increases the chance that you will spot the opportunities and risks first.
At the Faculty Partnership, we help clients do this through a consultancy practice delivered by a team of senior leaders from the private and public sectors. Our ethos is the best way to do this is to work intelligently using collaborative and people focused techniques dedicated to providing you a positive return on your investment.
About the author:
Ted Leavitt, Executive Director at Faculty Partnership Ltd, has an eclectic background that in general management, marketing, strategy, entrepreneurial, and M&A spanning large corporations and management consulting to his own start-up company. The common theme is taking these enterprises in new directions via top-line or bottom-line changes whether in the Private or Public Sectors. Ted can be found at Twitter at @inspeer.
