Surviving a shakeout is unpleasant business. The challenge for many companies lies in mastering a conundrum: just as they are reaching a stage when success leads them to systematize management, they need to tear up strategies that served them well in the past. Combined with the tough external environment, internal struggles walking that tightrope manage to sink many firms. Yet success is achievable for the tough-minded.
As industries first begin to gain real traction with customers, a predictable story unfolds. Companies chase after their first customers through offering whatever the buyer needs to close the deal. They put together a full solution to the customer's unscratched itch, leading to what Harvard Professor Clayton Christensen has called an integrated industry architecture. For example, the leading Chinese solar energy firm Yingli Solar prides itself on vertical integration from polysilicon through to a completed module. This sort of integration allows an early mover to provide a high quality and consistent solution to potential buyers.
Alas, an industry's growth brings changes. The initial quality hiccups common in the industry's nascent stages typically fade away, and specialists using proprietary technology, scale seconomies, assets from a parent company (e.g. unused factory capacity, a salesforce, brand, etc.), or other resources tend to build presence in particular links of an industry's "value chain" that leads from raw inputs through to final sales and service. A company may provide the world's finest integrated offering, but many customers will start to prefer the lower-cost alternatives made possible by the modular industry architecture that takes root during this period.
Simultaneously, industry growth leads to a host of new entrants all desperately searching for critical mass. Prices erode, and in some industries with high upfront costs (e.g. solar wafers) capacity gets over-built. A crash ensues. Solar energy may be currently entering such a phase, and we are close to seeing it in e-readers as well (while Amazon's Kindle still leads, there are more than 50 competitors).
To survive a shakeout, companies with the flexibility to adapt to this modular industry structure can choose from a handful of typical plays:
- Most obviously, focus on your competitive advantage. If you have the best technology for a sub-component of an overall process, double down on that investment while starting to partner for other aspects of the offering
- Define market segments not as they are, but as they will be. Oftentimes performance attributes such as cost and convenience will begin to trump focus on quality and reliability as these factors become table stakes for shakeout survivors
- Focus on enabling technologies. While solar module manufacture is getting ugly, there are good margins to be earned in the equipment that makes these modules. Similarly, e-readers are becoming hyper-competitive, but enabling technologies such as E Ink are more attractive (in fact, the company was recently snapped up by a Taiwanese LCD manufacturer)
- Consider services. While every venture capitalist's dream is to fund a high-margin product company that gains scale and wins in a shakeout, most companies do not live this story. Services can be a way to earn money and differentiate products, while providing a long-term path to survival. The services could lie in providing technical expertise, but equally there may be ways to productize a service. For example, Skiff is an interesting platform for re-purposing magazine and newspaper content for e-readers; News Corporation recently acquired it from Hearst
- Dominate a geography. Friendster still lives...in China. Orkut thrives...in Brazil. Even while Facebook cleans up in key developed markets, these orphaned social networks have managed to do well in targeted countries where they can have critical mass. In time the companies could be acquired by a global leader, but equally they can survive in these niches
In 2002 I ran one of the earliest mobile marketing companies, Brainstorm. We were at the epicenter of the industry in London, yet even as start-ups were piling in revenues were very hard won. We had made a living creating integrated mobile solutions -- ad campaigns, ringtone services, you name it -- but the world was changing. I led a wrenching transition that abandoned some of the product lines we were most proud of to focus on a platform for customizing content for the exponentially-growing number of handsets that could support picture messaging and other forms of sophisticated interactivity. The discussions with our VCs were often heated. Yet today the company survives and does well in its niche. It was not a home run for the VCs, but entrepreneurs during a shakeout need to be firmly realistic about the options on the table. Base hits still count toward a good batting average, and they open up options for interesting ways to eventually score.
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"It's a different product. Expenses will outweigh revenue on the product for this time, and some dealers may not want to make the investment." This honest opinion, expressed by the President of the New Jersey Coalition of Automotive Retailers, sums up a key challenge that has been lost in the excitement around electric vehicles. Sales channels are essential to successfully creating new markets, yet they often lack motivation to push new offerings. Their influence can be neglected, but it is massive.
As often happens with new markets, the technology of electric vehicles (EVs) has received tremendous attention. Huge budgets are dedicated to improving battery capacity, charging times, and vehicle weight. The industry is focused on end users' demand, and estimates of their speed of adoption range vastly. In the midst of this hubbub, the comparatively dull endeavor of moving EVs through dealerships seems straightforward. It is not. Channels frequently squelch innovation due to their short-term orientation, focus on costs, inability to train customers, and adherence to traditional business models.
Each of these factors threatens EV take-up. The pay-off from unleashing demand for EVs will come as sales grow in a few years, not immediately. With margins already thin, many dealers will not have that patience. They also may not have the stomach to take on the costs of training staff, financing expensive inventory, and dealing with extensive questions from buyers who may well go back home to ponder the decision before taking the plunge. Their staff may be ill-suited to training customers, and they may calculate that other firms should do the customer education first before the dealer gears up to reap the rewards. To cap it all off, they see their current profits being generated largely through their service operations, and EVs should require less service than internal combustion alternatives. So, why sell a Leaf when you can sell an Altima?
It is easy to hope that dealer resistance will be neutralized by buyer enthusiasm. Certainly that is likely to be true for the very first wave of sales. The customers pre-ordering 20,000 Nissan Leafs did not need dealers to persuade them. But this is a sliver of the market. A huge proportion of customers walk into dealerships uncertain of what they will buy, or whether they will buy at all. As banks, insurance companies, cellular firms, and many others have found, a face-to-face channel can be essential for sales, despite all the channel's inefficiencies. Dedicated EV dealers may help to address some of the initial hurdles, but given the crowded dealer landscape they may struggle to find a long-term customer base.
To circumvent the roadblocks, auto manufacturers will need a multi-threaded strategy that addresses financial concerns, provides staff training, and reaches out directly to end customers like never before. Super Bowl ads are great fun, but they are unlikely to create committed purchasers. BMW's Mini has stood out as one brand that tightly integrates direct marketing with a distinct dealer experience. We shall see if others adapt that playbook.
New products are typically created by enthusiasts who like new technology, and they tend to focus on the technical side of the offering. But ultimately market creation is about sales. If sales channels are not fully on board, they can cause havoc for even the most elegant technical solutions.
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