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 economies, 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:
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.
Story by Steve Wunker.