If manage a design firm, ad agency, or web development firm and you haven’t read The Innovator’s Dilemma by Clayton M. Christensen you should. The process described in the book by which small companies are able to not only compete against much larger companies but also put them out of business can also be applied to your industry.
Here’s a synopsis of how it works:
Company A does design work for small clients. As time goes on, they find that it’s more profitable and less stressful to do work for larger clients, and so they focus on “quality not quantity” and try to win larger and larger accounts and they achieve a certain amount of success.
Enter Company B. Company B creates a process by which custom design can be done in large quantities for 10-25% of the cost of Company A. However, the quality is also about 10-25%. Company A sees that Company B is taking business from them, but they are not worried because those are the smaller clients they don’t really want anyway. Company A continues focusing on the larger and ever more profitable clients at the upper end of the spectrum, which is exactly what they should do. After all, that’s where the money is and the work is more enjoyable and it’s the kind for which you win prestigious awards.
As time goes on Company B starts improving the quality of their work, as well as refining their processes and adding more ancillary services, and as a result they start taking more of the market away from Company A. But that’s fine with Company A because they are moving up in the world and taking on ever larger accounts, accounts that will never want to go with the high-quantity, no personal attention, no in-depth strategy type of company that Company B is.
But then it all catches up to Company A at once. Suddenly their clients say to themselves “Wait a second…we’re paying Company A $50K to do something that Company B says they can do for $5K, and the past work Company B has done doesn’t look all that bad. Why don’t we try them out and maybe we’ll save $45K? If not, no biggie, we only spent $5K and we can still go to Company A.”
All of a sudden Company A is losing the big clients they thought they would never lose, and because they’ve spent the past five years building a company around big clients with big budgets there is no way they can compete against Company B that has an entirely different business model nor can they change their model fast enough to avoid going out of business.
If there is a voice in your head saying “Well yeah, but that can’t really happen to my firm, I just don’t see it happening” then I’d take a closer look because that’s what other large companies that are now extinct also thought.
Now the thing that is truly different is the industry about which the book was written. The Innovator’s Dilemma is specifically about the technology industry, which is a product-oriented industry as opposed to a service industry like design, and which progresses extremely rapidly as opposed to most other industries. Perhaps you can dismiss the theory of The Innovator’s Dilemma by saying that it doesn’t apply because of those differences. But then again, maybe it does apply, and maybe the process I described is happening right now.
Take www.logoworks.com for example. They target small businesses that need a new logo. Through a web-based system designers on one end are connected with clients on the other end. The client submits information to help the designers get started, and 2-3 designers start working. The designer whose logo design is chosen gets paid more than the other designers, so there is a competitive atmosphere that benefits the client.
Many of the logos that LogoWorks puts out would be scoffed at by high-end design firms. However, the quality of LogoWorks has been increasing steadily over the years, and now they are designing websites too, and while I haven’t seen many I’ve seen some that are pretty ok, especially considering the low price tag.
Is IBM going to rebrand themselves by going to LogoWorks? What about Coca-Cola when they release a new product? It seems highly unlikely. But there are a limited number of those types of clients. What about your clients? Who did you do work for during the past year? Now be honest and ask yourself how many of those clients could have had their needs/wants met by a company like LogoWorks? My firm has clients that are quite large, established companies generating tens of millions in revenue per year that I believe would not hesitate to use a company like LogoWorks and would likely be satisfied with the quality. I have other clients that come to me with such small projects that are a distraction from bigger clients to the point where I’m just about ready to tell them to go use LogoWorks.
Am I worried that LogoWorks is going to put me out of business next year? No. Are there some services that cannot be provided any other way than under a traditional agency model? Certainly. Am I worried that between LogoWorks and ten other types of companies I might start feeling the squeeze to the point where I need to adapt and perhaps try and create a new business model for myself? Yes, I have those types of thoughts going through my mind.
And that’s where The Innovator’s Solution comes in. Christensen wrote this book to answer the question he posed when he introduced us to the dilemma. And what is the solution? To sum up, the solution is to put yourself out of business.
But isn’t going out of business a bad thing? Seems like it, but IBM has done it several times not to mention a slew of other companies. Here’s how it works–You take part of your company, and you give them the mission of putting the other part of the company out of business. Not by doing the same stuff better, but by doing it in a completely new way. The end results might not even be better, but they might be more marketable and in the long run they might indeed get to be better. Then you fold the old employees into the “new” company, which of course has the same name and prestige of the old one. Your customers might not even realize you’re a new company. This is the solution to the dilemma.
It’s not comfortable. It’s not easy. Not every company can do it successfully. Not every company needs to do it. But it’s also not comfortable to go out of business with nothing else to fall back on. Market forces force businesses to change if they’re not will to do it voluntarily. Would you rather change because you have to, or would you rather be the innovator who is changing to meet new opportunities and take advantage of them ahead of everyone else?