Imagine that you have built a highly successful business, commanding more than 75% share of a market with high growth potential. However, you are facing tough competition and a price war is brewing as the product you manufacture gets increasingly commoditized. This product is not the only one in your stable, but it does account for 90% of your revenue. You must decide whether to commit resources to try to maintain your market share or invest in new products. This was precisely the challenge confronting Intel in the early 1980s as it faced competition from Japanese manufacturers. In hindsight, it’s easy to see that the answer to the question “what should we do?” The path forward must involve at least some diversification of products if the company is to realize its growth potential. However, suppose that you have faced this kind of competition before and have consistently been able to improve your product to maintain a premium in the market. Consider that your company is defined by this product or service. Maybe you invented it, maybe it has become so omnipresent that it’s now a verb like “Google it.” Would you be able to see the decision as clearly?
For Intel, exiting the memory business in the 1980s would have been like Google exiting the search business, or like today’s Intel exiting the microprocessor business. And so, not surprisingly, Intel fought hard to maintain its market share even as margins shrank dramatically. As Andy Grove describes in his book, Only the Paranoid Survive, “We tried a lot of things. We tried to focus on a niche of the memory market segment, we tried to invent special-purpose memories called valued-added designs, we introduced more advanced technologies and built memories with them. What we were desperately trying to do was earn a premium for our product in the marketplace as we couldn’t match the Japanese downward pricing spiral.”
Only when things got really dire did Grove and then-CEO Gordon Moore take an outside perspective that precipitated a different decision. As Grove tells it, he asked Moore, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” and Moore replied, “He would get us out of Memories.” Intel did eventually get out of the memory business – and invest heavily in microprocessors. In its early days, Netflix faced a similar dilemma and made an even bolder move. At a time when DVD sales were growing and accounted for 90% of its revenue, Netflix, recognizing the threat of Amazon, decided to focus on rentals and entirely cede the online DVD sales market.
The challenge in these situations is two-fold: first, recognizing that a pivot is needed and second, being able to make the excruciating decision to abandon what has made you successful in the first place in service to growth. How can you increase the odds that you’ll be able to spot emerging threats and opportunities and be willing to pivot – even when doing so requires moving away from the tried and tested?
To limit the negative impact of past successes on growth potential:
- Take an outside view
- Make change the default
- Clarify your strengths and competitive advantages
- Gather intelligence from all parts of the business
Take an Outside View
It is incredibly difficult to be objective when you are emotionally invested in a course of action. As the Intel story illustrates, Intel saw itself as a memory company. What was obvious to an objective observer, that the memory business was commoditized, was almost impossible for Intel to acknowledge. Asking questions like Grove did or looking at other industries/companies that may be facing similar choices can help you see past the emotional stake. You can also gain this unbiased perspective by talking to customers, competitors, and un-invested third parties.
In their 1993 paper, Daniel Kahneman and Dan Lovallo labeled two distinct approaches to forecasting: the inside view and the outside view. For Netflix, the inside view would have said: we have the biggest library of DVDs so we have a head start, our DVD sales are continuing to grow, we are unique, and we can compete against Amazon. The outside view, on the other hand, would say: Amazon is a behemoth, Amazon has a distribution network that Netflix cannot match, Netflix will not win a fight over DVD sales., our growth potential lies elsewhere. Fortunately for Netflix (and for all of us stuck at home quarantine binge-watching), its founders, Reed took an outside perspective and chose to focus entirely on rentals.
Make Change the Default
Change is to be expected in a rapidly shifting, highly uncertain world. Our desire for a state of homeostasis is so strong that behavioral psychologists even have a term for it – status-quo bias. This bias, combined with past success, can breed the complacency that John Kotter describes in his book, A Sense of Urgency, as behavior that leads to unchanging activity and ignores new opportunities or hazards. The reality is that, in many cases, being complacent and un-thinkingly continuing to invest precious resources in your current portfolio of products/services incurs significant opportunity costs in
Given the strength of the status-quo bias, it is helpful to periodically question your current decisions by asking questions such as: why should we continue to invest in our current portfolio of products/services; which ones should we stop investing in; what will the market look like in 5 years; what if our customers stop wanting our products/services? Shifting your mindset from if things change to how will they change can nudge strongly against the status-quo bias.
Clarify your Strengths and Competitive Advantages
A solid understanding of the strengths and competitive advantages you have as a business will not only help you identify new opportunities, it can reduce the attachment you might feel to a particular product or service. When Kodak and Fuji were both faced with a rapidly declining market for their primary photography business (due to the advent of digital photographs) Kodak, who defined itself as a photography film company, focused all its efforts in trying to stay relevant in the photography business. Fuji, on the other hand, recognized that its understanding of chemistry and its highly precise quality control mechanisms could be applied to other opportunities, like LCD screens, pharmaceuticals, and even cosmetics. By considering its unique competencies, Fuji was able to chart a transformation path that moved rapidly away from its previous core business while enabling it to leverage its strengths. To do so required that it be able to identify them at the fundamental level –chemistry and engineering, not photographic film.
Knowing your strengths and unique positioning can be an accelerant when faced with a need to pivot away from your core business to pursue your growth potential. Explore this by asking yourself questions such as: what problems do we solve for our customers; what capabilities do we rely on in solving those problems; what differentiates our product, our services, our processes, our internal operations…; what companies in other industries have similar capabilities; who do we compete with for talent, especially skills-based rather than experience-based talent?
Gather Intelligence from all Parts of the Business
The pace and complexity of change make it increasingly difficult for a few leaders or managers to be aware of all the relevant information needed to identify threats and opportunities. A free flow of information and intelligence from the employees closest to customers, suppliers, competitors, and regulators is critical to the early identification of trends that may require a significant pivot. Pixar holds an all-inclusive morning meeting that they call Dailies where everyone is encouraged to speak up and provide their input. In addition to creating such platforms, for managers to tap into this intelligence, leaders should cultivate a culture where information is valued and where all employees are encouraged to express opinions and provide input. While this shift in culture is not easy and takes time, periodically asking front-line employees what changes they are seeing through their everyday interactions can be a simple way to start to gather more intelligence. Any one piece of insight is unlikely to be game-changing, but when all this information is put together it can be.
Every business faces decisions about where and how much to invest to generate the growth forecast into their strategic plans. These decisions are particularly difficult when one of the choices is to double-down on an existing product or service while the others represent new opportunities. History and human psychology suggest that leaders are more likely to and underinvest in new ideas. While there are no simple answers, by creating an environment and culture where change is expected, an outside perspective is sought, all employees are encouraged to provide input, and the status-quo is rigorously challenged, leaders can avoid trying to hold onto past successes at the expense of growth potential.