So, bad news, the Money Button is definitely broken. But why? There are three broad buckets that explain why the money button stops working, company, competition and the market. Under the Money Button theme, we’ll talk about each across a series of posts, this post will focus on a facet of competition.
When the Money Button is working, its easy to forget where the money is coming from. No matter how great your money button is, there is always someone out there looking for a better way to do what your money button does. If you are not constantly looking for ways to improve it, they will succeed in breaking your button by cutting off its supply of money (customers).
Tech companies understand this reality better than any other industry given the rate of change associated with internet driven markets. I’ve never met Mark Zuckerberg, Larry Page or Sergey Brin, but there is one thing I know for certain about them, Clay Christensen’s The Innovator’s Dilemma must be one of their favorite books. They have sat in both competitive positions, the Innovative Disruptor and the Entrenched Incumbent in an industry that is impossibly competitive and perfectly illustrates the Innovator’s Dilemma.
The Innovator’s Dilemma, in short, is the idea that as a company gets set in its ways, competitors will emerge that can better serve your least profitable customers. Once these competitors figure out how to make a profit serving customers you cannot, watch out because they will begin to steal more of your customers until your product is rendered obsolete. This is Disruptive Innovation in a nutshell.
The idea of disruptive innovation has quite a few layers to it and the book is well worth the read if you enjoy or have need to think strategically about positioning a business. It reads as a horror story or how to manual depending on your business’s orientation in the marketplace. From an incumbent’s perspective, it warns that you must find ways to remain agile and focused on innovating on behalf of your customer. It drives home the idea that there is no such thing as “winning the war”, industries are in a constant arms race, though in some industries each cycle can be decades long.
From a start up’s perspective, it encourages businesses to use their agility and fresh perspective to maximum advantage. For example, if you are Southwest Airlines, cater to price sensitive leisure travellers on whom legacy carriers cannot make enough margin to contribute to their gargantuan overhead expenses. Once Southwest found the formula for serving those low margin travellers profitably, it expanded to compete for business travel and is able to generate higher margins on business customers than incumbent carriers because they’ve developed a lower cost structure that can now be applied to higher margin customers.
It can be tough to find applicability as a small business when the examples are focused on huge multi-billion dollar industries where even the disrupter is a giant company by relative standards, but the rules still apply. Whether you adjust your cost structure to deliver your product at lower internal cost or you discover a new approach to better solve the problems your customers face, take time to work ON your business so that you are disrupting your competition and not the other way around.