Summary: I was at a love fest recently that was all about extolling the virtues of entrepreneurial niche businesses. Then, someone said how she was consulting with large companies on successfully defeating entrepreneurial startups. That was a buzz killer.
I just got back from a learning event that I attend each year at MIT. I always come out of it a bit wiped out. This is partly due to the volume of the content and partly due to the alcohol flowing into the wee hours of the morning. This year was one of the best I had attended with some really fantastic speakers and subjects that hit home for me.
One of the speakers, Frances Frei of The Harvard Business School had done a lot of research into focused disruption and the responses to it. Focus is one of the three classic competitive advantages put forth by Michael Porter in his 1980s work, Competitive Strategy. Focus is how a company targets a niche market and is able to retain an advantage over its large, well funded competitors. She said that in most cases, the practice of focus is a strategy that big companies just can’t deal with. Big companies need big growth. They can’t spend a lot of effort developing small markets. They need to introduce products with mass market appeal and reach. Of course she had a very friendly audience in me. But then she went on to say that she was consulting with big companies on how she had seen big companies respond successfully to focused differentiation.
Hold the phone! What is she doing? The last thing I need is someone out there doing that. I thought about heckling her to distract her but she seemed pretty quick witted. I thought about pulling the fire alarm but that wouldn’t stop her in her crusade of darkness. So, I bit my lip and decided to listen to this evil doer.
She described the typical reaction process that big companies go through when a focused disruptor moved in on some of their business.
First they are dismissive. “Their product is inferior. They’ll be lucky if they are in business next quarter.”
Next comes concern. “Huh. Some customers seem to like their inferior product.”
Following this is a ‘who cares’ attitude. “We didn’t really like those customers anyway. They were just a distraction from our core customers.”
Finally, worry sets in about other focused disruptors as the first walks away into the sunset with a bunch of former BigCo customers.
Fortunately she went on to say that successful big company responses are few and far between. However, the few successes that she did delve into shared some characteristics. Yum! Brands, GE, and Omnicom all have been successful. All have distinct sub-brands and all of them have shared back end services that their individual brands all use. Sharing these services gives them a cost advantage over their niche competitors. You can really see this play out with Yum! Brands and their ‘Multibranding’ locations. Several restaurants share one building. Not only does this cut the costs for each individual restaurant but it appeals to groups that can’t decide on one kind of food. The other common characteristic was a strong autocratic leader. This person, in her eyes, was a requisite in order to say no to the constant pull of non-shared services. You could see how the management in charge of the Pizza Hut brand for example might push for their own procurement system explaining that their customization would allow them to be even more competitive. The strong leader who resists this tide is the one who maintains the cost advantages.
I came away from this talk a bit more worried about large companies than I had been in quite a while. My mind was put more at ease when I decided that leaders like Jack Welch, David Novak, and John Wren don’t come along every day.