August 17, 2010 | Author: Tim Williams
One in a series of observations from the new book Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success
Advertising Age recently observed, “The list of great brands that have been damaged, even ruined, as they’ve been milked for growth rather than managed for profit is a long one — and it grows every year.”
The unbridled quest for growth has played out in very visible ways in the marketing communications industry. Today, just five holding companies control 85 percent of the advertising expenditures in the world. In addition to creating leverage when negotiating media contracts, this roll up of marketing communications companies also was expected to produce significant economies of scale. It didn’t. What was the total “savings” resulting from consolidating the operations of thousands of agencies? According to one study it was less than .025 percent.
In professional services, size is not a competitive advantage
Not only is growth not a strategy, but the supposed advantages of size are diminishing, especially in professional services. Aside from the benefits of what could be considered reputational capital, “bigness” is no longer a competitive advantage for law, accounting, advertising, or consulting. In fact, the trend is clearly away from big diversified firms to smaller specialized operations. In the paper The Death of Big Law Larry Ribstein chronicles the megatrends behind the devolution of large law firms, including increased access to legal information and resources via technology, competition from lower cost economies, and the “commoditization” of some forms of legal work that are widely available on legal websites.
Business observer Jim Collins describes the stages through which successful companies pass on the way to their downfall. Second on the list: the undisciplined pursuit of more.
Growth through acquisition — pursuing more for the sake of more— is almost always an unsuccessful strategy. The majority of mergers and acquisitions fail, and sometimes spectacularly so. While some of these attempted partnerships build the CEO’s ego, they usually erode shareholder value.
The belief that less is more
Most business books feature examples of large publicly-owned companies, which largely have shaped the collective consciousness of the business community. As a result, many have come to accept business axioms (such as “grow or die”) that apply mostly to companies that are in a constant quest to satisfy shareholders. But privately held companies — which actually make up the majority of businesses — can and usually do operate under a different set of principles.
The most exceptional private companies have chosen not to focus on revenue growth but rather to be the best at what they do. They deliberately place limits on their growth, choosing instead to focus on doing great work, providing great service, and creating a great place to work. The agencies most of us admire know that size is not a strategy.
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Excerpted from the new book Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success by Tim Williams.
August 2, 2010 | Author: Ron Baker
Evolutionary biologists have proven that the more adapted you are in your existing environment, the less able you are to adapt to environmental changes. Struggle is good for us. Rigidity is what organizations manifest when they are faced with either superior competition or outdated business models.
This is the history of business. New ideas, inventions, and business models from the tinkerer in the garage change the world, while rendering obsolete the existing modes of production, infrastructure, and business models.
The automobile replaced the horse and buggy, the calculator replaced the slide rule, and the personal computer replaced the typewriter, iTunes replaced CDs, and so on in a never-ending "perennial gale of creative destruction," as described by economist Joseph Schumpeter.
Change and creativity always take us by surprise. If it didn't, we wouldn't need it, because we could simply plan on it and incorporate it into our existing strategies and processes. Nassim Nicholas Taleb makes this very point in his book, The Black Swan:
"We do not know what we will know. Invention and creativity is always a surprise. If we could prophesy the invention of the wheel, we'd already know what a wheel looks like, and thus we could invent it."
The professions, however, have been slow to adapt to the realities of an intellectual capital economy. Never before has this mentality been such a hindrance to success in today's rapidly changing, globalized marketplace.
A business model can be defined as follows:
"How your firm creates value for customers, and how you monetize that value."
Thinking about the history of innovation, creative destruction, and business models in the context of professional knowledge firms, this diagram provides an interesting look at where any firm can be at a given point in time. Since competitive advantages are built based on effectiveness, not efficiencies, I have chosen to highlight each as the axes of the diagram.
Luddites: Firms that resist technological advances and other innovations that are merely table stakes risk being Luddites. They have both low efficiency in doing things right, and low effectiveness at doing the right things—not a bright future. Fortunately, not many firms are in this category. If you are here, you are dead already and the funeral is a mere detail.
Buggy Whips: Usually when an industry is at the apogee of its efficiency, it is at risk of being made obsolete by new technologies or business models. As Peter Drucker said, no amount of efficiency gains would have saved the buggy whip manufacturers from the automobile.
Innovators: As George Gilder wrote in Forbes, "Knowledge is about the past; entrepreneurship is about the future. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth." Innovators are firms that are willing to invest some of today's profits into tomorrow, while at the same time sacrificing efficiency for effectiveness.
Humpty Dumpty: This is a precarious future. This represents firms that are highly efficient and effective. I am arguing if you are here, you better be sliding back to the Innovators position and start sacrificing some of that efficiency for innovation and making the firm more valuable to its customers. Humpty Dumpty eventually falls and ends up like the industries mentioned under Buggy whips. Efficiency is not the answer. Effectiveness is.
Firm of the future or firm of the past?
Embracing a new business model requires leadership and vision. It requires knowing you are doing the right things, not just doing things right. It requires focusing the firm on the external value it creates for the customer and simultaneously building the type of firm people are proud to be a part of and contribute to—the sort of organization you would want your son or daughter to work for.
It requires a sense of dignity and self-respect that you are worth every penny you charge, and you will only work with customers who have integrity, whom you enjoy, and respect.
It requires an attitude of experimentation, not simply doing things because that is the way it has always been done. It requires less measurement, less fear, and more trust. It requires boldness and risk-taking—there has yet to be a book written titled Great Moderates in History.
Skeptics will call for an incremental approach, which is how they maintain the status quo. But how will these optically challenged skeptics make incremental changes to an existing business model that is already dying? By making it incrementally less dead?
There is no limit to what we can achieve, as long as we do not lose faith in ourselves. It is the difference between remaining a firm of the past, or, like a chrysalis, emerging as a firm of the future.
The choice is yours.
Ron Baker is an Ignition associate and founder of the think tank VeraSage.
This post is adapted from his forthcoming book, Implementing Value Pricing to be published this fall by John Wiley & Sons.
