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The success trap (and some ideas how to get out of it)
A diversied revenue base will also reduce dependency and,
with it, risk. In a downturn, the probability of individual sources
drying up is large, so a rm can’t afford to be focused on just one
or a few of them.
But will searching for additional sources of revenue not be
costly? If will not be costless but, by denition, it should not be
expensive. Paradoxically, rms should not be focused on winning
any big accounts, major new products or customers; they should
aim for many smaller ones. They are relatively cheap to access
and often the rm will already have knowledge about them; they
may have shunned them in the past, considering them too small
to advance at the time.
Concurrently, this strategy of exploring multiple smaller pockets
of revenue will equip rms well for the economic dawn which
will inevitably come. Their diverse revenue base has laid the
foundation for new sources of growth. The rm will be able to
quickly benet from the upheaval in the economy. Many of the
smaller pockets of revenue will stay small – and the rm would
do well to shed quite a few of them – but the newly formed
strategic landscape will be more conducive to different sources of
revenue than before. Although you can’t tell beforehand which
ones it will be, some of the small pockets of revenue will be the
new stars in the rm’s rmament.
In a crisis, innovate
If you didn’t buy that one, let me try another hypothesis (or,
admittedly, a bit of the same wine in a different bottle): recently,
an executive – an ex-student – told me about his company.
The company had a handful of similar competitors (it is a local
business) and they were all losing money in the challenging
economic climate. Now one competitor – the worst-performing
of the lot – had started to accept assignments for a fee below its
cost price, just enough to cover its variable costs and at least earn
back a tiny bit of its xed costs. My ex-student asked me, “What
can we do?”
Business Exposed46
The answer isn’t easy. But it is of course a typical situation to
be in. It happens in most industries in trouble; some bloody
competitor – often the lousiest one of all – starts to sell below cost
price, out of pure desperation. Actually, my ex-student’s company
responded in a way that is just as typical: they said, “But their
product is inferior to ours; we deliver quality, and customers will
always want to pay for that” (and stuck to their comparatively
high price). But customers didn’t. And they seldom do. Even if
there is a minor quality difference – and it’s usually just minor, at
least in the eyes of the customer – if the price difference is large
enough, you will lose a lot of clients; more than you can afford.
So what can you do? What else can you do but lower your prices
too, tighten your belt, hold your breath, and hope the crisis
blows over before you bankrupt yourself? Because that’s what
companies usually do.
I’d say the phenomenon is common, so the solution can’t be.
It reminded me of the British newspaper business some years ago,
which I briey alluded to before. All quality newspapers were in
trouble; newspapers had started to move online big time; free
newspapers such as the Metro had ooded the market and, on
top of that, the general trend was that people simply read less.
The four main players in London – The Guardian, The Times, the
Daily Telegraph and The Independent – were all in decline but The
Independent was the one widely expected to fall rst. The others
had deep pockets due to rich owners and, thanks to a price war
several years earlier, which had hit The Independent hardest, it was
basically broke.
Now, The Independent could have done what most companies in
such a situation do: moan about it, cut some more costs, and
attempt to prolong an inevitable death. But it didn’t. It took
a plunge. It launched a small-sized version of its newspaper;
the denounced “tabloid” format. All the newspapers had been
talking about it for a long time, but everyone had dismissed it as
too risky (customers won’t like it), phoney, or plain cheap. But
The Independent launched it, and it worked (customers loved it).
They survived.
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