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Fighting the Future and the 20% Rule

Fighting the Future and the 20% Rule

The tendency of incumbents to fight the future is a theme we see crop up regularly as we look at how companies lose their Founder’s Mentality.

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Fighting the Future and the 20% Rule

I notice that French president Francois Hollande has just returned from his recent trip to Silicon Valley. I’m sure it was productive, but I’m also sure I’m not the only one to notice some irony in the president’s trip to one of the world’s tech capitals, even as the French government made news for placing restrictions on the online taxi company Uber. Although Uber offers faster and often cheaper taxi service at a click of a smartphone button, the government, under heavy lobbying from the traditional taxi industry, requires Uber drivers to wait 15 minutes before responding to customers.

And France is not alone in fighting the future in this way. Largely in response to protests from traditional taxi companies, Uber and services like it have run into restrictions from regulators in New York, Hoboken, Washington, DC, Denver, Miami and Dallas. For example, Miami-Dade County applied existing car service regulations to Uber that require rides to be booked 60 minutes in advance and cost a minimum of $80.

This tendency of incumbents to fight the future is a theme we see crop up regularly as we look at how companies lose their Founder’s MentalitySM. The “default path” for most successful companies as they grow is to transform from insurgents (small, aggressive, founder-led firms) to incumbents (big, aggressive, professionally managed firms that have lost their Founder’s Mentality). Insurgents see themselves as the future, and are often on a mission to disrupt incumbents on behalf of a dissatisfied customer segment. Michael Dell disrupted the personal computer industry with a direct model. Amazon did the same in retail. Uber is disrupting local taxi companies with a new model that for now often offers far better service—and the incumbents are “fighting the future.”

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Incumbents always want to believe they are the future—after all, they often are the insurgents of the past. They believe their scale and scope give them tremendous opportunities to better serve their customers, and they believe that they are constantly innovating to respond to new challenges. But incumbents often benefit enormously from the current industry structure: its rules, profit pools, pricing structures and value chain. They have designed themselves to be the best player in that industry and seek to protect the playing field they created for themselves. And why not? On that field, after all, they are the best team.

But this creates a tension. On one hand, incumbents want to continue to offer the best products and services for their core customers. Yet they also want to protect and enhance their hard-won economics, the industry rules that favor them and the profit pools that have tipped into their happy laps. And when strong insurgents begin to nip away at the edges of their empires, they can find themselves fighting the future.

We’ve all heard the big examples: Kodak and digital cameras, the music recording industry and digital music, brick-and-mortar booksellers and Amazon, and traditional retailers and Walmart. But these are stories of incumbents being overwhelmed by fast, once-in-a-generation changes that wiped them out. They didn’t really fight the future—the future just pummeled them into the floor.

But smaller fights against the future are going on in companies every day, and they can have just as big an impact over time: Telecommunications and energy companies keeping their customers locked into long-term contracts significantly above current market pricing, packaging companies resisting efforts to be more environmentally friendly in order to reap a few more years of better margins, branded consumer goods players offering inferior propositions to the retail brands (knowing that the strength of brand loyalty will ensure a few more months or years of profit), companies across multiple industries not copying or improving upon innovations offered by insurgents that have breached the walls of their industries.

The management of many incumbents are aware of the noise and dust arising from the insurgents battering their walls and moats, but do nothing: another month of superior profits from the current industry structure is simply too alluring.

In my work, I see these little acts of fighting the future every day. Seen in isolation, through the lens of the income statement, these acts are understandable—even clever. But the accumulation of these acts, seen through the lens of the balance sheet, can destroy a company.

First, employees catch on quickly. They begin to understand that their main mission is to protect incumbency economics, not continue the insurgency of their forgotten founders. They see too many examples in which the company doesn’t do the right thing for customers, communities or the employees themselves

Second, customers find out. They are loyal to brands and have often grown up with the incumbent. But the insurgents keep knocking on their door, with new and wonderful offers at better prices or better quality.

Third, insurgents find out. They bring the battle closer, convinced you will stay behind your moat. By not responding aggressively to their early hit-and-run tactics, you allow them to grow and to become bolder. You’ve enabled “the barbarians at the gate.”

I have no scientific proof of this, but I think there’s a 20% test. Incumbents inevitably spend 20% of their time fighting the future in some way: refusing to respond to a price war, trying to ignore an innovation from an insurgent competitor, convincing themselves that a local government’s punitive environmental legislation won’t pass and so on. Incumbents must make decisions every day about whether or not to respond to the latest widget, gizmo and disruption in the marketplace.

And that’s OK. You can’t run a business if you change your propositions hourly or panic with each piece of proposed legislation. But if more than 20% of your management time is spent fighting the future, I think you’re in trouble. You’re losing the loyalty of employees, customers and business partners, and you are emboldening insurgents. Here’s a simple set of questions to ask yourself:

  1. Do we continue to offer the best propositions to our core customers, relative to new insurgents? Against these insurgents, by segment, are we demonstrably the price-for- quality leader?
  2. Do our employees believe we will continually do right by our customers? One acid test: If employees discover that competitors are offering better propositions to our customers, are they empowered to respond aggressively?
  3. Are we the cost leader? If not, why not? Are we higher costs to other incumbents in our industry? If so, why? Are we higher costs to new entrants? If so, why?
  4. Are we gaining share in growth areas of the market? Are our channels of distribution still the preferred channels? Are our customer segments growing relative to the market as a whole? Are the geographic markets in which we compete the fastest-growing markets? In other words, if we took no more share starting tomorrow, would the market still move toward us, or away from us?
  5. Are we responding faster and better to the main disruptions in our industry? Are we leading the change, or are insurgents? Are we constantly monitoring the innovations we see at the edges of our industry and adopting them, or improving upon them?

The 20% rule would suggest that if you are an incumbent, you could probably get away with a “no” answer to one of these questions. Equally, it would suggest you need to be responding “yes” to the rest. If you are an insurgent, a nice competitive target is an incumbent that isn’t passing this test. It might be ripe for the taking.

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