We all get so used to running our businesses that it is very easy to miss a significant market shift. We may well be in the Rapids of growth and then within a very short time fall into the Swamp of stagnant revenue and lower margins. Because we are so good at doing what we always did, our biases keep us thinking we will succeed while we ignore important signs of market shifts. By the time we react, it can be too late.
Take music recording and sales. For years this was a simple business. EMI, RCA, Sony, etc. simply signed up a lot of artists who wanted contracts. The music company spread its risk in a form of venture capital play by signing lots of bands and then needing only a few to succeed. The artists had no way to make an album and get it distributed other than to sign a contract, often at very low initial returns, with a major studio. It was a business that made it very easy for the large recording companies to make good money.
So we should not be surprised that when MP3 technology came along the major recording companies ignored it. They blithely allowed Apple to set up iTunes and sell iPods while they kept right on pushing the same contracts to artists and making CDs. What they ignored was that MP3 technology made it possible for consumers to bypass albums completely, dramatically impacting sales, and likewise artists could now bypass the recording studio by making their own songs and albums available directly to consumers across the web. Even though this future was not hard to visualize, and plan for, the recording studios kept planning for past markets and ignored desperately needed changes given easily expected future market conditions.
Get the following statistics (all of the following information comes from Paul Grein at Chart Watch):
"The paid digital download medium scarcely existed five years ago and now it’s the biggest growth area in the music business. (It may be the only growth area in the music business.) Billboard reports that album sales in the first half of 2008 totaled 204.6 million, down slightly from 229.8 million in the first half of 2007. Digital track sales for the same period totaled 542.7 million, up substantially from 417.3 million….Just three albums topped 1 million copies in sales (CDs and digital downloads combined) in the first six months of 2008, the lowest total since Nielsen/SoundScan set up shop in 1991. Six albums sold 1 million copies in the first six months of 2007. Fully 16 albums hit the million mark in the first half of 2006. (The business hit its peak in 2001 when a whopping 37 albums reached the 1 million mark in the first 26 weeks of the year.)"
When markets shift, trying to maintain Lock-ins in the hope of making money is like pushing on a rope. Lots of work with poor results. When new technologies or market practices come available, we have to focus on new competitors to understand how they make money. Likely, they will change the market in a way that diminishes the returns from old Success Formulas while making new Success Formulas more profitable. Customers won’t tell you about new solutions, because they are buying your solution – right up until they switch and aren’t customers any more. Focusing on customers only helps you understand and marginally improve your Locked-in old Success Formula. You have to look at the new competitors to see what is happening in the market. New competitors can show you that given market shifts, it’s better to pull the rope than push it.
In today’s global and connected economy markets can shift a lot faster than they did in previous eras. Resources and customers can shift quickly. Old Success Formulas can become obsolete (unable to make above average returns) before we even have time to react. If we don’t maintain a powerful focus on competitors, and generate scenarios about the future regardless of current market conditions, we will almost always be late to the changes. And that can be deadly to sales and returns. Just ask the people trying to generate profits by making and selling CDs today.