Defending the status quo kills companies

“Defending the status quo is what kills companies.” That line comes from the excellent book More Than a Motorcycle: The Leadership Journey at Harley-Davidson written by former Harley CEO  Rich Teerlink and his organizational consultant partner Lee Ozley. The book chronicles Teerlink’s and Ozley’s process to change the culture at Harley-Davidson to ensure the company was ready for the challenges to come. What I found most remarkable, though, was that they didn’t initiate this massive change when the company was troubled — they initiated massive change when the company had just completed a successful financial turnaround and the press was actively singing their praises.

They changed when conventional wisdom would have said to keep doing what they were doing.

Bankruptcy courts are littered with companies who kept doing what they were doing and failed to adapt to changing marketplaces and changing customer needs and expectations.

I spent 20 years in the music industry with Tower Records, so I’ve see one of the best examples in recent years of an entire industry that desperately clung to the past rather than embrace the future. The music industry didn’t suffer because of Napster and illegal downloads; it suffered because it turned its back on its customers in favor of short term profits.

The music industry failed to recognize the opportunity that came with the advent of the Internet and digital music formats. Rather than see their industry from their customers’ perspective, the industry fell pray to the elitism I’ve discussed previously. So a computer company took their business from them. Apple‘s iPod and iTunes took the music retailers’ business and substantially wrestled control away from the music labels.

The retailers could have created digital music stores if they weren’t so worried about protecting their current businesses. And there were other opportunities available. Seth Godin spoke to the industry last year and gave some excellent examples of opportunities to change the business model.

Now other traditional industries like newspapers, video stores and bookstores, among others, are also losing substantial market share to new, technology based upstarts. Others, like travel agencies, are mostly gone.

But some companies are embracing change even during the height of success.
A recent Forbes interview with Xerox’s retiring CEO Anne Mulcahy highlighted her strategy to focus Xerox on “paperless printing” even though the entire organization was basically built on paper-producing technology. Rather than focus on paper, Mulcahy instead said the company’s value was always about the creation, management and dispensing of information, “Democratization of information, however it happened.”


Threats to existing business models aren’t only coming in the form of digitization.
Look at the shoe business. In ten years, Zappos.com went from a germ of an idea to a $1 billion company. Their model? “In March of 2003, we made a decision to be about customer service,” say their CEO, Tony Hsieh, in a recent Fast  Company profile. “We view any expense that enhances the customer experience as a marketing cost because it generates more repeat customers through word of mouth.”

Customer experience as a marketing cost. It’s a whole new way of looking at the shoe business (or retail in general), and it’s a hit worth a cool billion in a short amount of time.

I can’t believe that billion dollars was incremental business to the overall market. That share came out of somebody’s  hide. And that means an existing shoe business could have done it first if the thought process and the courage to act  was there. If the Zappos model works, it can be applied to anything, and it appears that’s exactly what Zappos intends  to do.

And the radical ideas keep coming. Chris Anderson has a controversial new book, Free, that describes a future he believes will be centered largely around business models that give away 95% of their offerings and make money on the remaining 5%. Are Anderson’s ideas open for debate? Sure, but they and other seemingly nutty ideas should be regularly and honestlydiscussed. One of them may well be the next billion dollar idea.


It doesn’t take wholesale change in the marketplace to significantly disrupt a business model.

A drop in business of 10-15% can have massive impact, as many have clearly seen in the current economic downturn. But the economic downturn has not sunk all boats. Amazon.com reported a sales increase of 18% and a net income increase of 24% for their first quarter this year.

As e-commerce continues to be the growth vehicle in retail, and as Amazon continues to dominate e-commerce, I wonder how brick and mortar retail models will adapt. I believe there are many opportunities today to leverage both the growth and value of e-commerce and existing physical real estate.

Certainly, tying the web experience and the store experience together via cross-channel capabilities is a must. In the industry, we talk a lot today about capabilities like order online and pick up in store, and I think those are good.

But how can we take it further?
For example, I know from my experience with in-store kiosks at Borders that a lot more people than I expected still aren’t comfortable shopping online. They want someone to help them use the kiosks, and then they want to pay with cash at the register. Why not use our store POS systems to take cash payments for online orders? What if we took it a step further and took cash payments for other sites’ orders. What if the physical store essentially became an affiliate for a pure play e-commerce site and took the cash along with a commission? What type of opportunities might that open for both the pure play and the brick and mortar store? What other reasons should customers continue to shop physical stores well into the future as technology and delivery systems continue to improve?

What challenges does your business face in the coming years, or what businesses in general do you see most at risk? How could your business model change — maybe radically — to address those challenges? Or, do you think this is all hogwash? Let’s discuss.



14 Comments

  • By Sarah, July 14, 2009 @ 11:07 am

    Netflix strikes me as a similar example…look how long it took blockbuster to give netflix a run for their money by leveraging a huge competitive advantage–all those stores.
    These are all great examples, but asking the few companies that are successful right now to take huge risks seems like a tall order. Will corporate boards in this economic environment support the kind of move Harley made–reinventing business at the top of their game?
    As for Anderson’s Free idea, in the web world, the 800-pound gorilla giving everything away for free is Google. Google has disrupted a lot of solid business models by giving it away for free, and honestly, I don’t know if that’s good for business overall. But that is a different post I guess.

  • By Sarah, July 14, 2009 @ 11:30 am

    Also just thought this might be of interest to you, given your background. A report from Pew about the state of online music, 10 years after Napster: http://www.pewtrusts.org/our_work_report_detail.aspx?id=53450&category=56

  • By Kevin Ertell, July 14, 2009 @ 3:29 pm

    Hi Sarah,
    First, thanks for the link to the Pew study. That study was worth reading for the quality of the writing if nothing else. The opening comparison of the old Napster to the new Napster was priceless. And how can you not love a writer who uses the phrase “musical bacchanalia?” Of course, the actual content is also great and describes in more detail some of the bad decisions and missed opportunities I described in my post.
    Thanks also for your first comment. Netflix is certainly a great example of a new company that came up with an extremely disruptive model and changed the industry.
    It may well be that many corporate boards of successful and unsuccessful companies today will not support the types of moves Harley made if it means putting any sort of short term gains at risk. But that’s not a reason to avoid the fight. In fact, it’s the successful companies that should probably be the most paranoid. They’ve got multiple competitors trying to knock them off their perch, and one of those competitors (new or old) may come up with the innovation that succeeds beyond its wildest dreams and changes the game.
    Google is certainly one of the biggest examples of companies giving away a lot for free, and their tactics are certainly not good for some business models today. But I’ll argue that just because it’s disruptive to some of today’s business models does not mean it’s bad for business overall. Google has created amazing opportunities for many companies to get in front of brand new customers in ways that were never possible before. The precision and reach of targeted marketing that exists today exists precisely because of the value Google provides its users for free. I could go on and on, but maybe you’re right that it’s a good topic for another post. Stay tuned for that one. 🙂

  • By Jeff H, July 14, 2009 @ 3:42 pm

    One factor that keeps corporate boards focused on the short-term, instead of seeking strategic opportunities or shaking up the status quo, is the market’s obsession with short-term results and stock price. Private companies have a great advantage in being able to take risks without being beholden to analysts, institutional funds and the like.

  • By Kevin Ertell, July 15, 2009 @ 7:36 am

    I think you’re right, Jeff, that private companies have an advantage over public companies that become slaves to the short-term obsessions of the public market. Since some are blaming those short term obsessions for the current recession, I wonder if at least some portion of those pressures might subside just a little in the future. Or maybe that’s just a pipe dream on my part. 🙂

  • By Chris Eagle, July 15, 2009 @ 3:33 pm

    Check out the forward to Andy Grove’s “Only the Paranoid Survive” (http://www.intel.com/pressroom/kits/bios/grove/paranoid.htm). It’s amazing to me that these words were written in 1996. I was happy to see that the website shows his “Inflection Curve”. A big theme of the book is that companies have to change what they’re doing BEFORE their business starts to decline.
    Of course, most companies don’t buy this logic at all. How often have you heard a struggling company say “We need to get back to what we do best”? Personally, I think this helps explain why there are only a handful of Fortune 100 companies that have been in business for even 50 years – and only a thimbleful that have made it 100.
    As as small aside, Chris Anderson’s ideas and Google’s business model are apples and oranges. Anderson’s concepts are very socialist in nature while Google is pure free enterprise. Just because the consumer doesn’t pay for the product doesn’t mean it’s free, any more than NBC gives away it’s content for free, or Gillette sends me free razors in the mail. (This from someone who sends a BIG check to Google every month).

  • By Francesco, July 16, 2009 @ 12:57 am

    The web experience and the store experience are already closely tied up in innumerable ways. Think about reviews, checking a restaurant based on reviews from Yelps. Choosing to buy a TV after extensive research on the web, and considering all the trade-offs between online and on the store purchase. Brick and mortars are already adapting, like matching a web price to make a sale. I agree with you when you state that “there are many opportunities today to leverage both the growth and value of e-commerce and existing physical real estate.” Successful brink and mortar retailers will find ways to adjust and add value to their customers providing a seamless e-commerce/physical experience.
    The basic difference between the two venues provide an answer to your other question about the reasons should customers continue to shop physical stores well into the future as technology and delivery systems continue to improve. Yes, the exponential growth of technology and fastest delivery systems will further make e-commerce grow. But the basic difference is between instant gratification of purchasing something at the store, being able to try it, touch it, smell it, etc. combined with the convenience of being able to easily return if not satisfied. And the convenience of remotely purchasing something online and have it shipped at own door.

  • By Kevin Ertell, July 16, 2009 @ 8:56 am

    Chris, thanks for providing the link to the Andy Grove introduction. It’s totally on point for sure, and well worth the read. These two lines in the opening paragraph just about say it all: “Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left.” Grove’s descriptions of the inflection point are excellent.
    I think your points about companies saying they are “getting back to what we do best” are also dead on. The general problem of trying to replicate the past is that the world has changed, and what worked then is not in any way guaranteed to work now. In fact, I would suggest the odds are against it.

  • By Kevin Ertell, July 16, 2009 @ 9:55 am

    Thanks a lot for your comments, Francesco. I agree that retailers are starting to increase their cross-channel integration efforts, and that’s good.
    I think you’ve captured accurately the primary differences between physical retail locations and e-commerce. Some might also include the ability to shop socially in physical stores with other people. It seems that all of these gaps are beginning to close, though. With products that have been digitized, instant gratification is now possible (even more than physical stores, for that matter). In harder goods, supply chain systems in certain metro areas are making same day delivery a possibility. Given those advances will continue, I wonder how many people will shift their behavior away from physical stores. If and when they do, at least some of today’s physical store models will likely break. How should those models change to remain profitable? Are some models more capable of adaptation than others? I’m curious to know your thoughts.

  • By Sara, July 16, 2009 @ 1:42 pm

    Hi Kevin,
    I agree with Francesco comments. Retailers are not only challenged to understand the future potential of their different sales channels, but the marketplace has become – and will continue to become – more behaviorally driven. Most retailers still tend to focus on past purchase behavior and the status quo in direct marketing tactics to push their own company agendas to the company preferred channel. Instead, I believe companies that focus on utilizing the many tools available to leverage current web behavior and to let consumer-choice drive decisions will come out on top.
    Companies are also less willing to focus on these smaller groups and pockets of individuals for fear of lost revenue and traffic to their channels – even though the percent return is typically higher and they will be positioning themselves for the future increase in e-commerce and social networking channels.

  • By Kevin Ertell, July 16, 2009 @ 3:33 pm

    Hi Sara,
    Thank you very much for your comment. I am in complete agreement that it’s best to use all available marketing vehicles to attract customers to the brand and not bias them to any particular channel.

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Other Links to this Post

  1. The Hidden Cost of Change | Retail: Shaken Not Stirred — January 6, 2010 @ 7:54 pm

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