At the end of our last piece, I asked aloud whether we as lawyers are intellectually and emotionally capable of adapting to the new market landscape, suggested that adapting would require experimentation and—yes—failure, and noted that countries and industries that did not reflexively punish failure enjoyed stronger long-term growth.
Let’s talk about that some more.
A key set of players facing us on the new landscape are lower-cost providers. They come in a variety of guises but all essentially embrace (you can say “exploit” if you prefer, not that it will help you in the least) clients’ newly exercised power to demand more for less.
The founder and head of one of these firms, which is in the business of applying Six Sigma processes to document review, and which has demonstrated consistently and convincingly that their quality is immensely superior to that produced by BigLaw associates working on the same document sets, remarked fairly casually to me not long ago that “for every dollar of revenue we gain, BigLaw loses three.” If you want to reduce what “disruption” means down to a size suitable for a T-shirt, this will do nicely.
But we’re hardly the first industry to encounter lower-cost providers. How have other incumbents responded when such a threat arises? I’m sorry to report the track record is not all that reassuring.
In June 2010 McKinsey published When companies underestimate low-cost rivals which opens thus:
When low-cost competitors appear, one of the toughest decisions facing executives in companies with premium products and brands is whether to respond. Should the company or business unit adjust its strategy to meet the low-cost threat or should it continue business as usual, with no change in strategy or tactics?
As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it. Sometimes executives are so focused on their traditional competitors, they don’t even recognize the threat developing from low-cost rivals.
Often, the incumbents’ slow response stems from the most rational, admirable, and correct of motives: They’re focused on their core customers and clients, who are not patronizing the low-cost new entrants. But markets, competitors, and technology—not to mention clients’ tastes and preferences—are never static. The newcomers want to move up the value chain as badly as anyone, and often they find they can do so:
As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it. Sometimes executives are so focused on their traditional competitors, they don’t even recognize the threat developing from low-cost rivals. What executive isn’t familiar with the case of the low-cost airline Ryanair and its hugely successful entry into the European market at the expense of the region’s traditional carriers? Likewise, were the world’s leading telecommunications companies too busy competing with one another to recognize the threat from the Chinese low-cost competitor Huawei, now a leader in fixed-line networks, mobile-telecommunications networks, and Internet switches? Then there was Vizio, a little-known LCD TV supplier that overtook the premium brands in five years to become the North American market leader in large-format TVs. Complacency and arrogance produce blind spots that delay a response and leave incumbents vulnerable.
It can be a mistake to think one has a reliable pricing umbrella over one’s head. Even though Xerox first commercialized and introduced copiers into the US market, to the point where “xerox” became a verb like “google” is today, they never saw the threat coming from Canon, which introduced low-cost, low-feature-set machines into the US and in short order owned all but the very top end of the market. By contrast, when duPont introduced nylon, it priced it not at what a patent-owning monopolist could persuade the market to bear, but at what duPont anticipated its costs of production would be, together with a modest profit margin, five years hence after going through the learning curve. This alternative approach accomplished two things: Not only did it make it all but impossible for new entrants to match duPont’s economies of scale when the technology became generic, but it induced duPont customers to discover completely unforeseen uses for nylon (such as, to use a wild example, in women’s stockings during the WWII silk shortage), which greatly increased duPont’s nylon revenues and accelerated their advances in optimizing production efficiencies.
Low-cost entrants have upset apple carts in everything from California premium wines to IT services, software development, pharmaceuticals, flavors and fragrances, and retailing.