Understand that we are scarcely defenseless in the face of new entrants; they may have resources, so do we; they may have talented people, so do we; they may have enthusiastic clients, so do we.
The problem is that for the first time in a long time (a century?), change is not something to be suspicious and skeptical of; it has become something we must welcome and indeed embrace.
Twenty years ago, Peter Drucker wrote of “the five deadly sins” of management, and what he had to say is timeless:
Recent years have seen the downfall of one once-dominant business after another – General Motors, Sears Roebuck and IBM, to name just a few. In every case the main cause has been at least one of the five deadly business sins – avoidable mistakes that harm the mightiest business.
Here are those sins (mostly a paraphrase or verbatim quote of Drucker, emphasis mine):
- The first and easily the most common is the worship of high profit margins and of ‘premium pricing’. This was Xerox’s downfall in the face of Canon’s entry into the copier business, and GM, Ford, and Chrysler’s in the face of first the VW Beetle and later the Japanese. Drucker’s lesson: the worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Rather, maximum profit is obtained by the profit margin that yields the largest total profit flow, and that is usually the one that produces optimum market standing.
- Closely related to this first sin is mispricing a new product by charging ‘what the market will bear’. This, too, creates risk-free opportunity for the competition.
- The third deadly sin is cost-driven pricing. Most American and practically all European companies arrive at their prices by adding up costs and putting a profit margin on top. And then, as soon as they have introduced the product, they have to cut the price, redesign it at enormous expense, take losses and often drop a perfectly good product because it is priced incorrectly. Their argument? ‘We have to recover our costs and make a profit.’This is true, but irrelevant. Customers do not see it as their job to ensure a profit for manufacturers. The only sound way to price is to start out with what the market is willing to pay – and thus, it must be assumed, what the competition will charge – and design to that price specification.
- The fourth of the deadly business sins is slaughtering tomorrow’s opportunity on the allure of yesterday. It is what derailed IBM.IBM’s downfall was paradoxically caused by unique success – catching up, almost overnight, when Apple brought out the first personal computer in the mid- 1970s. But then, when IBM had gained leadership in the PC market, it subordinated this new and growing business to the old cash cow, the mainframe computer.
- The last of the deadly sins is feeding problems and starving opportunities. All one can get by ‘problem-solving’ is damage containment. Only opportunities produce results and growth.I suspect that Sears Roebuck has been starving the opportunities and feeding the problems in the retail business these past few years.The right thing to do has been demonstrated by GE, with its policy of getting rid of all businesses – even profitable ones – that do not offer long-range growth and the opportunity for the company to be number one or number two worldwide.Then it places its best-performing people in the opportunity business, and pushes and pushes.
Did you note what I noted about what all but one of these five have in common? Four of the five have to do with price.
And isn’t “price” what has been driving us to distraction ever since the Great Reset? “Clients are demanding value.” “Realization hits all-time lows.” “Annual rate increases don’t work the way they used to.” “No junior associates on our matters.” “Purchasing managers on review panels.”
It’s all about price.
The market is trying to tell us something. My counsel would be to listen.
My thoughts on how exactly to go about that will be in the next installment.