Why, you might be asking yourself, would any rational firm choose—and it is a choice—to stick with the declining model?

Now, this may not be an answer, but it’s a reality: Firms in every industry do this all the time. Perhaps the most well-known recent excavation into how this happens was Clayton Christensen’s The Innovator’s Dilemma but I recently discovered an even earlier and at least as nuanced a treatment of the phenomenon in Peter Drucker’s Innovation and Entrepreneurship (1985). The following excerpts are from his chapters on “Industry & Market Structures” (pp. 76 et seq.) (all emphasis mine).

Industry and market structures sometimes last for many, many years and seem completely stable. … Indeed, industry and market structures appears so solid that the people in an industry are likely to consider them foreordained, part of the order of nature, and certain to endure forever.

Actually, market and industy structures are quite brittle …

In industry structure, a change requires entrepreneurship from every member of the industry. It requires that each one ask anew: “What is our business?” And each of the members will have to give a different, but above all a new, answer to that question.

A change in industry structure offers exceptional opportunities, highly visible and quite predictable to outsider. But the insiders perceive these same changes primarily as threats. The outsiders who innovate can thus become a major factor in an important industry or area quite fast, and at relatively low risk.

Drucker also identifies “near-certain, highly visible indicators of impending change in industry structure,” which include:

  • Rapid growth and the success of existing practices, “so nobody is inclined to tamper with them” despite their becoming obsolete;
  • A tendency to become complacent and above all to “skim the cream;”
  • A tendency to define and analyze the market based on history and not reality.

And this from “Hit Them Where They Ain’t” (pp. 220 et seq.):

Some fairly common bad habits that enable newcomers to use entrepreneurial judo and to catapult themselves into a leadership position in an industry against the entrenched, established companies:

  1. “NIH,” or not invented here; because we didn’t think of it, it can’t be of great value;
  2. Again, the tendency to “cream” a market, that is to get the high-profit part of it, which is always punished by loss of market and trying to get paid for past rather than current contributions;
  3. Even more debilitating, according to Drucker, is the third bad habit: the belief in “quality.” “Quality” in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not “quality” because it is hard to make and costs a lot of money; that is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes “quality.”
  4. The delusion of the “premium” price. A “premium” price is always an invitation to the competitor.

Harsh words, harsh advice? Indeed.

Yet firms once upon a time as distinguished as RCA, Xerox, Bell Labs, US Steel, Westinghouse, Kodak, Honeywell, and countless others have failed to learn these lessons at their peril.

This is not the type of history we should want to repeat. So what now?

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