Growth is Dead: Part 7-Psychology

Sunday, October 21, 2012

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.

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11 Comments


  1. J Chen, 2 years ago Reply

    Side note: Drucker was educated as a lawyer.

    http://www.businessweek.com/stories/2005-11-27/the-man-who-invented-management


    • Bruce, 2 years ago Reply

      Here’s the key excerpt from the article:

      When Hitler organized his first Nazi meeting in Berlin in 1927, Drucker, raised a Protestant, was in Germany, studying law at the University of Frankfurt. He attended classes taught by Keynes and Joseph Schumpeter.

      Would that I had Keynes and Schumpeter as professors in law school! (The study of so-called law in Germany at the time was a bit different than we conceive it today.)


  2. Barry Wilkinson, 2 years ago Reply

    I am so pleased that you have picked up on the McKinsey article about Low Cost Competition. I was beginning to think that I am a lone voice in the wilderness. Even though Richard Susskind said that More for Less is the Key issue for 2012.
    I followed the article through in 2010, read the original book by the author, and my team conducted a research project into the readiness of mid-size UK firms in 2011.
    This lead us into a belief that the middle market is headed for a squeeze from above and below more like a “gastric band”.
    Only this week I did a Law Society webinar on Cost Structures and I shall be revisiting the subject again at the Ark Finance / Business Planning Conference in December.
    You will not be surprised that most firms still underestimate their ability to reduce their costs (and thus prices if necessary) and are unaware of the extent to which they may need to reduce costs in order to match the new competition.
    However, even if firms overcome the lack of awareness, they still have to overcome an inbuilt unwillingness to accept that new technology can provide clients with an acceptable solution as well as lower prices. This denial could cost many firms their insependence.


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