Author: Robert Bradford

How are industries disrupted?  We have already identified the three most common causes:  technology, business practices, and law.  But if we want to do a good job anticipating disruption, we need to know exactly what kinds of changes are likely to lead to disruption.

As a general rule, disruption occurs because customer behavior changes radically – or the customer disappears altogether.  For example, the shift from land lines to cell phones (which is much more noticeable in younger generations today), is a radical change in customer behavior for telephone-oriented operations, and it may mark a complete disappearance for those whose markets depend on the existent of land-line service (companies that make RJ-11 jacks or pay phones, for example).

Some disruptions lead to very rapid change and disappearance of a market.  The rise of “smart phones”, for example, eliminated the consumers’ desire for a stand-alone personal digital assistant, making devices such as the Palm Pilot obsolete almost overnight.  Technological convergence has a tendency to eliminate discrete devices as they are combined into a single technology.

Other disruptions can take a longer time to play out.  The land line to cell phone migration is an example; so is the slow change from in-person to online banking, which started in the 1980s and is still playing out.

So what kinds of things cause changes in customer behavior?  Certainly, the three root causes we discussed earlier – technology,  business practices, and law, are at play here.  But to gain a more fundamental understanding of disruptive change, you need to think about how customers behave.  As a rule, customers make choices to seek pleasure or utility, and avoid pain.  This may be as simple as buying a candy bar – seeking the pleasure of sugar and chocolate – or as complex as buying insurance – avoiding the pain of an unanticipated financial loss.  In most business transactions, there is a delicate balance between the pleasure and utility of the product or service purchased, and the pain of paying for that product or service.  In other words, most purchases involve customers doing something they would prefer not to do, spending money.  Root cause changes, such as technology, may dramatically change a customer’s perception of pleasure, utility and pain in your market, because the change may change the fundamental experience of these three attributes.

Let’s examine an example of radical change.  Changes in telephone technology and business practices led to the rise of call centers as a customer contact point.  This change was largely driven by suppliers desire to reduce cost by centralizing customer contacts and also by using technology to increase efficiency (both time efficiency and global market efficiency, by moving operations to markets with lower costs).  So far – increased utility for suppliers, and reduced pain, which may or may not be passed on to customers in the way of reduced prices.

From the customer perspective, this shift looks different.  There is increased pain, as shifting responsibilities, reduced communications and technical abilities, and depersonalization of service came with the increasing use of call centers.  In some markets, this decreased value was accepted as a given, since all competitors essentially pursued the same change in business practices.  In others, the difference between the high pain and low pain offering led to unexpected changes in customer behavior.  For example, in the airline industry, the aggravation of low-cost call centers and long hold times led to accelerated adoption of online travel services.  This, in turn, enabled customers to quickly use technology to sort air travel options by price (and usually, by price alone), so that the market became increasingly commoditized.  One could argue that, by partially shifting the cost of the phone operation to the customer (in the form of longer hold times), airlines created a strong incentive to seek alternative ways of purchasing their product.  This dramatic shift essentially destroyed most of the travel agency industry in a very short time, and also – because of ticket price competition – led to the bankruptcy of several airlines.  Viewed from the perspective of the travel agents, this shift was extremely rapid and devastating.  When you look at how customer motivations interacted with shifts in business practices, it was entirely predictable (and, in fact, I did predict it when working with one airline in the early 1990’s).

While economists point out that customers do not always make rational choices, there are usually emotional balances driving customer behaviors.  Some consumers, for example, will spend 5 minutes driving out of their way to save 50 cents on a tank of gasoline for a car.  When you put it in price terms, this makes sense  – “I bought here to save 3 cents a gallon.” – but when you put the decision in relative terms, it is clearly irrational “I just spent time to be compensated at a rate of $6 an hour.”  So, when assessing how customers may dramatically shift their behavior, be sure to look for the emotional equations that are dominating people’s thinking, and not just the rational ones.  Here are the most common emotional decision drivers:

1.       Price – far too easy to focus on, because price is credible above most other claims.

2.      Status – customers will pay extra to be perceived as high status.

3.      Sex – customers will pay extra to think they are more attractive as romantic partners.

4.      Pampering/aggravation – customers will pay extra to feel they are treated well or to avoid the perception of mistreatment.

5.      Fear/hope – customers will pay extra to avoid things they fear or obtain a chance to achieve something they hope for (which is why lottery tickets sell).

When examining your markets, be sure to look at the effects that changing technology, business practices and laws have on all five of these things in the minds of your customers.  Whether your customers are consumers or companies, you will find that any of these can lead to significant disruption – and therefore both threat and opportunity – in your markets.

For an excellent discussion of strategic planning in uncertain times, click here.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.

By Robert W. Bradford, President/CEO

As a rule, people don’t like to change.  People do change, however, and this happens for three basic reasons:

Changing behavior can eliminate a major source of pain

An example of this is the mass migration of airline ticket purchases to the internet in the 1980s and 1990s.  Two sources of pain were eliminated through this – the inconvenience of working through an intermediary (the travel agent), and the higher cost of maintaining the agent-based distribution system.

Changing behavior can create opportunities

As eBay became a deep and viable market for all kinds of goods, many people in specialty retail businesses, such as collectibles, changed their business model to include a substantial amount of online auction sales to take advantage of the more robust market opportunities.

Changing behavior may be required by changes in the environment

Physician practices, historically dominated by the small, one or two doctor practice, have begun consolidating into larger and more sophisticated practices as a result of increased regulation and payment practices in the industry.

In each of these types of change, there is potential for destruction or major reconfiguration of the industries involved.  The travel agent business has become oriented toward very specific types of travel – and the mainstay of air travel is almost completely gone.  The collectibles markets affected by eBay have largely transformed into a hybrid of online/offline dealers.  Suppliers to the health care industry have changed their selling practices to target larger and more savvy buyers.  These changes are not something we can fight – they are inevitable consequences of changes in laws, technology and business practices.

For strategic thinkers, the foresight that would enable us to adapt to disruptive changes before they occur is incredibly useful.  Without question, the players in an industry who anticipate and adapt to such changes are most likely to improve their competitive position.

What are the best ways to spot disruptive changes in your industry?  It helps to understand the most likely drivers – technology, law and business practices.  Using each of these as a lens, you can look at your industry and ask whether any of these factors have changed to a point where they present an opportunity for major change.  One very effective way to do this is to put yourself in the customers’ shoes.  I like to ask for the three or four most important behavior drivers for customers – such as price, convenience, product features, etc.  With this list, you can ask “How will technology change our ability to drive customer behavior in the future?” (and, of course, “How will legal changes…” and “How will changed business practices…”).  You can rest assured that someone in your industry WILL use the changing situation to drive customer behavior – generally by attempting to draw more customers by meeting their changing needs and preferences better than other competitors.

Armed with this analysis, you can begin to piece together the most likely scenarios for your market, and then develop a Winner’s Profile.

If technology, for example, is dramatically reducing certain costs in your industry, you can very effectively plan for an improved cost structure and, unfortunately, price competition.  The company who best anticipates future changes and positions itself to succeed is the one most likely to generate windfall profits – higher sales at a price that is not yet commoditized.  What you do with this windfall is strategically critical.  Smart strategists will invest much of the improved profit in building market share and reputation.  This is important – you CAN just let the increased margin flow to your bottom line, but it will make for a fairly weak longer term competitive position.

The best strategic choice is to look at how you can apply your strategic competency to the future disrupted market.  For example, if you are good at being a travel agent, and your business is about to decline because of the internet, you want to ask “What strategic competency makes me a successful travel agent?”  The answer to this question will lead you to ways you might catch the wave of change, instead of being wiped out by that wave.

Continue to Part II, click here.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.

Profit, many would say, is profit.  But in reality, profit comes from several different sources, and the type of profit you are getting in your business can be very important in thinking about your strategy.  Profit that comes from a temporary or threatened situation, for example, should be treated quite differently from profit that comes as the result of your brand reputation (assuming your reputation is solid, of course!).

Let’s look at the different types of profit that most companies get:

1.       Capital profit – profit you make as the result of owning capital assets, such as a building or equipment.

2.      Labor profit – profit you make as the result of employing people.

3.      Process profit – profit you make as the result of an action that you perform.

4.      Brand profit – profit you make because people pay more for your products or services as a result of your brand.

5.      Relationship profit – money you make because of a specific, unique relationship with another person or organization.

6.      Information profit – money you make because you know something that your customers or suppliers do not (for example, you have a customer list that allows you to sell products at a premium that your suppliers could sell directly).

This is not an exhaustive list, but it gives you a good sense that money can be made in a lot of different ways.  Most businesses make profit in more than one of these ways – it’s not unusual for a manufacturer to have capital, labor, process and brand profit, for example.

The reason flavors of profit can be important in strategic planning is that each creates a unique set of strategic issues as well as competitive dynamics in your industry.  For example, information profit has been eroding in many industries because the Internet has enabled buyers to research primary suppliers and cut past traditional intermediaries, such as distributors, in some markets.

Some sources of profit – labor, for example, and brand – can be problematic because they erode as they are used.  Relying on your brand for profit involves charging more money for your products or services – which changes the ratio between price and value delivered.  Unfortunately, while your brand can enable you to do this, doing too much of this will diminish your brand reputation and, as a result, your ability to use brand to increase profit.  So, while brand can be a great source of profit, relying on it too much can lead to killing the goose that laid the golden egg.

What kind of profit does your company make?  Are any of the types of profit you earn more or less stable – or are some continually fluctuating due to technological or competitive pressures?  When evaluating profitability in your strategic planning, you might find it useful to break down profitability into different types, so that you can think about different strategic responses and choices that will enhance your profit growth in the future.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.