The dinosaur’s eloquent lesson is that if some bigness is good, an overabundance of bigness is not necessarily better. – Eric Johnston
Thanks to Professor Clayton Christensen of Harvard University and his 1997 landmark book, The Innovator’s Dilemma, we have a new way of understanding the life cycle of companies and why some market leaders maintain their dominant position and other one-time market leaders disappear.
Here’s how it works:
Dominant companies that focus too much on the current needs of their largest customers may miss out on unstated or future needs, thus opening the door for competitors to gain a foothold into their customer base. And if those dominant companies fail to adopt new technology or improved business models, and continue to pursue strategies that perpetuate what has historically helped them succeed, they may find their once profitable business declining. Christensen calls this “disruptive innovation” and gives examples as diverse as the personal computer industry, milkshakes, and steel minimills.
What is a disruptive innovation?
Mini steel mills that only produced specialty steels for special applications rose in dominance because the large steel companies chased market share through focusing more and more on high volume production where they could gain efficiencies of scale (chasing profit). Slowly the mini mills kept moving into empty niches abandoned by the big companies as “unprofitable”. Before long the mini mills were gaining market share at the expense of the established market leaders. Consider the now dominant positions of mini mill makers Steel Dynamics and Nucor versus US Steel, which once owned the global steel market.
Earlier examples of disruptive innovations:
- telephone (disrupted the telegraph)
- semiconductors (disrupted vacuum tubes)
- steamships (disrupted sailing ships)
And more recently:
- the Walkman disrupting cassette players
- the iPod disrupting the Walkman
- digital music disrupting the large music publishing companies
- ebooks disrupting the giant book publishing houses
- the tablets disrupting PCs.
The same trend of disruptive innovation is now happening in global banking with the “invention” of complex derivatives, CDCs and other profit-generating products being aggressively pitched to customers. Due to poor service and escalating fees from large banks, clients are now looking for alternatives to big banking and thus the rise in FX houses, private financing and the fast growing phenomenon of crowd-funding. Also disruption is happening in the global executive search industry where firms like LinkedIn and other internet-based solutions to help companies find qualified candidates are eroding the big search firms from the bottom up.
Global Consulting and Disruptive Innovation:
All this got me thinking about another industry and disruptive innovation: Consulting.
At one time there were a few large and highly professional consulting firms who provided advisory services and business expertise. But over time, after hiring the best and the brightest and having to feed a swelling cost base, and with the invention of a new selling-communications “technology”, PowerPoint, consulting firms began to aggressively market more and more complex solutions to traditional clients problems. As a result the big consulting firms ended up producing “solutions” and new approaches that were complex, expensive, and highly invasive.
As a result, businesses requiring consulting help started looking around for other options and an opening was created for disruptive innovation. Enter the “mini-firms” and single practitioner consultants who provide solutions to clients that are less expensive, maybe not as sophisticated but still work, and certainly with fewer staff (they don’t have an army of junior consultants to throw at client problems). A great number of these mini-firms are composed of partners and near-partners who grew tired of large consulting firm leveraged business models and internal politics. These mini-firms provide highly professional services at less cost and are often more focused on the specific needs of the client.
As a result we now have the long-tail effect in the consulting industry where there are a few large firms and a very, very long tail of small-sized practitioners. And over time several of the mini-firms have grown and merged into fairly large global competitors, taking market share away from the traditional incumbents.
To protect their large imbedded cost base and profit margins, the big firms began looking for additional markets to penetrate where they could deploy their “army of consultants” and command high margins. And so the world of “technology consulting” began to emerge with the split up of Andersen Consulting and its transformation into Accenture and now all of its spin offs.
And I suspect the world of consulting will continue to evolve in this manner of disruptive innovation, because in the long run it is good for clients; more choice and better service.
My question is:
when will the big consulting firms realise that many of their “products” and solutions are too complex, costly and invasive for clients and their excessive leverage model with an “army of junior consultants” is sorely outdated? When will they innovate themselves?
Is your industry or business ripe for disruptive innovation?
See the review of LEVERAGE in The Economist (January 9, 2014).
John also writes thriller novels: novels.johnrchildress.com