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Falling into decline. Why a successful business can "falter"

business intelligence

Falling into decline. Why a successful business can "falter"

BUSINESS INTELLECT

Jaroslav Kaplan
President of the Kaplan Research Company
Founder of the Business IQ project
Everything was working fine before! Why is the business "frozen" now? Such words are increasingly heard from its owners.

What is the reason? Jaroslav Kaplan, president of Kaplan Research Company and author of the bestseller "Business INCOGNITA: How to Expand the Boundaries of Entrepreneurial Thinking", explains.
The most important reason is that the transformation processes in the modern world are proceeding at a truly impressive speed.

Radical technological changes are taking place before our eyes, and this inevitably changes the quality and quantity of interactions - between individuals, companies, and even entire markets.

Familiar industries are collapsing. Instead of hailing cabs we use aggregators, instead of travel agencies we prefer self-booking sites, we pay with cards instead of cash, and television and traditional press have been effectively replaced by streaming video and online publications.

It is becoming increasingly difficult for entrepreneurs to make the right decisions year after year - realizing the irreversibility of change, they sometimes simply do not know how to act so that their company does not collapse.

A study of failure stories shows that 80% of those companies that bet on the need for change were unable to resist the ongoing destruction of markets. We are not even talking about those who did not try to resist this process.


What has been left out?
It is impossible to drive a car that stands still. Any movement equals change, and in our case it affects all levels of business. At the same time, if the movement is orderly, not chaotic, it has its own direction, its own vector of development. This is a fact that many people overlook.

The vector of development and the vector of market power are one and the same. The development vector is built in accordance with the flow of market power that exists in a given area.

Moreover, it always refers to a specific value perceived by consumers.

This value has to be managed taking into account the changes taking place in the environment, not in isolation from them.

For example, we can look at a low-pressure area and a high-pressure area. Let's say there is a low-pressure region in the atmosphere. Of course everything will start to move from the high pressure region to the low pressure region. And what happens to the trees that are in between these regions?

Suppose there is a grove of small trees in between these regions. We see that all of these trees are leaning in the same direction. It is as if they are saying, "The wind is blowing that way." So, the force itself is something as invisible as the wind, but if we add the movement of consumers and products to these lines of flow, we see that this market force takes direction.

This is the vector of development.


The success defeat trap
The success defeat trap (also known as the "success paradox") describes a situation where a company's past success can lead to future decline. This applies to any company - both small and very large.

For example, only 13% of the companies on the 1955 Fortune list currently exist. The average tenure on the list today is only 15 years, up from almost 60 years in the middle of the last century.

Most companies end their existence when consumers' view of what they consider a "valuable product" changes.

Few companies that have fallen into the trap of their success have managed to find a way out of it. Those that have survived have realized in time that the only way to escape is to focus on creating new value for their customers, which is always linked to a new context of customer interaction.

One of the most successful statements in this regard belongs to former IBM CEO Samuel Palmisano: "You either create innovations or fall into the hell of standard products".


Context
Context, in terms of entrepreneurial challenges, is the set of any factors that can influence a consumer's assessment of the value/utility of a product. Compare the value of the same bottle of water in the supermarket and in the desert. Why is it different?

The answer is obvious - different context. It can have a strong influence on the outcome of any activity.

For example, Kodak could have started developing digital photography back in 1975. However, the company ignored the opportunity because film and paper production was very profitable at the time.

On the other hand, Japan's Fuji Films along with other companies, showed great interest in digital technology. In the end, Kodak was left behind. It "gifted" the digital camera category to new players with a different vision of the future.


Destroying old value
The value that entrepreneurs created for consumers is very often altered or destroyed in the realities of the new information economy. Those who have not realized this have failed to make the necessary changes to their business.

For example, the rise of online commerce has resulted in consumers being able to choose between thousands of suppliers. The value of a company that produced goods in a neighboring town tends to plummet as consumers can buy everything they need online. They only gain from this - and companies lose.

The important thing to realize here is that any product is embedded in its specific activity structure.

This, for example, was brilliantly exploited by the Starbucks coffee chain: they refused to compete with other cafes, restaurants or stores. Instead, Starbucks, in the words of CEO Howard Schultz, began to fight "for your third place": that is, they entered into competition with all the locations where people like to spend time away from work or home - parks, theaters, libraries.


Loss of meaning
The development of a business system does not take place in a vacuum, in isolation from everything else. It always takes place in a specific environment and in specific circumstances that determine the available resources of the entrepreneur, his opportunities and limitations.

To claim that something is "taken out of context" is to assume that it is something that is wrong. This is exactly what entrepreneurs often do - they view their field of activity too "narrowly", outside of its relationship to the rest of the market environment.

This causes them to severely shorten their planning horizon (often as short as a year) and use simplistic business models to understand what is happening.

It is the loss of their business’s meaning (from the consumers' point of view) that causes the company to lose its right to have a place in the consumers' minds and slowly (or quickly) fade and then disappear from the market space.

The company is no longer able to attract the interest and attention of its consumers, which means degradation and death for the whole business.