Defending the Castle: Surviving Disruption

This is a transcript of the CI Life Podcast, Episode 30. If you’d rather listen to the podcast, click here.

Sean Campbell: Welcome to another episode of CI Life. In this episode, we’re going to talk about a subject that is near and dear to our hearts, which we sometimes refer to with our clients as “defending the castle.” You can throw a rock and hit a thousand news articles that talk about how some disruptor is killing a long-standing company. But what’s not talked about as often are the times that those venerable companies actually killed the disruptor, or at least survived and maybe pushed the disruptor into a corner.

We’ve done a lot of research in this space, and we’ve had a lot of direct experience with working with folks in this regard. But without further ado, Scott, we should probably introduce the subject a bit, just to make sure people understand exactly what we mean by “defending the castle.”

Scott Swigart: There is a great body of stories out there about how Sears, Ringling Brothers and Barnum & Bailey Circus, or Encyclopedia Britannica got put out of business. Generally, the story is that some big Fortune 500 company ends up going under after facing a much smaller rival.

But a lot of times they don’t, and one reason is that the large incumbent has assets that the startup just doesn’t have. They have strategies and tactics that they can employ that are simply not available to the startup, and it ends up being a very asymmetric conflict.

There are things the startup can do that the large company can’t, but there are things that the large company can do that are unique to them. That’s a story that rarely gets told.

Sean: It’s worth mentioning here that all the stories we are talking about here are based on battles that are now public. You can look up the results of these battles and see what we’re talking about from the public domain, to be absolutely clear. Much like the anecdotes that appear in business books, these are cases where you can divine where the strategy came from.

We’re also not talking about scenarios where the cannons roll up and it’s only a matter of time before all castles are nothing more than tourist attractions, meaning that we’re not talking about situations not where something so fundamentally changes that there’s no way for anyone existing in the market to survive. We’re talking about all those other times, and perhaps the more interesting ones, that end with the old-timer company still being around. It’s valuable to consider how they managed to survive.

Scott: There are many strategies that can be employed, and we’re just going to talk about a few. The first one is significant in the sense that we have heard it associated with from everything from high tech software companies to tugboat operators. It’s a strategy we call the “Make a Suite Deal.” The scenario at work here is typically that the competitor does just one thing, and they do it very well. In fact, your company may be very threatened, because that competitor may do that one thing better than you do.

A large tugboat company told us that a smaller, low-cost competitor came into one of their ports and started to take a bunch of business from them. The larger company went to the shipping companies and we said, “We’re going to make you a deal across six or eight ports.” So even though that tugboat company might’ve been cheaper and better in one port, it was a better business decision for these large shipping lines to make a bundle deal.

Software companies do this all the time. They have several products, and rather than sell them to you individually, they sell them as a suite, so that even if you buy the competitor’s product, you have probably bought theirs too, because they’ve made it cheaper to buy the suite than to buy individual pieces. That makes it very tough for a competitor to make a sell, because in a sense, they’re forced to compete against a free product, which is a tough position to be in.

Sean: Many people in corporate America don’t realize that the reason they use SharePoint isn’t so much because SharePoint was the best product. If you ask someone in your IT shop how SharePoint originally got into the company, you are likely to get the response that it was part of license-bundling deal because they had already bought Windows and Office. Software is well-suited to this approach because you can just add another license to the bundle. But you can do this in other industries, too.

Another interesting one that comes into play a lot—especially in technology industries—is fast following.

There’s a book out called “Fast Second”. The fast-following approach is applicable for companies that have the resources to wait and develop a competing solution. They might wait and buy their way in by acquiring another smaller competitor, or they may alter an existing solution and extend it into a new space.

Scott: In this approach, the larger company may let the startup wander in the wilderness until it solves the key challenges in a new area. Then the incumbent swoops in with an army of resources, and assuming that the smaller company doesn’t have IP protection that prevents it, the larger company replicates the capabilities quickly.

Sean: Now, bear in mind that, as with a lot of things in the field of strategic analysis, it’s very easy to let your own biases drive this process. If you are the type of person who likes doomsday movies, maybe you are overly inclined to think that that upstart’s going to kill you. If you’re the person who always believes in the triumph of the hero, maybe you’re going to irrationally believe in your company’s survival, regardless of where the data points.

But, at the end of the day here, what we’re trying to say is that there are ways for the large companies in these scenarios to effectively defend themselves, rather than focusing only on the disruption.

Scott: Right, and in these David and Goliath stories, everybody likes to root for the underdog. If you’re Goliath, it’s good to know there’s some hope out there for you as well.

Sean: Exactly. There are other ways to go about this, rather than just mimicking the slingshot, so to speak. I think that’s really the key takeaway.

We’re going to come back to this topic in subsequent podcasts, and we’re also open to hearing from you. If you have particular strategies that you think we should be aware of that you can speak about in the public domain of effective ways to defend the castle, feel free to email us. And with that, we’ll let you go. Thanks for listening.