A chat with William Wolfram about how large, established brands face the ‘Innovator’s Dilemma’, and a little about what that concept is.
Kat: Article 2 is, “Large, established brands face the quintessential Innovator’s Dilemma”, what is it exactly that large, established brands are facing that’s an issue for them.
William: Professor Clayton Christensen at Harvard Business School wrote the book called Innovators Dilemma, you know I think it’s one of the great business books for anyone to read today. He introduces a concept called the Innovators Dilemma, which essentially means that when the predominant player in a market is disrupted by a new technology or competitor, the innovator dilemma occurs, and that predominant player would have to cannibalize their own core business in order to stay competitive with that new technology or new competitor.
So the example there would be, Netflix having their core business be the DVDs in the mail and then Reed Hastings, their founder and CEO, saying 10 years from now bandwidth is going to cheaper, more people are going to have faster internet connections so, we’re going start pushing that you know streaming product even though it’s losing it’s money at the time bandwidth is very expensive. We’re going to push it and cannibalize our own core business in order to survive in the long term. But that’s extremely rare, they are you know thousands of examples where you know companies fail to adapt.
Kat: Right, so I think for me and I think for a lot of people initially I would have thought that “well it’s obvious Netflix is doing really well now, so obviously that had to you know change”, but you know there are situations where companies cannot do that because that’s where they’re getting all of their money from.
So how does that all fit into our manifesto?
William: Sure, so you know we believe that direct to consumer arguments are absolutely abundantly clear the future is direct to consumer. We also think that the big fortune 500 brands, they’re smart and they know that this is happening. If they don’t know it now they’ll know it in 2 years time. The question is, will those large, established brands own the future of direct to consumer? and we think that’s absolutely not going to be the case, because of the Innovator’s Dilemma.
So, what is the main advantage of going direct to consumer is the fact that you don’t have to charge your consumers that high price of this inefficient supply chain, you can pass on these savings to your consumers. So, they’re actually able to get the same product at one/ third or half the price. Now what happens if Parker & Gamble says “hey, if you buy a Gillette razor blade from our website, we’re giving you a third of the price that you would pay at like CVS or Walgreens.
Kat: It just seems like “what is going to happen?”
William: But, if they did that then basically you know the next business day or the next day the CEO of Walgreens/ CVS would call Parker & Gamble up and say “You know that shelf space we’ve got a hundred other companies that want that shelf space, and if you’re going to start cannibalizing our sales by offering the same product to your website for a third of the cost we’re going to find another competitor ourselves.” No one is going to come here to buy Gillette razor blades if we can get it for a third of the price online. Gillette will lose 98% of its core business and then have to start building up this direct to consumer business online that takes time, it takes patience, and a very different organization structure because you have all these fixed costs, all these thousands of people who have been working the traditional supply chain model. So, adapting to that reality, I would be surprised if any CEO reporting to any publicly run group of shareholders could ever you know sustain that type of disruption in their own business. We would take a very profitable company and make it very unprofitable for many, many years with no certainty that future is going to be what you think it is.
So, we think that the direct to consumer model will be built for direct to consumer brands and if you’re a traditional brand and you want to go direct to consumer you sort of have to choose. Are you going to stick with the model that you have or are you going to transform your business direct to consumer? There simply is no two way! You can’t have your cake and eat it too
Kat: Well, without making severe serious sacrifices
William: I see a lot of direct to consumer players and brands that are saying we’re going direct to consumer, then you go onto their websites and their price is the same you can get at the sales or CVS. You know the main advantage, you can offer better prices to customers and if you’re doing direct to consumer but you’re offering the same price, then you’ve completely missed the point!