The upside of being a cannibal

Most businesses - and non-profit and government organizations, for that matter - fiercely protect their turf. In the case of business, it usually means not doing anything that might jeopardize the core income stream. For example, Microsoft has been loathe, at various stages in its history, to move towards the Web, cloud computing, or anything that might put a dent in its core operating system, desktop software and business server businesses. This is understandable. If your business made $58 BN in revenue from these core products in the last year, anything that would reduce dependence on your products, and thus that number, by providing more cost-effective solutions to your customers, would feel like suicide to you. The beauty of our market-based capitalist system, is that even if the incumbent players or regulators cannot (or do not want to) see a better way, someone else can, and can successfully sell it. It is probably fair to say that the only reason Microsoft released any such products is due to competitive threats, at various times, from Netscape, Yahoo, Google and others.

Clayton Christensen, in his brilliant Innovators series of books, calls this disruption of the market. In simple (and overly simplified) terms, you cannot beat a large incumbent at their own game, but if you can disrupt them in a way that changes the rules of the game, provides compelling benefits to customers, and moves in a way that the large player cannot - due to perceived gross margins, cultural inability to shift, existing relationships, or protection of a core market - the underdog can and often will win. Christensen recommends that incumbents can avoid this trap by disrupting themselves out of business. Essentially, they need to become their own competitors. In business terms, we call this a type of cannibalism: you cannibalize your own market-share by selling a product or service that is better for customers than the existing ones, by creating your own internal (or external) disruptive start-up. Of course, the devil is in the details, and few firms can succeed at doing so.

Every now and then I come across a business, large or small, that successfully cannibalizes its own business and grows because of it. Yesterday, I met a small Web design shop, just a handful of employees, that nonetheless cannibalized its own business, at least partially, and impressed me.

In most respects, Web Design Insight is like every other quality custom Web design shop out there. They have design talent, programmers, and provide high-quality service. However, unlike most such shops, they saw a pattern, saw a competitive opportunity, and decided to grab it themselves. WDI does a lot of work with synagogues. Synagogues are, as most readers know, Jewish houses of worship that also function as community centers. In general, they use the Web to publish information about themselves, whether static "we are Congregation So-and-So," or more dynamic weekly updates. In addition, they have the usual activities of most non-profits, especially religious ones: keeping in touch with members, raising funds and membership dues, etc. Finally, they have the unique needs of a Jewish house of worship: language, as most Jewish ritual is in Hebrew and English; calendaring issues, as Jewish ritual revolves around the Hebrew calendar, distinct from the Gregorian one in common civil usage; unique lifecycle events, such as birthdays on the Hebrew calendar, bar/bat mitzvahs, etc.; times of prayer that vary weekly based on season and location; and many others. Thus, what a "normal" non-profit might be able to purchase for $15-20k, a full-service Web site for a synagogue would require significant amounts of custom work, boosting prices to multiples of that, perhaps as high as $50-60k. (These prices are my estimates; I have no actual pricing information from WDI). For a Web design shop, this is a book: lots of custom work means lots of consulting, with gross margins on each hour sold. Yet the husband-wife proprietors of WDI decided to cannibalize their own business. They built a product called Synagogue Launcher, which likely sells for a fraction of what a custom solution would. They took the common work in all of the synagogues, did it once in a generic fashion, and sell it as a synagogue platform. In doing so, they have robbed themselves of their own consulting revenue, i.e. cannibalized their core business, to create a new one. They disrupted their own business, took a big risk, and hopefully are reaping the benefits. They deserve credit... and if only the larger businesses could do so as well. At the same time, that would leave little opportunity for all of the entrepreneurs out there, so we should be grateful.

On the reverse side, I heard Esther Dyson speak 3-4 years ago. Esther is a fixture in the tech community. She also sits on the board of the advertising conglomerate WPP Group. As part of her address, Esther noted that WPP had recently acquired a small, brash interactive media player (whose name escapes me at the moment). When asked about the rationale for the acquisition - to be blunt, large companies tend to smother the creativity of smaller dynamic firms that they acquire, making acquiring a small firm whose success depends on its culture highly questionable, see in dictionary: IBM and _____ (you fill in the blank) - she said openly that they acquired the firm for it to be a catalyst for change in WPP. The world was moving rapidly towards dynamic, interactive, hyper-local advertising, and WPP needed to change. She (and assumedly the WPP board) viewed this acquisition as the kernel of change, the grain of sand that irritates the oyster leading to the pearl. In essence, WPP was trying to acquire a disruptor, rather than create one, but in doing so, it actually wanted to disrupt. I found two points very notable:

• WPP recognized it needed cultural change, and openly admitted it could not do so on its own. Whether or not it had tried and failed, they didn't say. This public openness is refreshing, and is good.
• WPP's board is incredibly naive in believing that some small, recently acquired group could effectively change the culture of a company with 140,000 employees across 107 countries. This naivete is bad.

So we have three examples:

• Microsoft, who refuses to disrupt itself until forced to, and poorly at that, and only then after it fails to crush the disruptors.
• WPP, who recognizes the need for change, yet tries to buy it from the outside, and shows naivete.
• WDI, who openly and willingly cannibalizes its own young business to serve its customers.

The world is always changing. The smart players are, like Gretzky, going to where the puck is going to be, not where it is.