Surviving the Format Invasion

Here is an excellent article about surviving format invasions.(free reg. required)

Two of the most intense competitive wars in modern business history are being waged simultaneously today — both centered in the United States, but already spreading to Europe and beyond. General Motors and Ford, once global leaders in automobile manufacturing but now unprofitable and losing market share, seem helpless to defend their home markets against intruders like Toyota and Nissan. Among airlines, household names like United and US Airways have been driven into bankruptcy by intruders once viewed as niche carriers, such as Southwest Airlines. In both cases, struggling incumbents offer the same explanations: weakened industry demand, excessive labor costs, legacy pension obligations, and rising oil prices.

But these standard explanations are misleading. In the 1990s, incumbents like GM, Ford, United, and US Air (now US Airways) were already losing market share and money whenever they faced the intruders directly. Only rising markets elsewhere kept them profitable. Today, even if their employment costs were equalized, their pension obligations were lifted, and crude oil prices returned to $28 per barrel, they would still have higher costs and lower quality than their new competitors.

The real explanation is format invasion. Every business has a format — its own distinctive way of organizing the many activities involved in delivering its product or service. Incumbents suffer (as GM, Ford, United, and US Airways have suffered) when intruders enter their markets wielding new types of business formats. These new ways of assembling commonplace assets deliver familiar goods and services at massively lower cost, often 20 to 40 percent lower, while maintaining or improving quality. The traditional market leaders fail to recognize the power and potential of their competitors' new formats. They cling instead to their old familiar formats, and gradually but inevitably lose ground to the new ones.

Companies often try to address this with the "make your own products obsolete" mantra. But that doesn't always work. Sometimes when companies go in dramatically new directions, there is stiff internal resistance. Executives that are going to lose staff, budget, etc. because of the change usually don't support it. And if they have been in the company a long time, and the culture isn't what it should be, they may have "allies" that fight for them instead of the new, better idea. Managing change is tough because it includes managing egos.