Ever wondered why IBM almost went out of business in the 1990’s? How did GM fall from grace as one of the biggest automakers in the world? All of these companies have good management, planned their strategies, worked hard, focused on their customers, innovated and yet they were rewarded with decreased profits and loss of market share.
Are all the hallmarks of good management really bad for business? YES, good management is bad for business IF that is the only thing you do and see.
The discussion of why good management can lead to failure can be split into three basic points:
Sustaining versus disruptive technologies
Sustaining technology are technologies that improve product performance along the dimensions that current mainstream customers value, allowing the company to keep their customers. Disruptive technologies are technologies that result in worse product performance but bring a different customer value.
Most well managed companies are good at creating sustaining technologies but are unaware or ignore disruptive technologies because of its lower performance.
Technological trajectory is incorrect
The pace of sustaining technology improvement in well managed companies is faster than what the actual consumer wants. The disruptive technology is not a threat since the performance level is not acceptable to the mainstream customers yet. However, when the disruptive technology eventually catches up to the minimum performance level accepted by the customer and starts eating market share, it is often too late for the current market leader in sustaining technologies to copy the disruptive technology competitor.
The typical markets for disruptive technologies are fairly small and less profitable at the start. This makes it hard to justify allocating precious company resources to chase after small markets that are not as profitable to already large and well managed companies.
To make the picture clear, here’s an illustration of GM’s failure in these three segments:
GM did not focus on the small economy car market in the 1970s.
The technology of small economy cars have progressed to a point where the needs of the mainstream customers who want a reliable car to go from point A to point B are met with the added bonus of fuel efficiency.
Small economy cars back in the 1970’s were entry level products and the market size and profits on them were not high. It made no business sense for GM to devote precious resources to them.
These three points eventually started the failure of GM. Is good management a bad thing? Yes, if that is the only thing you do. In Part Two, I’ll discuss ways to prevent disruptive technologies from failing your business.
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