05 December, 2018

Why It Might Pay NOT to Eat Your Own Lunch

How many times have you heard the advice “eat your own lunch before someone else does.” It is one of the most over-used clichés in business (and in a cliché-riddled field, this is quite an achievement!). According to this line of thinking, when an established company is confronted with a potential threat to its core business, it should proactively embrace the threat, even if that means destroying its own business. After all, the logic goes, you are better off destroying your own business and having a future than having someone else destroy your business and having no future. Seems reasonable; you’re better off being alive than dead, right?

Not so fast. Under many circumstances, “eat your own lunch,” is a horrible strategy.  To figure out when such advice might be helpful or harmful, let’s dig more deeply into the logic. The wisdom of “eat your own lunch” makes two critical assumptions that often do not hold up. The first assumption is that you can predict with high certainty the timing of disruptive threats. If you know you are on a sinking ship, then getting off is a good strategy. The problem with innovation trends, though, is that we generally do not know with any certainty if and when a disruption is really happening. If you don’t know for sure whether your boat is sinking, does it really make sense to jump into the icy waters of the Atlantic? Many writers make it look like disruptive threats are obvious. But in reality, technological disruptions only look obvious after the fact. Innovation is a messy evolutionary process—full of dead-ends, wrong turns, and surprises. As a result, predicting future technology disruptions is really hard—it is easy to either over-or under-estimate how quickly things might change. The demise of the internal combustion engine has been predicted for decades. It might happen, of course, but if you are Ford or GM, the differences between it happening in 5 years, 10 years or 20 years from now are worth several hundred billion dollars. The eat your own lunch logic criticizes managers who moved too slowly (after the fact) but ignores the fact that moving too quickly can be just as costly.

A second flaw in the eat your own-lunch logic is that it assumes (unreasonably) that transitioning to the disruption in question offers decent profit potential.  Why should we assume that? Profit opportunities at the industry level are determined by structural factors like barriers to entry, opportunities for differentiation, supplier bargaining power, demand conditions and scale economies. There is nothing in economic theory or in historical experience to suggest that profit opportunities will be enhanced by every disruption. Digital photography and personal computers were technological disruptions that created financial bloodbaths for just about every player in the industry. Blowing up a profitable core business to embrace a money-losing one hardly seems like a good strategy, but that’s what the “eat your own lunch” crowd urges you to do. This is a particularly troubling strategy if you are uncertain about whether the disruption is ever going to happen in the first place!

In criticizing the “eat-your-own-lunch” advice, I do not mean to imply that managers should ignore disruptions or be myopic, or just assume away threats (this is never helpful!).  But I urge managers to take a more nuanced view of the risks.  Here are two alternatives.

First, just because technology predictions are difficult, does not mean you should not explore trends and assess various scenarios on an on-going basis. Simply getting managers to discuss potential threats keeps an organization from becoming complacent. You can also begin to conduct small-scale experiments and exploratory projects to begin to learn about new threats first-hand. Auto companies, by and large, have done a nice job of this with alternative fuel vehicles (GM, for instance, has conducted R&D in fuel cell engines for a couple decades). Such small-scale projects help the organization gain much deeper understanding of the technologies in question and enable it to make better assessments of the threat. They also plant seeds of competence that become critical once a threat does become more imminent. As a general principle, when you face uncertainty, hedging is a good strategy.

Second, you need to gain an understanding of the likely profit impact of a potential disruption. Is it good news in terms of boosting potential profit opportunities? If it is, then the eat your own lunch strategy is spot on. But what if it’s not? What if, for instance, you are in a situation like Kodak where the transition to digital was going to destroy a very (very!) profitable film business and replace it with something that offered scant profit opportunities? I call this the “party is ending” scenario—a disruption is pretty certain and it does not spell good news for your business at all (think about the situation faced today by owners of large shopping malls as online retail continues to overshadow brick-and-mortar stores). One strategy is to pivot around your capabilities. Try to find completely new business opportunities where your distinctive resources are valuable (e.g. if you are a shopping mall, maybe the mall becomes an entertainment space rather than a retail space). The second strategy is what I call “defend-and-extend.” Under defend-and-extend, you try to stave off the inevitable decline of your business for as long as possible by incrementally improving your core product or service or targeting sub-sets of customers who still value what you offer. If you can extend a profitable business for another 10 years that can be worth a lot of money, and could create much more value than futilely diving into a new disruption where you stand no chance to make a dime. It’s not a glamorous strategy, but sometimes extend-and-defend is your best (and only) alternative.

Dealing with potential disruptions is a critical task for senior leaders.  Eating your own lunch might be an effective strategy under some circumstances, certainly, but not under all. You have alternatives. To navigate these transitions, you need a strategy—not a slogan.