Question: Why do once successful businesses fail?
Answer: They aren't reevaluating their core revenue streams often enough.
If you've ever built a business from scratch, you know that in the early stages you have to get your priorities straight: you have to identify the big rocks, the high-level pieces, and get it right.
Over time, you build up aggregates around larger rocks to strengthen and support them, thus avoiding as many future risks as possible and maintaining your advantage. Then many of the medium sized aggregates become entire divisions, each with their own subset of goals and strategies, further strengthening and strengthening these support structures.
But no business operates in a completely static and predictable environment. No matter how perfectly your offering fits the environment and your buyers when you start, over time gaps between these three elements (buyer, environment, and offering) will appear and widen.
This is where value leakage occurs.
Of course, you can and should keep up with these changes by continually improving your offerings. But keeping up with every new trend and making the investments necessary to capitalize on it would surely bankrupt you. Many of these “trends” effectively fade into the historical record. And unfortunately, the trends that truly disrupt established businesses are often only identified in hindsight.
In my experience, it's not a failure to not be able to predict the future, but it is a failure to not reevaluate your offering the moment a new future becomes predictable.
We all love an underdog story where only a few saw the disruption coming. And, of course, there are the cautionary tales of entrenched incumbents who never saw the business tsunami coming. But it's easy to conclude that everything is predictable and ignore the dynamic nature of the environment in which you operate.
Over the past decade, I've worked with dozens of Fortune 500 executives, watching them evaluate and make tough choices for the future. I've witnessed a notable recent trend firsthand, often to the leaders' own chagrin and the detriment of their companies: Leaders are dedicating less and less bandwidth to securing the fundamentals of their products and services, and more time to juggling back and forth to keep up with never-ending external expectations and internal performance metrics.
In other words, they tend to spend more time managing perceptions and messages than developing the core product and ensuring its success in the long term. This can manifest as trying to please an unrealistically wide range of stakeholders, or trying to avoid being seen to have done something wrong because of past experiences.
As a result, many companies simultaneously pursue many inconsistent product strategies. At worst, companies knowingly march toward an inconvenient cliffhanger in their business model without sufficient impetus within the larger team to correct course. In previous decades, these “doomed to fail” unit economics were obvious, but many of these deficiencies have been obscured by a wave of rising capital valuations.
The tide can't stay rising forever. Sooner or later, the water will recede, exposing the companies that have taken the risk of swimming naked. Some are already past the point where they can't change their fate.
Unfortunately, even if your company didn't contribute to this situation, we will all be facing the same challenging environment when the tide eventually goes out.
For these reasons, regular reassessment is important. You need to:
1. 80/20 narrow down where and for whom you will create the most profitable value.
Make sure this is not assumed or prescribed, but empirically verified.
For example, American Express boldly positions its services as being “worth it” only to select customers who are valuable to American Express. American Express consistently ranks last in the U.S. in terms of total number of credit cards issued, but when it comes to total purchase amount, its main source of revenue, it ranks a close second to leader Chase Bank, despite having less than half the number of cards in circulation.
Or take Mike Berghold, a highly experienced executive who laughs that in 30 years he has yet to encounter a struggling company that could easily get results by simply optimizing its existing customer base.
This is true even in unusual cases, such as a restaurant chain whose management insisted that its regulars had nothing in common: A study of the top-selling tickets from a recent weekend at the restaurant's flagship location found that eight of the 10 highest-priced tickets went to “regulars who brought guests.”
The question isn't whether your most valuable customers are distributed 80/20, but rather, does everyone in your company know who they are?
2. Map out some “must-have” non-negotiables that will bring value.
Most teams are constrained by the way they were originally organized: they focus on “how can we improve” and never ask “what do we really need right now?”
Legendary microprocessor engineer Jim Keller asked this very question when creating the bottom-up design for Tesla's autopilot hardware. He describes the core challenge as:
“People are constrained by 'how,' I have this and I know how it works, and then I make a few tweaks to it and something comes out. As opposed to, what do I actually want? And how do I figure out how to build it? It's a whole different way of thinking.”
There are so many opportunities to improve the situation that they cry out for your team's attention, but little internal bandwidth or budget to address or optimize them all. However, once you get to the real “what,” your team has no choice but to create value that drives revenue.
3. Optimize the company's operations in areas of high deviation.
Continuous improvement is often measured in bits. But in your reevaluation, if you find an option that can save you 3 percent, look harder for where you're wasting 30 percent. Trust me, it's there.
To take one extreme example, when a young Carl Icahn took control of a struggling railroad-car manufacturing company, he fired the manager of 12 floors in the New York office after talking with the chief operating officer in St. Louis who oversaw the actual revenue-generating product.
Surprisingly, firing the floor managers had no unintended consequences — it was as if these managers were not creating any value outside of their own office buildings.
In modern times, Silicon Valley investors have been watching similar situations closely: Would Elon Musk's firing of all but 30% of Twitter's workforce backfire? Apparently not.
This diagram speaks to what most successful people already know: if you don't actively choose to cut the small parts of your business that are “totally fine” on a regular basis, you'll choose to let the waste accumulate.
Now is the time to lead, catch up, or ride the next wave. No matter how well you manage your business, time and market pressures will inevitably bring waves of budget cuts to bear on us all. If you don't regularly and proactively reevaluate your core revenue streams, you'll inevitably enter a new future that's no longer in your control.
