The New Contrarianism: Less for Less

I recently chatted with Michael Raynor, co-author of The Innovator's Dilemma, author of The Strategy Paradox, and currently a Distinguished Fellow at Deloitte Research. We recorded a podcast, which you can hear here, on Michael's latest theory:

I recently chatted with Michael Raynor, co-author of The Innovator’s Dilemma, author of The Strategy Paradox, and currently a Distinguished Fellow at Deloitte Research. We recorded a podcast, which you can hear here, on Michael’s latest theory: “The New Contrarianism.” Essentially, it’s his way for businesses to think about innovation in straitened times. Rather than paraphrase his ideas, I thought I’d just go ahead and publish them, complete with his analysis of how the wireless phone industry could use the current global economic woes to turn itself around. So… Here’s Michael:

Your customers are going bankrupt. Your suppliers are cutting off credit. You’re struggling to avoid layoffs. It’s the perfect time to innovate and grow!

Contrarian investing has made some people fabulously wealthy, Baron de Rothschild and Warren Buffett among them. In fact, contrarianism is hardly contrary at all; it is the conventional wisdom, and it is conceptually straightforward: having husbanded at least some of your cash during the boom, you look for companies with solid fundamentals but prices that have been artificially depressed by the prevailing panic.

But watch out: There are at least two pitfalls that await the would-be contrarian. First, it's often impossible to buy when everyone else is selling because you don't have the cash. The general lack of liquidity is what makes this a financial crisis, after all.

Second, our instincts often lead us to pursue contrarian strategies in self-destructive ways. Wedded to the mindset that innovation amounts to "more for more" – that is, better value but at higher prices – we try to take advantage of others' weaknesses by offering the "same for less." The result is that companies that try to innovate in a downturn actually do little more than slap on a 20% off sticker. This can make bad situations much worse.

For example, it's been reported that in the wake of the US federal government's $85 billion bail-out of AIG, other commercial insurers are taking a run at the company's most lucrative commercial insurance customers. Not surprisingly, AIG is fighting back with everything it's got: those lucrative customers are likely key to the company's long-term prospects. The result has been a rapidly escalating price war that one can only imagine does little to burnish anyone's results.

If companies are to take advantage of the current malaise, we need a "new contrarianism," one that shakes loose the money needed to invest and applies those resources to bone fide strategic opportunities. This is summed up in the notion of "less for less." Seen through this lens, the current environment is awash in promise.

Take, for example, the telecom industry. Major wireline providers have long been losing customers to wireless services. In a recession, this trend will only accelerate, rapidly eroding the profitability of a capital intensive, scale sensitive business. Making lemonade out this serving of citrus requires bold moves. Since the wireline business is in secular decline anyway, why not shift the business model to align better with marketplace realities? Turn voice services from a core offering into a by-product of a new infrastructure focused on video and data services. The quality (latency, selection, etc.) of the video need not even be as "good" as cable, for now, because stretched consumers might be easily won over by a la carte, channel-by-channel subscriptions. The finishing blow is bundling video service with wireless telephony. Then, rather than fighting a losing "more for more" battle for $35/month in voice spend, the telcos could seize the high ground competing with "less for less" for $50/month on video. Into the bargain the telcos would be freeing themselves from a 19th century business model even as they positioned themselves for growth.

Another "less for less" opportunity lies with high-end retailers that have a chance to re-make their model for the masses. Whole Foods, for example, has defined the market for organics. The company's historical growth rates might be in jeopardy, however, for as The New York Times reports, as belts tighten the organic arugula might be the first to go. The "more for more" response is to find distressed sales of good locations and expand, either now or when the economy recovers. The "same for less" response is to scale back investment and cut prices to hold share. The first ignores your income statement and balance sheet while the second foregoes a chance to remake your market. The "less for less" response is to forge a new model optimized for the current reality. Why not offer organic olives, just not 25 varieties? How about smaller, less expensive, focused stores with limited operating hours? Hold less inventory, tolerate more frequent stockouts, and shift to more self-service. This not only protects the bottom line today, it creates a model with broader appeal that is well-positioned for growth when the clouds part.

These suggestions might seem fanciful, but they are not without precedent. Toyota's econo-boxes gained credibility during the 1970s oil crisis and set the company on a thirty-year growth trajectory. Thanks to the rationing of WWII, women's silk stockings were prohibitively expensive and in short supply. In that scarcity DuPont found the first market for its new polymer, nylon. (And now you know why they're called "nylons".) And in the Great Depression, Kellogg's transformed inexpensive cold cereal from an unwelcome substitute for eggs into "part of this complete breakfast." Each of these began life as a "less for less" offering that grew into market-defining products.

Contrarianism can be good advice, but for most of us it is impractical. But the "new contrarianism" of less for less provides both the means to do it well and a way to do it right.

Thanks, Michael. What do you think?

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