Is your biggest business headache finding enough quality people to handle your massively growing customer base? Then you can stop here. But I think you should keep reading, anyway. Someday, your company will feel like a neglected swimming pool turning green in the hot August sun.
In fact, even if you don't need this story today, bookmark it. You'll need it soon enough.
The Sunk Cost Fallacy Is More Pervasive Than You Think
We all know about the sunk cost fallacy. You've already invested $200,000 in this thing, and you'll be damned if you're going to abandon it now. So you throw good money after bad.
Eventually, say $1 million into the nightmare, you say, "enough, already." Or, more likely, your board or your VC investors or you spouse says it for you.
If you think the sunk cost fallacy applies only to new projects, you might want to think again.
I see a lot of businesses that can't accept that activities or products that were once their core strength are now past their usefulness. Either world has changed or technology has changed, and the cash cow has dried up.
Kimberly Clark began selling off its paper mills some decades ago. The company's leaders were honest enough to realize that circumstances had changed. The company was no longer a paper company, but a products company. The energy and work required to operate its paper mills distracted from its new core strengths—strength's Kimberly Clark's customers wanted the company to focus on. So it sold off the part of its business that built the brand.
That takes courage and humility and vision and the things we look for in business leadership. The Dallas News wrote about the last mill closing in 2012:
It was “one of the best examples in the 20th century of taking a good company and making it great,” author Jim Collins writes of K-C’s transformation in his 2001 book Good to Great. Two years later, in an article forFortune magazine, Collins rated Smith, who retired as CEO in 1991 and died of a heart attack in 1995, among the 10 best CEOs of all time.
Few business leaders, in my experience, are so honest with themselves. The buggy whip manufacturers should have seen their businesses dying when the Model T hit the streets. Instead, they doubled down and convinced no one but themselves that the world would always need buggy whips.
Likewise, if your company is of any significance, there's a good chance you're doing things you shouldn't do at all. And one question, honestly and humbly answered, can help guide you away from a massive sunk cost error.
When In Doubt, Return to Drucker
Every time I re-read The Effective Executive, I'm floored by how smart Peter Drucker was. And every time I mention Drucker to senior business leaders, I'm floored again. Most know him only for a few quotes. Few have actually read and applied his brilliance.
I won't tell you to read The Effective Executive. I know you won't. Instead, I'll feed you one more Drucker quote and beg you to follow his advice. This might be the most important question a company or business leader can ask itself:
By asking yourself every few years, If we weren’t doing what we now do, would we want to start doing it? And if the answer is ‘probably not,’ then maybe it isn’t the right thing to do anymore.”
Would the buggy whip maker have started making buggy whips in 1922? Would a technologist launch a dial-up internet service in 2001? Of course not. But plenty of ISPs tried to hold onto their dial-up businesses long after cable modems became ubiquitous, just like the buggy whip makers scratched and clawed to keep their businesses alive and unchanged.
Does your company still try to impress clients with your "massive" data center? Why haven't you moved to the cloud?
Is your corporate blog full of posts proclaim your core business is "still relevant?" If you have to say it, it's probably no longer true.
Do you try to justify premium prices for your commodity products just because you make them? Do you think anyone really cares?
"But this is what we've always done!"
If you answer, "no, we wouldn't start doing this today," you'll probably hear or say, "but this is what we do." Not really. "This" is actually what you've always done, and that's not enough reason to keep doing it.
Your customers are already telling you how much they value that thing you've always done. They'll tell you about the work you do that they value more than your legacy activities. For example, Steelcase furniture recognized some years ago that its customers valued its knowledge of office and workplace design far more than they valued Steelcase's commodity: furniture.
If your company has been in business for a long time--say 50 or 100 years--chances are your knowledge and experience are far more valuable than the products or services you provide. Most products and simple services are easily copied. And new entrants bring to market advantages of newness. Incumbency can be as much of a burden as a benefit.
If you find you wouldn't start doing today what you've always done, ask yourself these questions: What kind of data have we built over the years? What do our analysts know that no one else in the business knows? What can we teach the world that the world will pay to learn?
You might not like the answer to Drucker's question, but you need to ask it before your customers do.