Business success is built on what I like to call a Shampoo Strategy. We find a formula, a business model that works, and then we rinse and repeat. It’s the way all wealth is created in the modern economy. We discover a process, service or product which has perpetual demand and we continue to deliver this to the same people again and again and again. The only problem is when to change the formula?
Shampoo Strategies are the type of business outcome any profit centric capitalist should be aiming for. We turn something from an idea into a system which makes money with very few changes to inputs. It’s essentially when we’ve cracked it. Ironically, the Shampoo Strategy is exactly where disruption comes from.
We develop a system which becomes its own thing. It operates on a kind of auto pilot and is highly profitable. Costs continue to go down while margins go up, and we end up serving the system, and losing track of why it worked in the first place. The reason it worked is usually because the formula, the customer and the business model all overlapped in a way that suited the market. But as markets evolve, yesterday’s formula may become less effective, sometimes seemingly overnight. But when we look hard, the signs of deceptive disruption are always there long before that ‘overnight‘ moment.
So what should we do to understand if our formula is about to stop working? Well, it’s rarely one thing on its own, but the way a few things interact. I break them into 3 parts.
The Technology: Questions to ask here include: How the problem gets solved and how can tech change that, reduce costs, or change the method of delivery?
The Business Model: Are people still prepared to pay for what we deliver? Can they serve that need more economically elsewhere? Can we increase our margin or reduce our price with a new emerging technology?
Demand: Is demand for what we do solid, shifting or waning. How can we shift with it? Is the solution just shifting? e.g. digitization of news. Or is the market in perpetual decline? e.g. coal fired power plants.
Finally, how do these three things interact to create a new formula for tomorrow’s rinse and repeat?
The one thing to remember with the Shampoo Strategy is that they never work forever, but new formulas can always be invented. And new formulas only ever get invented by those paying attention to the market, more than they pay attention to what they make or sell.