Posted by: In: Expert Opinion 18 Jun 2014 0 comments



Regulated industries beware. Disruption is headed your way, too. Companies whose incumbency has been protected by regulation face devastating competition from entrants none too concerned with pesky legalities.

Michael Porter, in his seminal book Competitive Strategy, proposed a model of five forces that can be used to analyze the attractiveness of an industry. While in business school at Harvard, I had the good fortune to address with Porter, a faculty member there, what I believed to be an important SIXTH force—regulation. We were discussing the airline industry at the time, and I argued that since some players yield relatively more influence over regulation, and since regulation sets the boundaries of the playing field, one cannot look at only Porter’s five forces to accurately describe a competitive setting

Over the subsequent two decades, scofflaws, aided by technological advances, have spurred disruptive innovation at a staggering pace. Regulation, viewed in Porter’s earlier works as of little competitive concern, is now at the heart of the matter.

Unsurprisingly, incumbents in the industries under assault don’t go down without a fight. Instead, they turn to the weapons that helped structure an industry in their favor in the first place. What they desperately want is inertia. They want the object at rest to stay at rest. It’s not that they are anti-innovation. They are anti-cataclysm.

The rules that built the industries were often designed to protect consumers from the risks posed by asymmetric information, monopoly power, or utter disdain for their well being. Certainly, some regulation was over-done or even wrong-headed. But, for the most part, the rules provided a safer, fairer marketplace.

Companies worked hard to shape regulations in ways that would not disadvantage them relative to competitors. If possible, advantages were sought. In the end, some equilibrium was reached—a set of boundaries within which Clay Christenson’s “sustaining innovation” could emerge, but where discontinuous change was unusual. Investments under these circumstances could be made with less risk. Profits were more predictable. Management approaches and organizational structures emerged to reliably turn out like quality products and services at standard costs.

Competing and prospering wasn’t easy, of course. But the rules of the game were better understood.

Over time, technology was adopted by incumbent competitors creating mainly marginal improvement at the customer level and to generate more profound impacts through internal efficiency. The spoils of these gains benefited the owners of the most powerful firms, at least until all the majors adopted the same, basic approaches.

Then, in the 1990s, technology not only advanced in power. It simultaneously rapidly decreased in cost. The competitive world became a bit more egalitarian.

What was the impact? What IS the impact?

  • Information asymmetry has become information transparency.
  • Monopoly power is shaken by upstarts.
  • Consumers’ well being relies more on individual diligence than government paternalism.

What emerges?

  • Medallioned taxis challenged by on-demand rides from Uber and Lyft.
  • The local record shop upended by file sharing and the iTunes Store.
  • The Bell System (once serving jacks in the wall) replaced by Apple and Samsung in collaboration with Verizon Wireless, Virgin, and Sprint serving customers who no longer use wire-line telephony.
  • Hotels challenged by homeowners and apartment dwellers renting their accommodations by the night through Airbnb.

Even old-line businesses like automobile manufacturing and sales are impacted. Tesla, the darling of the eco-friendly and growth investors alike, has run straight into incumbent protectionism. The company wishes to do what other successful companies have done of late—sell its innovative products directly to consumers. Yes, I know. Crazy talk.

The problem isn’t that selling products to consumers directly is at all radical. The most successful retail innovation of the last decade is, arguably, the (vertically integrated) Apple Store, known at once for terrific customer service and outstanding warranty support. The issue is that existing auto dealers are attempting to protect their business model from cataclysm. They fear, with good reason, that antiquated automobile consumer protection approaches, if shown unnecessary (or even inefficient: see ), would lead to the unraveling of the entire distribution system on which their model relies.

So, instead of competing through their own innovation, automobile dealers are seeking legal and legislative intervention to secure the rents they earn from an industry historically protected by government action.

What makes these challenges troubling to incumbents is that consumers are demonstrating demand for the upstarts’ models in droves. The writing is on the wall. Industry dynamics are in flux. Regulation provides only fleeting refuge. Sooner or later, that old, warm, protective blanket will give way. And, it should. In a market economy, protecting industries’ sunk costs of adhering to outdated regulation is inefficient and anti-progress. Ironically, in these situations some measured phase out of regulation is actually supportive of consumer interests.

The problem for incumbents is that their market strength insulates them from upstarts for quite some time. Why is this a problem? Because the upstarts’ growing consumer support sneaks up on industry stalwarts. By the time incumbents realize that they face real threats, their ability to effectively respond is impaired. Too little is able to be done too late. And, like many telcos and record labels, the incumbents wither.

Whether regulation should have been included in Porter’s “forces” from the beginning is an open question. What is indisputable is that companies who continue to overly rely on regulation instead of their own innovation to secure their competitive position are running a substantial risk.

To learn what three industries are primed to be disrupted next, check back for the next post to this column.

View this article on LinkedIn here.

Posted by: In: Expert Opinion, News 07 Feb 2013 0 comments

Eric Martin was featured in MSNBC’s story on Paula Deen.  Read the story below:

Bill McCay | WireImage | Getty Images
Heat’s On in Paula Deen’s Kitchen: Smithfield Drops Chef

While the saying goes, “if you can’t stand the heat, get out of the kitchen,” that’s easier said than done for a woman who has built a food empire out of a humble, Southern home kitchen.

Fallout for the celebrity chef Paula Deen continued Monday, as Smithfield Foods announced it has ended its partnership with Deen after it was revealed she used racist language.

“Smithfield condemns the use of offensive and discriminatory language and behavior of any kind. Therefore, we are terminating our partnership with Paula Deen,” the company said Monday in a statement to CNBC. “Smithfield is determined to be an ethical food industry leader and it is important that our values and those of our spokespeople are properly aligned.”

Court documents revealed the food celebrity famous for high-calorie Southern cuisine has used racial slurs and tolerated discriminatory jokes in her various business dealings. Deen has since posted three online video apologies. Fans, meanwhile, are flooding social-media outlets to defend their queen of Southern cooking.

Smithfield’s decision to ax its partnership with Deen comes after the Food Network on Friday dropped Deen, and said it would not renew her contract, which expires at the end of this month. Her cooking shows have been a staple on that network for years in which fans watched her fry butter and use donuts for hamburger buns, hamburger included.

(Read More: Paula Deen’s Fans Take to Social Media to Defend Her)

Deen’s Empire Worth an Estimated $6.5 Million Annually: Analyst

Marshal Cohen, chief industry analyst for The NPD Group, estimates Deen’s empire to be worth around $6.5 million annually which includes her retail and contract revenue.

Beyond her food network contract, Deen has product deals with many companies from big pharmaceuticals to big-box retailers. Deen’s name is associated with a diabetes drug by Novo Nordisk. Deen previously disclosed she suffers from diabetes.

Deen’s vast product deals also span a who’s who of retail: Macy’sSearsWal-MartJCPenney and QVC (owned byLiberty Interactive). Many of those companies are now evaluating their relationships with the well-known chef.

In a statement to CNBC, Paul Capelli, QVC vice president of corporate communications, said: “QVC shares the concerns being raised around the unfortunate Paula Deen situation. QVC does not tolerate discriminatory behavior. We are closely monitoring these events and the ongoing litigation.”

“We are reviewing our business relationship with Ms. Deen, and in the meantime, we have no immediate plans to have her appear on QVC.”

Sears Holdings tells CNBC they are “currently exploring next steps as they pertain to Ms. Deen’s products.”

Bad Celebrity Behavior in a Digital Age

As companies address the Deen situation, the public jury on her racial comments is still out.

Americans’ willingness to forgive celebrity misconduct often depends on whether the transgressions occur in the particular field the celebrity “plays in,” said Eric Martin, a partner at consulting firm Boost Partners.

“Tiger [Woods] rebounds, as does Manti Te’o, in a way that Lance Armstrong or Pete Rose never will” because the misconduct by Rose and Armstrong was in their respective industries, Martin explained.

“Martha Stewart’s insider trading conviction was far enough outside her field of celebrity that she could reemerge,” Martin said.

In Deen’s case, the public is not only reassessing her food business and dealings—but its star, who built an empire on a warm, giving public persona.

“Paula Deen’s celebrity isn’t simply about her food. It was also about her being the loving mom/grandma people admired. She had celebrity for being a nice, decent, giving person,” Martin said. “Using racial slurs, no matter where one is from, but particularly in the South, strikes at the very heart of that image.”

But perhaps unlike some previous celebrity flubs, Deen’s missteps are happening in a rapid-fire, social-media age, where judgement via Tweets can be swift.

“Damage can happen at hyper speed in this era of social media, and the blogosphere,” said Marty Brochstein, senior vice president of the International Licensing Industry Merchandisers’ Association.

Brochstein also agrees with Martin in that Deen’s controversy could be especially damaging. “Anything that even hints at racism is particularly injurious to a brand,” Brochstein said.

Brochstein said it’s important for companies that have business arrangements with Deen to react—but not over react.

Martin, however, thinks Deen’s image may have taken too much of a hit already. “I think her star is quite tarnished and will never regain its luster. She certainly can redeem her reputation among her core followers,” Martin said. “But I do not see her empire being rebuilt,” he said.

—By CNBC’s Courtney Reagan