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Don't Downsize, Innovate
By Pete Yoo

Pete Yoo WSJ

The Wall Street Journal Vol. CCXXXVII No. 79. April 23, 2001 Managers' Journal Editorials Page A22

After a decade of exuberant growth, the business world braces for a slowdown. Industries are lining up for consolidation, companies are announcing layoffs, and CVs are piling up on headhunters’ desks.

In corporate suites, chief executives are pacing about, frowning over the usual potpourri of unsavory decisions: lay off 10% of the company now and another 5% later, or vice versa; call it "downsizing," "restructuring" or perhaps "strategic repositioning"; announce now or let the competition go first.

Before making that announcement, they should reflect on the last time they cut back during a slowdown. They downsized, but so did their competition; they lowered costs, and the competition followed; they lowered prices, and the competition matched. When the dust cleared, their company survived but was smaller, weaker, demoralized and still without a competitive advantage.

A better alternative might be to try to remold the industry. Belgian movie theaters provide an example.

From the late '60s to the late '80s, the average Belgian’s movie-going declined 75%, decimating the country’s movie-theater operators. Many went out of business and survivors bled through two decades of painful downsizing and restructuring.

In 1988 one of the operators, Bert Claeys, stepped back from the bloodshed and decided to start over. The company began with a fresh look at the customers, who were increasingly staying home watching cable television and videocassettes, and pondered how they might be enticed out of their armchairs.

The incentive, it concluded, was a theater with armchairs and a whole lot more. Bert Claeys chose a large site outside, but within easy reach of, central Brussels and built the Kinepolis, a mammoth theater complex that projected an unprecedented number of titles onto gargantuan screens with state-of-the-art visual and sound systems. Instead of rows of seats, it provided stadium-sloped, extra-wide aisles of armchairs.

Kinepolis, the predecessor to today’s megaplex, in effect matched the comforts of watching a movie at home but radically improved its audiovisual effects. In its first year of operation, Kinepolis single-handedly expanded the Brussels’ movie-going market by 40% and captured half of it.

During that era, fellow Europeans in the Swiss watchmaking industry were suffering through similarly hard times. Tsunamied by the Asian quartz movement, the industry had shed two-thirds of its workforce over a decade and was in the midst of surrendering all but the highest-end segment of the watch industry.

Along came an industrial consultant named Nicolas Hayak who asked two questions. Why do people wear watches? To tell the time, of course. But why else could they wear them?

Mr. Hayek merged two Swiss watchmakers and set out to create a watch that people would wear as a fashion accessory. He slashed the number of components in his new watch, priced it under $50, encased it in brightly colored plastic, and called it Swatch.

By releasing a dizzying array of new models at a blistering pace, Mr. Hayek took back market share from the Asian competition and saved not only his company, but, as many Swiss now claim, the Swiss watchmaking industry. The Swatch Group is today the world's largest watchmaker, accounting for roughly one-quarter of the global watch sales.

Bert Claeys and Nicolas Hayek successfully remolded their respective industries, but not by responding to customers. Kinepolis was not built because a viewer asked for two tickets to armchairs and a giant screen. Neither was the Swatch created because a wearer asked for a watch to match her dress. Giving the customers what they ask for is the bare minimum requirement for the right to compete in an industry, not a competitive differentiator.

To remold an industry, you must be ahead of your customers and 'steward' them, as Bert Claeys and Nicolas Hayek did, to their powerful yet dormant priorities. And to earn the lion's share of the profits in the remolded industry, you should own at least one of its 'control points', the strategic high grounds from which to exert dominance over the industry value chain.

Setting out to remold an industry in a slowdown bucks the trend and takes courage. But slowdowns are in fact the best times for it. Competitors are busy downsizing and paying less attention. Suppliers are concerned about your account and can be pressed harder. And most importantly, your own organization is expecting job cuts, and will be accordingly receptive to trying something different.

So scrap that announcement about downsizing. By the time the competition gets done pursuing that strategy, you might have remolded the industry and be earning the bulk of its profits.


Mr. Yoo is managing partner of Innoval Consulting Group, an international strategy consultancy.


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