The Phoenix Principle

Past successes pose the greatest risk of future failure.

This statement, while accurate, is hardly original, whether applied to a business or a business executive. But Adam Hartung’s Create Marketplace Disruption: How to Stay Ahead of the Competition (2008) goes far beyond this commonplace observation. Hartung details its dynamics, allowing him to recommend practical ways to prevent it.

Quite a few of you asked for more information about this book. In particular, you asked about Hartung’s “Phoenix Principle” — his prescription for avoiding the stagnation and eventual disintegration that are the near-inevitable consequence of business success.

To understand the Phoenix Principle, you first have to understand three of Hartung’s core concepts. The first is that to sustain rapid growth, companies create “success formulas.” A success formula, while including such niceties as strategy and tactics, starts with the notion of identity — the definition of who we are.

When all employees know who we are, they are better equipped to efficiently make decisions that will help move the company forward.

The second core concept is “lock-in.” Lock-in is what companies do to enforce their success formulas, using a combination of organizational structure, systems, incentives, enforcement, and culture to prevent deviations.

Success formulas and lock-in are the keys to winning … until market conditions change. Then, lock-ins prevent companies from adapting, because that’s precisely what they’re designed to do — keep them pointed in the direction that once was right, but isn’t anymore.

It’s inversion of purpose: Lock-ins, which should be tools for implementing the right success formula, instead replace profitable growth with the success formula as the definition of effective management.

The third core concept is “white space” — unexploited opportunities in the marketplace, which smart business leaders are able to identify and pursue. In Hartung’s view, the key to sustainable business success is to identify white spaces and go after them. To do so, business leaders have to change their success formulas, and then to disrupt the lock-ins that would otherwise force course “corrections” back to the original corporate identity, strategy, and tactics.

This is the Phoenix Principle.

So far, so good. Hartung’s analysis is acute. He gets better, recommending that since lock-ins make companies predictable, you should exploit those of your competitors. It’s great advice, and a perfect account of, for example, how Microsoft rolled right over Novell with its introduction of Windows NT Server.

Hartung recommends casting a very wide net in the search for white space. He admires, for example, Singer, for selling off its sewing machine business entirely to become a defense contractor, avoiding competition with low-labor-cost foreign manufacturers.

This is where we part company. I know of too many companies that made equivalent Phoenix-Principle attempts and failed … not because they stubbornly defended their existing success formulas, or didn’t disrupt their lock-ins, but because of something more basic, which is that …

Most new business ventures fail. Choosing to pursue a brand-new white space that has nothing to do with the current success formula is equivalent to starting a new business venture, and I personally know plenty of cases where new-white-space-ventures simply turned out to be worse ideas than they originally seemed.

There’s a certain post hoc ergo propter hoc property to some of Hartung’s examples. For example, he lauds General Electric’s 1970s decision to sell off its computer business, its leaders recognizing the impossibility of competing head-to-head with IBM. GE certainly succeeded by diverting its attention to other ventures, but the computer industry had plenty of white space left in the 1970s, and companies like Digital, Data General, and Control Data took huge advantage of it.

And puzzlingly, Hartung criticizes Kodak’s decision to avoid competing with Nikon, Canon, Sony and Panasonic in digital photography while ignoring its Phoenix-Principle-like exploration of white spaces in digital imaging, document management, coatings, gelatins, and sensors.

My opinion: Singer’s defense-industry-as-white-space is a poor model to follow.

Companies shouldn’t abandon their success formulas. They should, as Kodak did, reformulate them in ways that take maximum advantage of one or more existing strengths.

Hartung lauds Apple for entering the music business with the iPod and its iTunes store. But Apple actually created the iPod, then iTunes.

The sequencing was crucial. The iPod took full advantage of Apple’s user interface mastery and ability to design seriously cool products. iTunes took full advantage of Apple’s iPod customer base. Both were flank attacks on moribund markets (portable music players and music distribution) with predictable competitors.

That’s the ticket to ongoing success: Use leverage and flank attacks. Find an industry whose players are playing defense and apply strengths you have and they don’t.

Their responses will be predictable — Hartung explains why with precision — and predictable competitors are easy to beat.