Thursday, July 28, 2016

What Dollar Shave Club's success says about innovation

I read today a rather rambling and confusing piece in the New York Times about Dollar Shave Club.  The article, entitled $1 Billion for Dollar Shave Club: Why every company should worry, can't seem to hit its stride or find a point it wants to make.  At first I thought the piece was going to congratulate a disrupter, Dollar Shave Club, who, despite the odds, grew a startup business to the point where Unilever acquired it for $1 billion dollars.  Dollar Shave Club did this in the face of overwhelming odds, taking on a deep pocketed corporate behemoth (and noted innovator) in Gillette and P&G.  I was sure this was going to be a story about the new innovations unfolding in customer experience and business model.

Instead the author seems concerned that new innovators are capitalizing on technologies and (horrors) merging those capabilities and technologies into new offerings and solutions.  While acknowledging the idea of creative destruction, doesn't he recognize that these mergers and new products were bound to happen?  Were the past solutions somehow better?  The market and the demand generated by Dollar Shave Club indicate that better solutions and offerings were possible.  He notes how Uber succeeded based on smart phone technology, the internet and location tracking.  All of these technologies were available to the existing corporations and to any potential startup, and most have been evident for over a decade.  The winners were companies that managed to merge the technologies and capabilities in a way that addressed unmet customer needs.  This is classic innovation.  The fact that larger companies refused to see the opportunity, or worse, saw the opportunity and recoiled from the risks, is beside the point.  Good ideas will be implemented by someone, either an existing competitor or a new entrant.  The market is mostly agnostic to the individual or company that provides the prevailing service.

Or, look at this another way.  Perhaps Unilever saw the opportunity but let Dollar Shave Club become it's prototype, knowing that if DSC succeeded, Unilever could simply acquire the company, letting venture capitalists bear the investment risks.  Acquiring a rapidly growing company is smart business as well - who doesn't benefit in this scenario?

Perhaps my favorite paragraph is just at the beginning of the article, where the author writes:
The deal anecdotally shows that no company is safe from the creative destruction brought by technological change. The very nature of a company is fundamentally changing, becoming smaller and leaner with far fewer employees.

Is this actually news to anyone?  The more we automate, the more we streamline and the more we outsource key functions, the smaller corporations can become.  And, hopefully, the more flexible, more nimble, more responsive and more innovative they can become, because that's what's required to survive.  Rather than simply looking at the downside of the changing economic models, let's consider the upside as well.  Yes, automation, innovation, globalization will change the large, somewhat paternalistic corporate model.  Here's where the article makes a new point:  the problem is inequality.
The wealth will be spread among a few. Dollar Shave Club has over three million subscribers but only about 190 employees. Its razors were made in South Korea by Dorco. Distribution was initially handled in-house but eventually was contracted to a third-party company in Kentucky. What remained was a terrific design, marketing and customer service shop; and a business that was easily expandable to meet demand and that had a good niche with men who do not like to shop. These super-successful companies with few employees should worry an America struggling with inequality.

Ok, so the founders and employees and venture capitalists who took a big risk will get a nice reward.  Good on them!  The author doesn't note that for every startup that succeeds like DSC, probably 10 to 15 fail completely, leaving the founders worse off than before, never mind the other issues with inequality generally.  What's the solution?  None is provided in the article, but what we should be doing is trying to create far more innovators and entrepreneurs, removing and reducing barriers to creating businesses, finding new ways to get more venture capital into the hands of people who want to create companies and jobs.

But here, in fact, is my favorite sentence in the whole article:  But the internet, mass transportation and globalization destroy everything.  Really?  The internet, which allows us to interact with anyone on virtually any device anywhere, which enabled political revolutions and offered us such incredible solutions as Amazon and Facebook (I kid) destroys everything?  Or does it enable new products and services?  And what's mass transportation got to do with shaving?  Does the author dislike receiving his books, clothes and increasingly meals via UPS or FedEx?  And, of course, the final whipping boy, globalization.  What's the answer - to refuse to trade with other countries?  David Ricardo did the original work on comparative advantage over 200 years ago.  Work and jobs will flow where the costs are lower.  Globalization allows people around the world to compete, and it raises standards of living globally.  But we are told that the internet, mass transportation and globalization destroy everything.

We can rail at the coming of the night or we can harness the best of the change that's coming.  Rather than fight the innovators, let's enable them.  Rather than accuse the internet and globalization, let's embrace them, because we can make it so everyone benefits.  Creative destruction is real, but it is not a zero sum game. As has been true in the past, large corporations that cannot compete or reinvent themselves will be shunted aside for those that can.  Where is the anguish for Sears Roebuck, or Tower Records?  Does the author find that the innovations that replaced them are wrong or full of inequity?  Is Amazon terrible because it replaced Borders?  Who makes the call as to what is right or wrong?  Ultimately the consumer does.

What to do?  Create far more opportunities for innovation.  Expect disruption - as more people get access to more technology and more connectivity, more new ideas will be created.  Large corporations don't have a right to exist, they have a right to compete.  But the best ideas, from any origin, will usually win.  Inequality results from too little opportunity, not from too few ideas.  Through trade and globalization, the world is getting smaller, but we have access to many more consumers and markets.  There is significant opportunity out there for any innovator. 
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posted by Jeffrey Phillips at 5:29 AM


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