The Five Stages of Strategic Grief

Post originally appeared on HBR.org.

Silicon Valley's been cracking with activity in the last few years — along with Melbourne, Australia and Santiago, Chile. According to the Global Entrepreneurship Monitor, there's been a sharp uptick in entrepreneurship around the planet, with the number of hungry entrepreneurs now topping 400 million across more than 50 countries.

This is good news for the global economy, potentially bad news for you. Or at least the kind of news that should give you strategic pause.

One or more of those 400 million may be targeting your less satisfied customers, with a plan to build a business around their specific needs. This is the "focused entry" strategy, a well-worn path in the history of successful startups (see Southwest Airlines). A focused entrant sees an opening in companies that are trying to serve everyone, but making no one truly happy.

Consider Dartitup's response to Pinterest's high-profile success in the social marketing space. Pinterest built a great model for the ladies, who largely drive its activity and content. Men are being dragged along, but they've revealed a comparative lack of engagement. Enter Dartitup with plans for a decidedly manly offering: think dartboards instead of pinboards.

If you're the Pinterest in this story, how do you respond? In our experience, the story typically plays out in stages that mirror the famous Five Stages of Grief:

Stage 1: Denial. It starts with dismissive chatter. Focused entrants tend to be small and shamelessly inadequate on certain dimensions — they have nothing to lose by underperforming in smart ways but this makes it easy to not take them seriously at first. Southwest Airlines? They don't even feed you! Boarding their planes is like a riot at a bus station! Dartitup doesn't even have employees yet!

Stage 2: Anger. Denial is replaced by anger that good customers have abandoned you. For example, there was a clear pattern in the customers who left leading retail banks for Commerce Bank — they were willing to tolerate lower interest rates in return for more convenient hours and friendlier service. In other words, they were not price-sensitive, and customers who are not price-sensitive tend to be the profitable ones. This is a classic challenge for market leaders: your best customers are often the first to jump.

Stage 3: Rationalization. This is where the competitive brain can get delusional. You'll often do anything to diminish the threat, in your own mind and the minds of your stakeholders. "Fine," you'll say, "We've lost some customers, but we've still got everyone else." Here companies often bring in outside consultants to validate their worldview. So what if you're being beaten in one small market, right? Right?

Stage 4: Despair. Here you give into the dread, which is often not pleasant to confront. It's not just Commerce Bank that's popped up on the radar to compete on convenience, but also ING Direct, offering industry-leading rates on savings accounts. If you're both successful and vulnerable — if you're making money, but underserving valuable segments of customers — then you may be facing a pile-up of new competitors.

Stage 5: Acceptance. At this stage, managers make peace with the threat and begin to deal with it strategically. They revisit the blueprints of the business, and redesign a model that can win in a brave, new competitive world. They unleash the creativity of their employees and learn from their best customers. Getting here is not pain-free, but it can happen in an instant. It's simply a decision to begin dealing productively with reality.

Have you ever found yourself or your company at any of these stages? What are some tactics you've used to help people confront the truth and move the organization to Stage Five?

Date: 
Thursday, March 22, 2012