James Surowiecki’s article in this past week’s The New Yorker reviews the rise, decline and near or total collapse of “category killer” businesses like CompUSA, Circuit City, Toys R Us, Home Depot and most recently Barnes & Noble and Blockbuster. Why were these businesses, which enjoyed enormous success for a significant period of time, often virtually eliminating their competitors, unable to thrive?

Surowiecki points to the reaction of management to changing circumstances, epitomized in the Blockbuster struggle.


“[The failure to evolve] was because of what you could call the ‘internal constituency’ problem: the company was full of people who had been there when bricks-and-mortar stores were hugely profitable, and who couldn’t believe that those days were gone for good… The familiar sunk-cost fallacy made things worse. Myriad studies have shown that, once decision-makers invest in a project, they’re likely to keep doing so, because of the money already at stake. ..throwing good money after bad.“


Surowiecki also points out the difficulties of making mid-business model transitions to new forms of product delivery that entry businesses, designed  for that purpose from the ground up, don’t have to contend with—think Macy’s and other retailers’ attempts to enter the mail order business that Sears had pioneered.


What does this have to do with law practice? Consider the rise of virtual law firms, legal service organizations and variations on/combinations of the two. And take a good look at firms like Finley Kumble that bet heavily on the future of law practice looking like the profitable past. 


Of course you don’t have to go to the dustheap to find firms investing heavily in bricks and mortar and the approaches of the past. In fact, those firms are often our most successful ones—top of the market firms who consider themselves to be category killers.


The science of paradigm shifts predicts that the last to change are the ones who were most successful at the old system, so the currently most profitable firms are unlikely to lead the way to new models. While struggling practices have no choice but to innovate. And of course, many firms, even if they want to, will not be able to transition to a new model without breaking up on the shoals—we are trained, after all, to find things wrong with any proposal and we are so good at that we can effectively impede our own progress with our objections.


But the most profitable firms are at particular risk for easily getting lulled by their past success.  Unless those firms are willing to take a hard look at the marketplace and how their business is going to make a profit in a rapidly changing competitive environment, unless they are willing to entertain turning their backs on what have been highly profitable approaches and risk retooling for an entirely new and targeted business model, those very firms who view themselves as the category killers in their markets are likely to fall to the next generation entries who are not hamstrung by impediments like internal constituencies and sunk-cost fallacies. 


The new category killers.