Cycles of creation and destruction

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One of the hot topics yesterday was the acquisition of ExactTarget by Salesforce (which I wrote about here). As someone who worked in the email marketing industry for a long time, this is a huge seismic shift, because Salesforce is the gold standard CRM for most midsize and large businesses. Having a built-in email marketing solution is a piece that’s been missing for a long time, and for competitors of ExactTarget, the landscape got significantly rockier.

In the bigger picture, one of the things least understood by folks who haven’t been in business for a while is that there are cycles of creation and destruction that happen regularly. Right now, the email marketing industry is going through a destruction phase. The “mid market” is vanishing, and has been since 2010-2011 in the email marketing industry. In the email marketing space, you are either serving the small business niche (which is very profitable and which companies like Constant Contact, MailChimp, iContact, and many others do very well) or you are serving the enterprise. The middle of the road customer is vanishing as they either move up or down market, and the vendors are consolidating, too. That’s the destruction phase. The big players buy up the healthy companies, and the sickly ones eventually wither and perish. Very few companies ever successfully walk the middle of the road for their entire existence – they have to go big or small to survive.

After a while, the big players get too big. Customer dissatisfaction goes up. New ideas and new technologies spring up. Employees at the big companies get disenchanted or laid off. Suddenly you see a groundswell of startups in the industry – and this is true for every industry. Some of the startups never make it past seed funding or round A, but a bunch do survive and thrive. They serve their niches and eventually a few grow up to be the middle market leaders. This is the creation phase, when businesses grow and even mediocre ones can do pretty well for themselves because demand is growing for services in the space.

These cycles occur roughly every 10 years, and they occur in rhythm with recessions:

Recessions

The broad market advances or recedes, and like clockwork, the companies that serve the overall market advance or recede. The companies that serve those companies advance or recede, as ripples spread through the economy.

As they say in Battlestar Galactica, all of this has happened before. Economist Joseph Schumpeter coined the term creative destruction in 1942 based on the idea from Karl Marx. All of this will happen again, and if you know where your industry is in terms of creation or destruction phases, you know what business strategies to pursue.

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