Don't Fear Shrinkage

Want to make a lot of money? Target a growing market. At least that's what conventional wisdom says. But sometimes, conventional wisdom is wrong. There's money to be made in shrinking markets -- too -- if you look hard enough for the opportunities.

Sure, venture capitalists and angels love to pump money into industries that promise big growth -- cloud, mobile, social, big data, etc. But here's the thing: That's a herd mentality. And when a herd starts to stampede you can get trampled by all the fierce competition. 

Sometimes, you should go against the herd. Often, you'll find ugly or challenging market conditions -- or old-world business thinking. But market competition won't be as intense. A few examples:

1980s: The video game market crashed and contracted thanks to lame, high-cost games from Atari. Urban myths suggest the glut of bad Atari 2600 cartridges eventually wound up in landfills. Just about everybody -- Coleco, Mattel, etc. -- ran away from the market amid huge losses. Then, Nintendo jumped in with NES and Super Mario Brothers.

2003: The music industry was shrinking amid digital piracy. Then Apple iTunes arrived to restore order... eventually funneling billions of dollars toward Apple.

2010: Around this time, Justin Crotty delivered an infamous Dung Beetle presentation. This wasn't about a classic market contraction. But Crotty's message to customers was clear: You go chase high-margin, sexy, emerging market opportunities. Let my company sit in the wiring closet and do the grunt work -- the ugly work -- that keeps the business running. The result? Crotty's employer at the time (NetEnrich) has apparently experienced multiple years of strong growth.

2014: CA Technologies veteran Chris O'Malley jumped to Compuware -- a mainframe software provider -- as CEO. Critics have predicted the mainframe's death for 30 years. But the critics have been wrong over and over again. And now, O'Malley is actually reaching out to millennials as he drives software innovation on the mainframe. The result? Compuware's new bookings enjoyed double-digit growth in December 2014.

Multiple Decades: The movie industry has been a painful roller coaster for theater operators. First came VCRs. Then DVDs. Then movies on demand. During each inflection point, IMAX managed to reinvent itself just enough to keep movie buffs paying a premium for theater tickets. This time around, IMAX is trying to customize its technology for high-end home theaters...

Risks Remain

Of course, shrinking markets can destroy companies (Digital Equipment, Kodak, Wang, etc.) . Some executives -- blinded by past success -- try again and again to jumpstart growth. Often, it's wiser to exit the shrinking market ahead of your rivals -- before the storm turns especially nasty. Among the examples above, I'm not quite sure how many more times IMAX can reinvent its business model.

Still, look closely at the shrinkage challenge. Sometimes, you'll find hidden opportunities for growth and disruption. And you'll never get trampled by a herd of well-funded startups chasing shiny objects...

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