Why The Next Big Thing doesn't usually come from market leaders

Clayton Christensen from Harvard wrote The Innovator's Dilemma back in 1997. I have read the book several times and always discover something new. Great book with lots of lessons for business leaders.

The book explores why successful market leading companies fail when faced with simpler, cheaper, less functional products that disrupt the market. The market for these products is viewed as small or ill defined. Your existing customer base has no interest in the inferior product, they want more features and performance at a reasonable price.  He uses the term "disruptive technology" to describe such products and uses examples in the disk drive business, computer business, and others.

The established market leading companies often discover these disruptive technologies first, but they discard them after applying good management principles. They usually find the following issues.

1. Large growing companies depend on their largest and most profitable customers and investors for resources. These customers want your product and want more features and better performance at a reasonable price. They have no interest in an inferior product.
2. Small emerging markets don't solve the growth needs of large companies. Companies need to maintain their 30% to 60% growth rates and when revenues exceed $100M that 60% translates to $60M in new revenues. The easiest way to achieve this growth is to move up market with more expensive, higher margin, versions of your own product.
3. Markets that don't exist can't be analyzed or justified. The market appears too small and risky compared to incremental improvement of your existing market share.
4. An organizations capabilities (strengths) define their disabilities (weaknesses). Good managers are excellent planners, they listen to their customers, they manage their costs, and improve productivity. These skills cause them to ignore the disruptive low end of the market.
5. Technology supply may exceed market demand. Successful companies often deliver new features faster than the customers can absorb them, and end up with products that solve every possible problem but are overly complex and expensive.

At some point the market doesn't care about all the new features. They want something simpler and cheaper that can do a very specific task. This is the inflection point where the disruptive technology on the low end overtakes the market leader. The sequence of events goes something like this;

1. The disruptive technology is discovered, often by the market leading company.
2. Marketing people seek reactions from customers and industry analysts.
3. Established companies decide it is a better bet to speed up the pace of sustaining technical advancement in their own product rather than go down market with the disruptive technology.
4. Start-ups learn about the disruptive technology and see opportunity. They keep their cost structure low, build the technology,  and find new markets through trial and error.
5. The start-ups get some initial success and then move up market and eat away at the low end of the market leading company.
6. The market leading company finally jumps on the bandwagon reluctantly with a half hearted attempt and fails. It is too late.

The book cites detailed examples in many businesses that conclusively prove the point. Anyone who has worked in a start-up knows the difference in attitude, culture, stress, creativeness, risk taking from what exists at old established companies.

The managers at established companies are highly skilled, hard working, intelligent people who make logical decisions based on the business models and structures. Start-ups are by nature much riskier, make decisions with no information, and often fail. The press only writes about the successful ones. Indeed, Christensen's book is only about the successful ones who were able to beat the odds.

In the end that is what business is all about; evaluating risks of failure and odds of success. Understanding your strengths and weaknesses. Then making bets on what will be successful. The conclusions are very different for large successful companies than they are for small start-ups who must take great risks or die.

UPDATE: See Innovate or Imitate...Fame or Fortune to see why early innovators often are eclipsed by fast followers. Market Leaders usually have a very difficult time being "fast followers" too.

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Comments

[Srikanth Thunga]

To talk about it from the opposite point of view,
Imagine a big company getting into all the new stuff being done by startups. I believe that around 9 on 10 startups close shop. Now, if 90% of the invested money of the big company goes without making any dough, shareholders/employees will start complaining. In a few years, it will not even be a big company with losses and all.

As an example, GE tried to do a lot of stuff before Jack Welch came on board. They were trying out new stuff to come out with disruptive technology but at the end, that is not what they do best. Jack Welch made sure that they concentrate on being best in the big things. The best thing companies like that can do is wait for someone else to come up with disruptive stuff and gobble them up like what microsoft used to do and what google/yahoo are doing right now.

It makes more sense for big companies to not get into disruptive technologies because the return on investment is pretty low.

Even for startups, say 10 companies are trying some disruptive stuff and only 1 succeeds. In actual calculation of return on investment, a big company which gobbles up the winner will make more money than when compared to the amount made(winner company) to amount lost(of the 9 other companies).

The money lost by startups are venture money whereas a big company cant afford to lose so much money.

[get domain name]

To talk about it from the opposite point of view,
Imagine a big company getting into all the new stuff being done by startups. I believe that around 9 on 10 startups close shop. Now, if 90% of the invested money of the big company goes without making any dough, shareholders/employees will start complaining. In a few years, it will not even be a big company with losses and all.

As an example, GE tried to do a lot of stuff before Jack Welch came on board. They were trying out new stuff to come out with disruptive technology but at the end, that is not what they do best. Jack Welch made sure that they concentrate on being best in the big things. The best thing companies like that can do is wait for someone else to come up with disruptive stuff and gobble them up like what microsoft used to do and what google/yahoo are doing right now.

It makes more sense for big companies to not get into disruptive technologies because the return on investment is pretty low.

Even for startups, say 10 companies are trying some disruptive stuff and only 1 succeeds. In actual calculation of return on investment, a big company which gobbles up the winner will make more money than when compared to the amount made(winner company) to amount lost(of the 9 other companies).

The money lost by startups are venture money whereas a big company cant afford to lose so much money.
+1