In December 1998, Fortune magazine's cover gace corporate readers a stark choice: 'INTERNET OR BUST!'. The article inside, by Gary Hamel and Jeff Sampler, was no less stark in its message: 'Somewhere out there is a bullet with your company's name on it. Somewhere out there is a competitor, unborn and unknown, that will render your business model obsolete'.
This book sounds the same warning throughout. It is neither hype nor hyperbole. The bullet has already struck home, with devastating effect for the wounded and wonderful results for the shooters. It's not a new piece of ammunition. Managements have always faced the same threat: disruption as some radical development changes their business so severely that great setbacks follow.
It happened to transatlantic liners when jetliners took off, to integrated steel producers when mini-mills opened, to Detroit when small cars and then the Japanese appeared, to US department stores when discounters muscled in. The Internet is different, though. It does not offer a specific threat to a specific industry. Not only is it disrupting somebody somewhere right now: it could place everybody on the firing line, and probably in ways of which the victims cannot currently conceive. As Hamel and Sampler say:
'The Internet will change the relationship between consumers and producers in ways more profound than you can yet imagine. The Internet is not just another marketing channel; it's not just another advertising medium. The Internet is the foundation for a new industrial order.'
The threat to established companies is most dramatic when technology takes a great leap forward. The dilemma is whether you meet technological threats head on and at once, or wait and see. The latter course almost invariably ends in waiting too long, until the new competition is out of sight. The former strategy, on the other hand, makes no sense. Your customers don't want the new technology, and you can't make it pay. In other words, established companies are forced to fail. Customer demands and competitive pressures make them invest heavily to sustain their existing strengths and, if possible, to enhance that prowess.
Some challenged leaders will try (as many have tried) to cover the new threat when it becomes obvious. But, as stressed in the previously, being late is too late. Also, you face grave problems in trying to ride two horses at once. The major technology (which dominates the organisation) fatally cramps the style of the innovators, who have rings run round them by counterparts in wholly new, dedicated firms.
As the Information Revolution powers on, many companies will lose leadership to its highly disruptive technology. But the genuine obstacles that blocked and eventually destroyed many firms overtaken by disruptive technologies do not, in fact, apply to the technology of information and communications. Your customers won't reject your innovations. They will applaud, rather than oppose your IP and other investments.
Companies armed with the new technology, moreover, are in a far stronger position to counter disruptive threats by becoming disruptive themselves. Lower costs of operation enable you to go after different categories of customers, who are attracted by lower prices and by different functionality. Like the disrupters, you can afford to head off into tiny markets, with sales ranging from zero to insignificant, in the hope that they will emerge into the sunshine of large size and profits.
Yet many companies are reacting to the Internet just as the 14-inch hard disc drive industry did to the 8-inch drives introduced by newcomers like Shugart, Priam and Quantum. In The Innovator's Dilemma, Clayton M. Christensen reports how the 14-inchers, even though all the technology was available to them, even though their resources were more than ample, by and large ignored the development, or vainly hoped that it would go away. Two-thirds of them never introduced an 8-inch model. Those that did were around two years late, i.e much too late.
VALUE NETWORKS
They were trapped by Christensen's Paradox: that large companies fail, absolutely or relatively, in face of disruptive technologies, not because they are poorly managed, but because their management is excellent. It wauld have been mismanagement to pursue 8-inch drives which offered smaller margins and a far smaller market (if any), and which the customers didn't want. Christensen firmly establishes the concept of 'value networks', in which customers and supplier develop a shared interest in a given technology which suits both their purposes - including their profit objectives.
The mistake of ignoring the new emerging market in these cases is only clear in hindsight. But that is not true of the Internet. The folly of ignoring it screams from every business journal. As the Financial Times stressed in March 1999:
'In boardrooms across the globe, executive are having to get to grips with the Internet and the e-commerce revolution. Many face the unpalatable choice of cannibalising their existing businesses to compete in the Internet era, or watching others do it for them. Either way, it is IT systems that will make the difference.'
That accurate diagnosis leaves no options. There isn't a choice, like that between going up-market or down. In the old business school model, every manager was urged to head up-market, aiming for the top left-hand corner of the price/performance matrix, where you win the highest price for the highest quality. That took the option of optimising the present. But the acxcompanying risk, of undermining, even eliminating, the future has now become insupportable. Today lowest price for highest quality is the killer app in many sectors - and that will not be achieved by out-of-date business models.
Firms and individuals naturally play to their strengths - what they are good at, which has worked well in the past and still works well. The time comes, however, when these strengths are threatened by obsolescence, even though they are still paying off. That was IBM's recurrent nightmare. The company may have deserved its one-time sky-high management reputation, at least in part, but it derived its vast profits and massive market strength from serving large corporate customers - and deep market changes undermined the model.
Although IBM eventually reacted very effectively to the rise of both the minicomputer and the PC, its natural bent was towards those same big customers. But the phenomenal growth in PC sales lay outside the large corporates, and IBM's market share in PCs, once 80%, slumped to single figures. This didn't happen overnight. But it might just as well have done. By lagging behind the new technology, you miss a bus that may not stop for you the next time round.
Missing the bus isn't a failing peculiar to IBM. In disk drives, Seagate, the disruptive 5.25-inch leader, came late into 3.5-inch disks - and by 1991 hadn't sold a single product to what turned out to be their prime users, manufacturers of portable, laptop and notebook computers. So there is everybody's problem. The biggest opportunity and the greatest threat may well lie outside your existing business and value network. You can't, however, just abandon the latter, because that network provides your current highly satisfactory profits.
The whole organisation, and the management mind-set, are geared, quite rightly, to what is. How can the same organisation react effectively to what isn't - and may never be? Christensen's unequivocal answer is that it can't. The existing organisation will never suceed with a disruptive technology. He cites Woolworth in the US, which attempted to combat the discount stores by opening its own Woolco outlets and simultaneously expanding the traditional variety stores.
The effort failed even more abysmally than IBM's move to absorb its phenomenally succesful PC operation into the mainstream organisation. The Woolcos disappeared completely. While IBM lost massive amounts of market share, it remains the world's largest IT company (though far from that in stock market value). Yet originally the PC operation was a model response to the innovator's dilemma. It's a solution which IP technology both requires and facilitates.
The PC activity was sited well away from any other IBM centre, in Boca Raton, Florida, under independent management with a distinct mandate. It met excellently most of the following key prescriptions, which apply forcefully to making the best of the new technology of information and communications:
1. Match the size of the organisation to the size of the market.
2. Learn about the market and its customers as you go along.
3. Get in early, while the market has still to be proved.
4. Accept the inevitability of mistakes.
5. Recognise the weaknesses of disruptive technologies and their strengths.
This sounds like an argument for the 'skunk works', an organisation given a specific task and located in a site which makes interference unlikely. Many a skunk-works failed, however, usually either because the sponsoring management didn't have real faith in the project, or because the R&D wasn't linked to manufacture and marketing. The catastrophic failure of Xerox to exploit any of the brilliant, epoch-making PC discoveries at its Palo Alto Research Center sprang from separation of the scientists and engineers from manufacturing and marketing.
SPONSORING THE SPIN-OFF
There's an apparent contradiction between what happened to PARC and the argument for siting new activities well away from existing ones. But the contradiction is only apparent, not real: the spun-off activity should be a fully integrated operation, and not (like PARC) a self-contained outfit with no commercial affiliations. Without a sponsor, even brilliant research and development will be lost. Even with a sponsor, though, the independent operation may not produce the right disruptive technology or market it appropriately to the different categories of customers who become involved.
The disruptive innovators have to learn how to play, not from strengh, but from weakness. Since they can't compete with the established business for the established customers, and initally have little or no idea of where their products will sell, they have to create new strength. They have to learn how to find new customers and open up new markets from which brilliant success can spring. That, however, doesn't makes it any easier to encompass disruptive change when those markets, in turn, become established.
What happened to the 14-inch disk drive makers was repeated again and again (as with Seagate) every time a generation of new boy entrepreneurs reduced disk sizes. The predecessors, now rich old boys, proved incapable of resisting the competition, even though it used the identical approach that had made their own wealth (and killed their established competition). The main antidote is to accept that in every business disruptive technologies or the equivalent lie in wait - developments which, like the World Wide Web, will one day enlarge and upset the market to your disadvantage.
At the start, the main strength of challengers lies in their highly adaptive approach. In these disruptive businesses, with their uncertain markets, there is no alternative to the points made earlier: to learn as you go along, and to make false starts and mistakes, but to react swiftly until you find the better path. For perfectly sound reasons, big companies discipline this behaviour out of existence in their mainstream operations. That is fatal in the context of the Triple Revolution.
The deathknell of the old order was sounded when, to gain its potent market position on the Internet, start-up Netscape famously gave away its browsers. You simply have to forget old inhibitions. For instance, companies need to compete with themselves, which means not being afraid to cannibalise your existing products: if you don't eat your children, someone else will. And you have to adopt four strategic principles which mark out winning strategies from the runners-up and flops.
Winners (1) concentrate on the winning hand; (2) cover every bet; (3) work with strong partners; and (4) think really big. A wondrous example of big thinking is Finland's Nokia, whose cellular phone technology has taken it to a market value of $9 billion. Once the Finns had spotted their winning opportunity in the cellular potential, they poured in resources to achieve world market leadership.
That meant intense concentration. For the sake of cellular, Nokia abandoned paper, tyres, metals, other electronics, cables, TV sets and its PC interests. That tight focus, however, is only part of the story. It won't save you from Christensen's Paradox. The failed market leaders trapped by the Paradox had enough focus to spot the opportunity. They not only developed the disruptive technologies themselves, but often took the development to the point of a business proposal. But it never made economic sense to take the technology to market, not within the established organisation. It never will. So don't try.
TAKING PARTNERS
Independent start-ups are not the only answer. You can also take partners. The Silicon Valley giants have formed the good habit of investing in small start-ups that have promising ideas. Cisco Systems bought or invested in 34 of them in three years: Intel set aside $500 million for similar purposes. If the investment succeeds with a new technology, the investing company has entered at the ground floor; if the start-up succeeds financially, the investor cashes in; and the odds are, of course, that technological and financial breakthroughs will go hand-in-hand.
If the 14-inch drive makers had invested in the 8-inch disrupters, or started up a disrupter themselves, the leaders wouldn't have lost out - provided, of course, that they had allowed the upstartss to follow their own logic. Hewlett-Packard did precisely that when setting free a new organisation to make ink-jet printers and challenge its own immensely profitable position in laser printers. The disruptive technology then worked to HP's overall advantage and followed the logic of Christensen's Paradox. Anything else invites eventual disruption by others - followed, if you're 14-inched, by destruction.
But IT managements have matured in a high-speed world in which, remember, months are as long as traditional years. They know the rapidity with which disruptive technologies appear, win markets and swell to major scale. That's why they invest in promising new disruptors, just in case. Managers and technologists have also learnt to work across disciplines and corporate borders (internal and external) to force innovations into marketable shape and on to market success.
These principles are highly transferrable. Managers in every industry need to honour the basics. First, bar no holds: forget about corporate shibboleths and 'the way we do things round here'. Second, make the independence of autonomous operations real: provide all the resources they genuinely need, and enough rope to hang the competition. Third, focus sharply on new competitors, and stay with them every inch of the way.
You may go up some blind alleys. Not all threats materialise. Hovercraft didn't have significant impact on existing forms of transportation, nor rotary car engines on the old technology. But never bet on such helpful outcomes: digital watches crucified clockwork, and Web-based entrepreneurs will demolish earthbound competitors. The Boy Scout motto applies. Be prepared.
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