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Approaching Both Types of Technologies
I had to read The Innovator’s Dilemma at a fifth of the speed at which I read finance books, generally. Clayton wrote an unbelievably insightful and concise piece. The substance each page has is overwhelming. It feels like, for each subtitle, which are generally 1-2 pages long, a hundred hours of reading and writing were done by Christensen. In this article, I’ll be bringing two huge takeaways.
Depending on the type of technology in question, the approach the firm should take. Leading companies have, by definition, at least one product that’s market dominant or that holds a decent share of it. When this is the case, where a product is already well defined, the path forward is making annual marginal improvements to its performance. These are called sustaining innovations. Clayton’s research found that, when speaking of sustaining innovations, it isn’t necessary to lead in terms of performance (under whichever measure). The prior is my generalization of the following:
“There’s no evidence that leaders have obtained any significant competitive advantage over followers” [referring to the disk drive industry]
This means that, even if one of the leaders were to fall behind temporarily, it wouldn’t really affect its competitive position. There’s always time to fill the gap. However, when dealing with disruptive technologies, a whole different picture is painted. Clayton thoroughly studied the disk drive industry and, in contrast to the last quote, he found:
“Companies that entered into new value networks, made available by disruptive technologies in the disk drive industry within the first two years after their ‘birth’, had six times the chances of succeeding than those who entered at a later stage”
Peter Thiel correctly said that being a first mover is a strategy, but it shouldn’t be considered the end goal. In line with all these thoughts, there’s a quote that further illustrates why a different approach should be taken when facing these two types of innovation.
“Only 3/51 (6%) of the firms that entered established markets got to 100M in sales. In contrast, 37% of companies that led in disruptive technologies were able to surpass the 100M mark.”
The case of big firms
Companies are rewarded in the form of higher valuation when they have high future growth prospects. Therefore, ensuring the business’ future growth is one of the core tasks managers face. Highlighted by the book’s thesis, the larger the company is, the less sense it makes to go after disruptive technologies. At the beginning, the addressable markets these have are extremely small, they do not move the needle for big firms. Nonetheless, it has always been the case that companies get displaced by disruptive products. Large corporation CEOs have three ways to address this:
Influence the emergent market’s growth rate (has problems under Clayton’s view).
Apple is one of the examples he gives. In the early 90s, led by John Sculley, management thought that the Newton was destined to be a huge success down the road. Nevertheless, because Apple was already a 5bn dollar company, the Newton had to earn multiple millions in sales to move the needle, and its market was barely beginning. Therefore, to influence its growth rate, the company incurred in one of the most costly marketing campaigns ever. Surveyors were paid to ask customers how could Newton serve them, and a lot of money was spent in advertising to make potential customers more aware of the product.
“Markets that don’t exist cannot be analyzed”
The effort ended up nowhere, according to management’s actions, who decided to discontinue the project.
Wait until the market is big enough (also has problems).
As exhibited above, it is very unlikely that new companies get to enter a market that’s already experiencing sustaining innovations. It is possible and has been done before, but odds of succeeding are low. The reason for this is the following:
“The firms that build markets often build capabilities that are in symptom with the market’s requirements and that later-stage newcomers find difficult to replicate”.
Assign the responsibility to a small organization (most feasible) by creating a new business unit or by acquiring another.
Because the business is small, it does not have the growth requirement we saw with Apple. In 1979, selling 43 thousand Apple II computers was seen as a huge triumph for the business. However, in 1994, the selling of 140 thousand Newtons was seen as a failure. The two different factors were the money invested in the project (a mistake in Newton’s case due to it being a new technology) and the bias the company’s size generates.
The third option makes even more sense once we understand the importance of corresponding the company’s size to the product’s addressable market.
Today’s article was supposed to be called “Advice for Managers”, but after two hours of writing, it got to 1.2k words and there’s still a lot of material to be included. I’ll work in the write-up in parallel and publish it when it’s ready, it will be very similar to My Investment Philosophy. Hope you enjoyed the read as I continue to distill this amazing book!
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