A recent article in the Financial Times discussed an all-too-familiar story in the world of technological innovation, this time in the mobile technology market: companies that are first-to-market with one product are not necessarily the ones that end up with the largest market share. Motorola was the first to introduce the cell phone as we know it today, and for a long time was the leader of innovation in that field. But it doesn’t have the largest global market share in the mobile market; that honor goes to Nokia. Nokia itself was an early leader in the smartphone market, but it lost the US market to RIM’s Blackberry and is losing the global market to Apple’s iPhone and Google’s Android.
What causes this phenomenon? Why do companies seem to drop the ball on markets that are theirs to lose? The Financial Times article offers some answers, but I think there are more structural and strategic reasons for this story.
One of the most profound ideas I got from my strategy classes was that a successful strategy has the potential of being a company’s worst enemy. Before you judge the preceding statement as nonsensical and outright stupid (like I did when I first heard it,) consider some examples from the mobile communications market itself. In the early 90’s could the CEO of Motorola have suggested a change in strategy to stave off competition when their innovative strategy was working splendidly? Would it have been possible for Olli-Pekka Kallasvuo, Nokia’s Chief Executive, to propose a radical shift in strategy to counter the impending assault by the Blackberry as Nokia’s handsets were taking the world by a storm? And is it feasible for Steve Jobs to suggest overhauling the iPhone strategy to counter the Android onslaught? The answer to all of these questions is a simple no. None of these CEOs would have risked their jobs by messing with strategies that had worked so well, until the markets were disrupted.
The failure to anticipate market disruption has a cultural component. Companies tend to specialize in catering to specific segments on the diffusion-of-innovations graph shown here.Companies that focus on cutting-edge and bleeding-edge technology tend to focus their efforts on the Innovators and some of the Early Adopters, only to be outmaneuvered by disruptors who can leverage existing technology to serve the early majority. These disruptors are later themselves disrupted by other players who can serve the late majority and laggards. Take Motorola, the company the practically invented the cell phone. They rode their technological innovation prowess in that field for a long time. I still remember when they announced a cell phone that weighed less than a pound. Their business was disrupted by Nokia, Samsung and other players who leveraged existing technology to provide more user-friendly phones.
So how can companies protect against the dangers posed by their successful strategies? First they need to realize that market disruptions are like death and taxes: inevitable. Once they make peace with that fact, they can utilize the following strategies to control benefit from disruptions:
- Serial acquisitions: They can keep a close eye on their market and acquire any companies that have the potential of disrupting their business. This is Microsoft’s strategy, but it can get quite expensive, especially that integrating the acquired companies may end up destroying their value as disruptors.
- Reserve the right to play later: Many companies today have venture capital divisions whose sole purpose of to invest in startups that play in their market. This is a cheap way to gain influence in these companies and to keep abreast of future disruptions, while not destroying their innovative cultures through outright acquisition and integration.
- Create their own disruptors: Through the use of a Skunk Works program, a company can create its own startups to try to disrupt its market. IBM was extremely successful at employing this strategy as detailed in this 2005 article by Fast Company Magazine.