Offense and Defense in Innovation: Mini-Mills Moving Upmarket and Independent Teams

Continuing today with The Innovator’s Dilemma. #WhyLeadingGiantsLoseTheirCompetitiveEdge Why do leading companies lose competitiveness? First, eliminate some wrong answers. They do not fall behind technologically. On the contrary, they stay at the frontier and can develop whatever products they choose. They decline to develop certain products—or fail to run them seriously even when developed—because they do not consider them worthwhile. Nor have they become complacent or lax in management. They keep refining their work. Salespeople visit customers daily, understand their needs, and forecast markets. Management pursues high growth, fearful that slower development will damage the market’s assessment. The Innovator’s Dilemma also discusses steel. Large steelmakers continually sought technical progress and higher-grade products. Only small firms used electric arc furnaces to melt scrap steel. They could initially make only rebar, which goes into concrete and has lower quality requirements: a typical low-end market. Could large steelmakers not make rebar? Of course they could. They were happy to surrender it because profits were thin and customers disloyal. Let small firms fight over that bone while the giants focused on better products. Once small steelmakers rapidly captured rebar, fierce competition forced them upmarket into better products such as angle iron, steel bars, and rods. The large firms moved upward too, into structural steel, with better margins and a larger market. Later, technical breakthroughs allowed small steelmakers to produce structural steel as well. The giants moved again, to more profitable steel plate. Repeated attacks ultimately squeezed the large companies into a corner: they could remain only at the high end and could no longer return to low-end markets. Leading companies lose competitiveness not because they perform poorly, but precisely because they perform so well. Understanding customer needs, forecasting trends, and pursuing financial results are essential in normal business. But your customers represent only a small part of the market; new customers are not in your address book. Customers do not know how future markets will develop and often give misleading answers about their needs. Technological evolution cannot be predicted. Pursuing margins too aggressively loses opportunities in emerging markets. By the time a new market matures, entry is too late. ---- #TheInnovatorsDefense If you lead a large company, how can you defend against disruptive technology? You cannot turn a conventional army into guerrillas. Size has advantages. Emerging small firms beat large ones not because they are small, but because their mechanisms are more flexible. The task is therefore to increase flexibility without destroying existing strengths. One effective approach is to establish a new kind of organization ‘outside’ the company and let it act as the innovator. Alongside a conventional army, navy, and air force, you can create a small special-forces unit, combining the advantages of conventional and guerrilla forces. Companies can do the same. In the 1980s, Quantum was a leading maker of 8-inch hard drives. It then missed the opportunity in 5.25-inch drives and declined. In 1984, several employees spotted an emerging market for ultrathin 3.5-inch drives. These served personal-computer users, whereas Quantum’s main customers at the time were computer manufacturers rather than PC users. The employees planned to leave and start a business, but Quantum supported them instead. It set up a subsidiary, provided funding, and held 80% of its shares. The subsidiary operated entirely differently from its parent: it hired independently, designed its own positions, and was responsible for its own profits and losses. As Quantum’s other businesses shrank, this subsidiary alone prospered. Quantum eventually closed the others and rebuilt a new Quantum around it. ---- #TheInnovatorsOffense If you lead an emerging small company, how can you use disruptive technology to attack? Understand your advantage. A small company has little chance in a head-on fight with a large one. Its opportunity is to find territory the incumbent has overlooked or willingly abandoned, then establish a secure base there. Where do guerrillas establish bases? Usually in difficult terrain, harsh conditions, and neglected areas far from major cities. An emerging company should seek comparable unclaimed territory. Compared with mature technology, disruptive technology is usually simpler, cheaper, more reliable, and more convenient. These are precisely the advantages mainstream companies dismiss. They prefer high-performance, high-margin products and markets. When developing their first disruptive product, their most common mistake is showing off technical prowess: they cannot resist adding assorted features and functions. Low-end customers often do not appreciate them. They want affordability, simplicity, and reliability, not fashion. Entering a disruptive market means entering unmapped wilderness. Mistakes are inevitable. As an emerging small company, you need not focus excessively on detailed production and financial plans or spend too much energy on long-range strategy. Your task is simple. First, earn money as quickly as possible; survive before anything else. Second, keep adjusting strategy and strengthening your position. Finally, if your direction is right, avoid rushing recklessly in pursuit of quick gains. Trust that time is on your side. What you need is an excellent moment to attack. --- #Dedao #HeFansReadingClub