Monday, October 04, 2010

Why great companies die

In these instances, although this “attacker’s advantage” is associated with a disruptive technology change, the essence of the attacker’s advantage is in the ease with which entrants, relative to incumbents, can identify and make strategic commitments to attack and develop emerging market applications, or value networks. At its core, therefore, the issue may be the relative flexibility of successful established firms versus entrant firms to change strategies and cost structures, not technologies.
(Christensen, 1997, p. 55)
Gates thinks Christensen’s Innovator’s Dilemma thesis is plain wrong. For starters, he says, Christensen chose to study the wrong industry for his thesis. In the disk drive industry, Gates says, “Every breakthrough in disk drives – every single one that really counted – was done by IBM.” In the boom and bust world of providing for the massive storage needs of digital systems, IBM has retained the edge in both technology and profitability. The new guys come in and go out, but IBM remained the leader.
“The large organization, that took the long-term approach, that did the R and D, they won every time,” Gates said. “Every single time.”
The bigger problem with the Innovator’s Dilemma book, Gates says, is that it doesn’t say what large companies should do. “Yes, a company needs to pick some revolutionary thing and bet its life on those things,” Gates said. “That’s all you get” out of Christensen’s thesis, he said.
“It’s more fun from the outside to think that there is. Company XYZ failed because of – One Sentence Description,” he said. “No. Unless there are a bunch of morons running that company, that is not what is happening.”
(Bank, 2001, pg. 41 – 42)
Certainly, Microsoft is not unstoppable. We have to earn our leadership position every day. If we stop innovating or stop adjusting our plans, of if we miss the next big turn in the industry’s road, we’ll lose out. Because Microsoft isn’t immune to failure, we’re careful not to dismiss the doomsayers. We heed their warnings, and we ask: “Why are they saying that? Are we being critical enough of ourselves? Are we missing a new technology?”
(Gates, 1996, p. 69)
These three quotes, from the books The Innovator's Dilemma, Breaking Windows: How Bill Gates Fumbled the Future of Microsoft, and The Road Ahead, adorned the first page of my university paper on organizational theory concepts applied to Microsoft's business.  It's been fascinating to watch the industry as Microsoft attempted to reinvent itself with various degrees of success.  Ever since Ray Ozzie's landmark services memo, Microsoft has attempted to change direction multiple times.  He was clearly anointed as the new technical visionary for Microsoft, releasing his much hyped mesh memo a few years later.  If that's not enough, Ballmer made sure that the message was delivered: Microsoft had to change its core technical philosophies in order to survive and thrive, and was therefore going all in on cloud tech.

But if Microsoft is truly facing these huge threats that could sink their business, why aren't we seeing them respond in the market?  Why did it take so long to get an online version of Office operational, as various institutions transitioned in greater numbers to Google Docs?  And now that Office is operational online, why is the online version so handicapped?  Why has it taken so long for them to get competitive in the mobile phone space?  Microsoft was in the smartphone game WAY earlier than both Apple and Google, and yet they've seen themselves get overtaken by both companies.  And only time will tell if Windows Phone 7 will sink or swim; it's far from a sure thing.  Microsoft was into tablets first years ago.  But they failed, and tablets were seen as a fad.  Now tablets are big again with the iPad.  Why is Microsoft always failing or late to the party?  Hey, but Microsoft is still doing just fine, right?  What's the worry?

I think these various examples are evidence that Christensen's Innovator's Dilemma concept is worth taking seriously.  Basically, the Innovator's Dilemma says that if a company has a successful business centred around a big technology, they are loathe to invest resources into technologies that perform poorly in comparison and have no clear immediate benefit or ROI.  The problem is that new entrants can attack the market from a different perspective, identify where there is value, and create and market a new technology (with both similar and different features) to a different niche.  It may not perform as well as the dominant technology, but it has a distinct advantage.  The dominant technology serves a stale market that has plateaued or is in decline.  The new poorly performing technology serves a new growth market that will eventually eclipse the other market.  And as that market becomes bigger, it will attract more and more R&D investment until the new technology outperforms the old technology.  As such, personal computers in the world where 64kb of memory was both laughable and yet enough for any normal consumer grew to eventually outperform mainframes, even to the point that servers started being manufactured with basic personal computer components.  Webmail that originally had only 2mb of storage and could never compete with your desktop's Outlook now have gigabytes of storage available; who do you know who really uses Outlook at home anymore?  How many people do you know who'd rather use Gmail for work, rather than Outlook?  Well, many companies now can and do, thanks to how Google Docs can integrate with your work systems.

And now maybe we're seeing another Innovator's Dilemma disruption with smartphones vs personal computers.  If everyone can do their email, edit their documents, and do whatever on their phones, connecting to a big screen and keyboard and mouse when necessary, why would anyone want to buy normal computers anymore?  Bam!  The end of Microsoft's bread and butter right there.  No more Windows sales, and if no more Windows sales, for sure no more Office sales (unless Office Live online really gets up to snuff as a rental model).  This is why it's so important for Microsoft's Windows Phone 7 to be successful.  Because maybe, just maybe, we're starting to get to the point where one would rather just use a phone than a computer.  Already, the Japanese have proven that the consumer behaviour is possible.  A whole generation of Japanese kids are growing up who don't know how to type because all their digital lives are spent on their phones (OK, I can't find the original news article about the typing, boohoo, but I really did read it, and it does seem plausible).

This is how disruption happens and how companies die.  Big successful companies don't die because a competitor went head to head with them and took them out.  Big successful companies die because a new entrant figured out how to make money with the side-effect of making the original dominant player irrelevant.  The best example of disruption I've ever read is found in a book called Blindsided, recommended by a former mentor of mine when I was working for the Quick Win Team at TELUS.  In the book, Jim Harris describes the ice industry.  Back in the day, companies would harvest huge blocks of ice from frozen lakes, transport them to warehouses, and cut, sell, and deliver them to households.  The ice would be used to keep food from spoiling in iceboxes.  Then along came refrigeration.  The skillsets required to run a refrigerator manufacturer were vastly different from the skillsets required to run an ice seller.  Where the incumbent ice companies needed a large labour force for harvesting ice, brute strength, and a warehousing system dedicated to inventorying, cutting, and transporting ice, the new refrigerator companies needed to have expertise on the chemistry behind Freon (CFCs), manufacturing processes, and making customer service calls for refrigerator repairs.

How does the original ice company compete?  It simply can't, it's not in the company's core DNA.  They can only fall by the wayside, unless they can pull off a miracle to reinvent themselves to be able to serve the same customer (almost impossible) or reinvent themselves to use their capabilities to serve a different customer (also very difficult).  Well, before they get blindsided, they can prepare for the onslaught, right?  That's what Microsoft's been trying to do.  But in cases like the ice company, they could never have seen Freon coming.  If the executive committees had brainstorming sessions about how to remain the leader in the industry, they probably would have said stuff like, "Research how to improve ice saws.  Better warehousing techniques.  Etcetera, etcetera."

Techcrunch wrote up the post about Facebook that I've been wanting to write for a while, but never found the time.  It's a fantastic teardown on how Facebook could potentially become much bigger than Google.  It's very well-written and a must-read.  Isn't that interesting?  Google, the king of the Internet, was seen as the big company that would make Microsoft irrelevant.  The biggest sign is when employees vote with their feet to join the enemy.  It still could happen, and Google played a classic disruption game, not competing with Microsoft head-to-head, but going about their business in a way that would eventually make Microsoft irrelevant as a side-effect.  But now, so soon into the game, Google is the one looking over its shoulder.

It's amazing to think that a company that has become so successful and influential can become irrelevant in such a short timeframe.  Google's CEO, Eric Schmidt, has acknowledged it's a big worry that Facebook is creating such a huge closed garden of content that they can't index.  If they can't index it, they can't serve ads against it, and they therefore can't monetize it.  That's the core of how their technology enables them to make money. And now with Facebook's more ambitious goals to seemingly integrate the rest of the Internet into Facebook using Facebook Connect and the like, Google could potential lose their bread and butter.  Of course, Google's now working to try to respond to the social onslaught and make sure that they don't become irrelevant.  Can they?  So far, all their attempts at social, from Orkut to Friend Connect, have failed.  Is there just something in their corporate DNA that disables them from being able to compete in social?  I still find all this amazing given that only 5 years ago, I thought Facebook would just be another Friendster, and no more than a fad.

I leave you with a lesson from history.  France didn't fall to Nazi Germany in World War II because the Nazis were able to push through France's defenses.  France was extremely proud of its Maginot Line, and was confident it could repel any German advance.  It probably could.  Except Nazi Germany never went through the Maginot Line.  They went around it.  It's the same for many big successful companies.  They often don't get defeated in head-on competition.  They die when someone takes them by surprise from an angle they never predicted.  Next time, I'll write about my thoughts on why it's so difficult for companies to respond successfully to disruptive change, even if they're aware that it's coming.

UPDATE: Browsing through some old blog posts, I found this one here; this Google AdWords fail is probably the best example of how Facebook's disruption play can eventually offer an ad platform much more capable of targeting customers than Google ever could with their current technology.

UPDATE 2:  Part 2 for this post is here.

UPDATE 3:  And my final post on this subject.  For now, anyway.  :)

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