All Disruptions are Not equal

Prof. Clayton Christensen in his book ‘The Innovator’s Solution’ tries to address the ‘Innovator’s Dilemma’ – the dilemma of whether or not the incumbent should go after the new entrant. The dilemma arises for one or more of the following reasons:

1. The new customers cannot be served profitably
2. It is a tiny market that won’t move the needle on the stock price in the next quarter
3. The employees and processes are invested in the incumbent business model
4. Fear of cannibalization of highly profitable products

He suggests the incumbent create a small company within the company but a planet away from processes and employees of current business model but shepherded by the CEO himself. The new company’s only mandate is to grow their new business and not to play second fiddle or reinforce the current business. ‘Disrupt yourself or be disrupted’. You don’t have a choice. This advice will give you the best odds of survival. But are the odds good enough?

The environment has shifted more than a decade after the Innovator’s solution was published. I think in spite of the seemingly large resources of the incumbent, there is no guarantee that the advice of creating a new business would solve the threat of a new entrant effectively. The following are my reasons:

1. New Entrants in an Industry may be ‘cash rich’ Incumbents in another Industry

Microsoft Encarta taking on Britannica. Apple disrupting music with iTunes. Google’s driverless cars will inevitably compete against Automobile incumbents.

When you have the cash chest of tech companies like Microsoft, Google and Apple, your resource advantage vanishes. On top of that, the best engineering talent will move to these companies attempting to your industry creating a massive skill gap between you and these ‘new entrants’.

The mega cash rich tech companies will spread their tentacles in every big Industry or will seek to acquire the best startups, its technology and talent. The Incumbent often will have no other chance but to die a painful death.

2. The money and resources required to startup a company has decreased enormously

In the past decade the amount of money it takes to start up a company has decreased drastically. So the software startups eating the world, are not at a resource disadvantage when it comes to incumbents thanks to widespread adoption of cheap and scalable pay-as-you-use computing resources from companies like AWS which eliminates huge capital expenditure.

When you eliminate resource disadvantage, what matters are things like speed, domain competence and technical competence where startups have almost always had a great advantage.

3. A world awash in capital

Some estimates say that the global invested capital market is around $100 trillion while the global GDP is only $80 trillion. Bain Capital estimates the gap to be a far bigger number. Here is an astonishing graph from the Bain report.

8 Capital superabundance

In this age of ‘capital superabundance’, what matters more (and is scarce) is good ideas and entrepreneurs to invest. Capital is not the scarcity. This scenario again removes the resource advantage of incumbents.

Which leads me to speculate that not all disruptions are equal. Some are just deadly and incumbents will stand almost no chance against new entrants. Sometimes there may just be no successful defense.




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