Rating: 7.8/10.
Business book that studies how established companies get disrupted by startups. It tends to happen due to a few structural reasons: the disruptive technology starts off underperforming in the mainstream segments that the large company values, performing well only in a niche segment with a small market. By the time the niche market grows enough to be relevant, it’s already too late. It also requires different processes and values from what the large company would make, so large companies struggle.
The book starts with a case study in the disk drive industry, which saw continuous rapid improvement from around 1970 to 2000. It’s not that the incumbents cannot adapt to new technology, in fact, many difficult advancements were funded by the incumbents. The difference was they were good at the improvements that made their existing products better, whereas new generations like the transition from 5.25-inch to 3.5-inch drives, were overwhelmingly led by new entrants. The smaller drives initially offered lower cost targeted at a new segment like personal computers instead of mainframes, and due to their limited capacity the new technology were not interesting to existing customers.
In other words, established companies have difficulty adopting a disruptive technology because it requires a different value network (that is, cost structure, customers, and sales motions) than what they have already established. New technologies are interesting to new customers, like the 3.5-inch drive is useful for portable computers but not mainframes. New entrants build a value network around the new technology and then eventually attack the incumbent’s market from below when the new technology has caught up.
A similar story played out in the excavator market during the transition from cable to hydraulics. Cable manufacturers had the knowledge and actually tried out hydraulics quite early, but couldn’t sell to existing customers since the capacity was much smaller. Eventually, capacity caught up and cable excavators were made obsolete since they were less reliable. It’s much easier for a business to move up the market than down like targeting bigger and more complex customers with larger deal sizes. Even if an established firm experiment with the new technology initially, the quality is lower than what they have in the market among existing customers, but new entrants easily attack from below when the time is ready. A case study of mini mills’ method of producing steel for cheap shows that it took some years before the quality was acceptable for the most profitable use cases.
The second half of the book talks about how established companies can hope to avoid being disrupted. When an established company invests in disruptive technology in its early stages, it almost always fails due to needing to compete for the same resources like headcount, customers, and budget as the main product. It’s judged by existing metrics and the project tends to get killed. You must allow the disruptive technology to operate as an independent organization so it can optimize for its own metrics.
Often the first iteration in disruptive technologies by a giant is viewed as a flop by the sales metrics and then later recognized as a stepping stone that was important. With disruptive technologies, it’s impossible to predict who will use it and how many will be sold, and many get it wrong, eg, Honda’s venture into the North American motorcycle market, where they initially misunderstood demand, this should be treated as a goal of learning rather than implementation at first.
Established firms also can’t effectively compete in disruptive technologies, not because of the employees who are often sufficiently skilled, but because their values, processes, and organization structure are mismatched to the new domain. Instead, they should spin out an independent subsidiary with autonomy and report minimally to the parent. The typical pattern is a disruptive technology is initially cheaper and simpler but more reliable, though missing some features, until it catches up. Once it catches up on the primary axis to be good enough, then the secondary axis becomes the differentiator.
Overall, a hugely influential book in the startup space, even though it’s almost 30 years old, it’s still quite insightful today. However, even at around 260 pages it is quite repetitive, with the main idea repeated more or less in the same way multiple times across chapters, just with a few different case studies.
