There are few CEOs who don’t feel threatened by their company’s main competitors. Often significant and costly measures are taken to stay ahead of, or apace with, the competition. Yet how many CEOs have a system in place to warn them of other threats that can be just as deadly to the survival of the company?
We have seen big corporations lose the battle for market share to seemingly smaller and “less privileged” entrants. We have also observed how these small entrants were seemingly negligible and posed no obvious threats to the incumbent initially.
In his book, “Exploiting Chaos: 150 Ways to Spark Innovation during Times of Change,” author Jeremy Gutsche shares examples of companies that, due to complacency and lack of foresight, lost their positions as market leaders. A notable one was Smith Corona, the typewriter maker whose $500 million 1989 revenues and market dominance gave them a misleading confidence in their ability to remain profitable in the coming years. Cutting short projects and a potentially viable partnership that may have led to their entry into the computing business, the CEO G. Lee Thomson stated in 1992 that, “There is still a strong market for our products in the United States and the world.” Of course, there is no need telling what became the fate of this company.
Today, one would honestly wonder why such a hugely successful company with access to a vast array of resources, as well as the power to reinvent themselves if they wanted to, should have fallen prey of the danger of disruption. Well, the answer is not farfetched if one considers the characteristics of companies that lose when it comes to innovation. Executives and managers typically act in accordance with the rational principles needed to survive. These rational principles are by themselves the danger to tomorrow’s success.
According to Clay Christensen’s work on disruptive innovation, incumbents are more likely to flee the segments that are least attractive to them at the time, such as an area where profit margins are low. However, new entrants will most likely enter into segments where the incumbents earn comparatively lower profit margins. Christensen cited the example of how minimills gradually disrupted the integrated steel companies as the latter fled from the lower-margin markets.
While this only makes sense, it is also the main reason why new entrants and new technologies are most likely to succeed in disrupting the incumbent. In some cases, the incumbent underestimates the potential of a small entrant stealing their market share and eventually forcing them to lose profits and possibly become extinct. In others, the incumbent fails to recognize or act on potential gamechangers in its industry, leaving the new entrant free to capitalize on future trends. [Read more...]