It’s odd how small companies can come up from nowhere and wrestle market share from seemingly invincible giants. Why didn’t the giants see it coming? Why weren’t they able to innovative internally and keep up with the latest trends. The answer may be because it didn’t make sense to do so.

Take the disc drive industry. There is a classic study looking into this very business carried out by Clayton M Christensen.

At one point in the industry’s history, the leading technology was the 8 inch floppy, as used in mini-computers. The market was dominated by a handful of companies who had operated from inception of the market; they had incorporated the latest technology and were proven innovators. New entrants to the markets were largely unsuccessful.
The emergence of 5.25 inch disk drives for desktop computers changed everything. Many of the existing market leaders examined the new technology; some invested.

However, they stopped short of embracing it; their customers used mini-computers and were not interested in “here today gone tomorrow” desktops. By the time the desktop market was established, with 5.25 inch drives showing signs of dominance, it was too late. The new entrants, with their specialisation in the latest technology, held all the cards. The former heavyweights lost market share; many went out of business.

This was not a one-off. Christensen was able to show that the business saw similar shifts several times. The giants of the 8 inch disk drive market should have learned from the decline of 14 inch drives for mainframes. The new kids, in the 5.25 inch market, were no wiser. When notebooks became more popular and 3.5 inch drives began to take off, they too were caught sleeping. In each case, be it 8 inches, 5.25 inches or 3.5 inches the technology was nothing special to begin with: the new players were using off-the-shelf components. Crucially, they became specialised. The older companies found that their specialisation was a disadvantage: change was too hard. Changing sooner might have preserved their position of strength. In other words, Christensen showed how disruptive technology can cause established players to fail.
See the idea of innovators’ dilemma from the point of view of a fitness landscape. 

If you imagine the market in which a company operates as being represented by a grid, and then imagine each square on that grid is either elevated or depressed depending on the fitness of the products and production and marketing techniques the company employs. A successful player in say the 8 inch floppy disk drive market may sit on top of an elevated square, surrounded by slightly less elevated squares which it had to climb. Across the grid is another elevated area, which reaches an even higher peak than the one this company sits on. This area represents 5.25 inch disc drives. In order to reach this area, our company has first to climb down, and travel across a depressed area that may sit between the two elevated areas. Travelling this depressed area is a very hard to thing to contemplate. At a later date, the grid may change shape, with the elevated area represented by 8 inch disk drives collapsing, but by then it will be too late for our company to change, because the mountain range represented by 5 inch drives is already crowded.

Microsoft may sit at the top of an elevated area; one in which it has perfected the art of selling software to the mass market. Google, on the other hand, is climbing in another area; one in which software is free and funded by advertising. Could Microsoft ever be capable of climbing down from its lofty perch before ascending elsewhere in the grid, competing with other players who already have a lead?

Microsoft may yet prove to a victim of innovators’ dilemma.

See also What banks, Nokia and disc drives have in common 



© Investment & Business News 2013