There is one business book that Steve Jobs said deeply influenced him – The Innovator’s Dilemma by Clayton M. Christensen.
Here’s what happens with a company. The founders have an idea and create a product of a service. In the beginning the product has some core functionality and some users take it – perhaps its cheap and does the main things they need it to do.
This is the low end of the market – where adequate performance is just fine.
Over time, the founders improve the product and build the company. There are more people, more iterations of the product and it gets better and better and just climbs up the S-curve of performance.
At some point, the product satisfies the needs of virtually all its customers – even the ones demanding high end performance and superior quality.
The company is now established, has lots of customers, is profitable and seems to dominate its space.
What are the founders doing now?
Perhaps they’ve been replaced by executives and have retired to a beach somewhere.
The execs come in with suits and briefcases and do what the company does best. The double down on the products that are doing well creating even more capability and features.
The only companies that can afford their high end tools are the large, established ones. The little customers aren’t attractive anymore.
The market doesn’t really need these whizz bangy things but, well, the execs might as well keep going and offer more options.
Along the way, they might create some new tech or capability, but its not really that interesting to customers and doesn’t get attention or resources – everyone’s focus is on the main earners.
Some of the people working on this other cool stuff get dejected and think about leaving and starting out on their own.
They ditch the suits, come to work in t-shirts and shorts, perhaps on a skateboard, and get on developing the tech that the large company rejected in a new startup.
This new tech is newer, probably faster, cheaper, easier to maintain and so costs much less than the older, more established technology of the incumbent.
The suits are going to find that they are standing at the edge of a precipice – they just don’t know it yet.
The startup tech is adopted by the low end of the market. In its new, unrefined form it does what is needed by these customers and starts building market share.
Soon, its climbing a new S-curve.
Finally, the suits look down in horror and see that the startup has hoovered up all the small customers they have been ignoring.
It’s now too late to create competing technology. Perhaps they can buy the startup and survive that way. Or else that’s it – they’re now walking dead and business is moving wholesale to the new company.
This disruptive cycle is the dilemma faced by the innovator.
We often think that companies go out of business because they fail to innovate.
According to Christensen, that’s not the case. The incumbents do their core business really well. They don’t invest in their fringe ideas because the return on investment isn’t proven – and they make sensible asset allocation decisions in proven markets and technologies.
Those perfectly sensible actions allow the startup to take root, grow and eventually disrupt the incumbent’s market.
A B2B CEO or MD needs to know which S-curve their company is on – the incumbent’s or the startup’s – and where it stands on the slope.
They need to know that before doing anything else.