Disruptive Innovation to create a market where you are the standard to follow

Google and the recipe to success

The entire Silicon Valley has been in awe of Google's success as it enjoys a $ 50 B market capitalization just nine months after its IPO. What made Google thrive while other Dot.com's collapsed? Google merely had in its hands the same cards as its competitors: a major technology disruption created by the web, opportunities to grab, lots of competitors supported by generous venture capitalists. The answer is: Google followed its Success Scenario in a Disruptive Market.

Disruptive Markets are distinguished by major and irreversible disruptions that alter their development. We can classify these disruptions in 4 classes:

The first is Technology Disruption. That was the case for Google, leader of Web search engines, in a market fired up by the Internet revolution. In another industry, the Internet Technology Disruption enabled the rise of online banking and transformed the stock market.

The second is Regulatory Disruption. This is a set of changes in regulations that modify the forces that rule the market. As an example, in the pharmaceutical industry, government regulations in favor of generic drugs put increased pressure on drugs manufacturers' margins.

The third is Business Model Disruption. A good illustration is the move of manufacturing to China. Western manufacturing companies have adopted a new business model in two stages. First, they moved factories to China in order to serve the huge local market. Second, they manufactured low cost products in China that were exported to the rest of the world.

The fourth is Customer Demand Disruption. In the area of consumer electronics, the recent success of the expresso coffee machines in Europe is remarkable. This product concept was barely imagined five years ago. It is an illustration of a new consumer demand that materialized only when products were on the shelves.

At the foundation of these market disruptions, the success scenario is the strategic response given by companies, like Google, who are able to take advantage of changes and become leaders in their field. After a close examination of the way these companies have built their success scenarios, it appears that the main questions they addressed were centered on four axes:

1 - Customer Needs. Let's go back to Google. At the time of the Internet surge, users were swamped with information and ease of access became a critical issue. From the start, Google has followed the same motto: facilitate access to information on the web. It has invested all its resources in tuning a technology capable of automatically analyzing more that 8 billion web pages. This is the key to its current success.

2 - New Entrants. For instance, digital cameras have now surpassed film camera sales. This shift enabled new entrants such as Hewlett-Packard to displace traditional players such as Kodak.

3 - Window of Opportunity. There is no point in arriving too early on the market. But arriving too late means letting competitors take the lion's share. Here is probably the most delicate question: When will the market get off the ground? Let's have a look at Apple. The Newton MessagePad introduced in 1992 was too innovative for its time. In contrast, its iPod music player and its iTunes Music Store service were right on time to create a new product category and dominate the market.

4 - Change of Course. During periods of disruptions, trajectories are not straight. The end goal is not achieved in one reach, but requires several steps. Between each step, it is critical to make the right Change of Course. The most well known example is the series of Changes of Course that Microsoft made during its history. Just to name a few, the alliance with IBM to launch MS-DOS, the divorce from IBM to push Windows at the expense of OS/2, the attack of the Office Automation Software market, the emphasis on the Internet strategy which marginalized the then-leader NetScape, are good examples of Changes of Course well executed by Microsoft.

Clearly, Success Scenarios in Disruptive Markets follow different dynamics from those of established markets. Market Disruptions harbor many opportunities that are fruitful to those who make the right choices. However, nothing is guaranteed, and they have to remain alert at all time. Today, Google is Microsoft's next target. Will Google be able to resist or will it fall as NetScape did? A fascinating page of Internet History is taking shape in front of our eyes.

AT&T and MCI: the death of two giants

It is a time of profound stupefaction in the whole Telecommunications industry. Two giants, AT&T and MCI, perished. AT&T succumbed in SBC's arms through a $ 16 billion merger, and MCI fell in Verizon's territory through a $ 6.8 billion merger. AT&T was the good boy, MCI was the roguish kid. For American shareholders, AT&T was a symbol of stability. MCI, its rival, mostly illustrated itself by a huge financial scandal in 2002.

Why did they die? Despite their differences, they succumbed from the same disease: they were not able to manage the disruptions that hit their market. Still, they knew. Amy Muller et Liisa Välikansas of the Strategos Institute report how, ten years ago, a group of 8 AT&T employees, named ODD (Opportunity Discovery Department) warned executives about approaching market disruptions. They denounced Telecommunication Service Providers' looking down on the Internet with disdain and investing into obsolescence doomed strategies. Those companies acted no better than sailing merchants responded to the threat of steam by inventing faster sailing ships in the mid 1800s. The problem was complicated and spread along three dimensions:

The first was a technology disruption. The "Stupid Network" - i.e. simple and efficient - of Internet had the power to overthrow the "intelligent" telephone network - i.e. sophisticated, complex and expensive - that was AT&T's and MCI's main asset.

The second was a business model disruption, characterized by near-free prices. Telephone communications prices were constantly falling and threatened to become free, forcing players to find new ways to generate profits. A company has found a solution to this dilemma: Google enjoys comfortable profits at giving away its search engine service that attracts traffic for lucrative advertisements.

The third was a customer demand disruption. On one side, telephone users were starting to migrate in hordes to mobile phones. On the other side, Internet users exhibited boundless greed at getting the most out of the new infinite information source of the Internet, be it in the form of text, audio or video. This enthusiasm has created today's formidable Broadband Access market, where a residential 8 Mb/s connection is a mere commodity.

Even though our 8 visionaries were famous among their colleagues, their conclusions quickly bothered the Executive Committee. Their work was judged non productive and the group was disbanded. Since then, AT&T systematically missed the strategic turns it should have made to change its fate. When it comes to MCI, its CEO Bernard Ebbbers was too busy at engaging into market valuation raising tactics to perceive the signs announcing its doom. 

Naturally, it would unfair to mock AT&T's and MCI's failed attempt at anticipating the market evolution. Markets are easy to analyze after they stabilize, but they are always difficult to predict at the time when new shaping forces are just weak signals. Let's rather try to learn from these companies and understand what drove them not to see what seems obvious today. As Greg Blonder, manager of ODD, said after leaving AT&T: "For AT&T management in the early 1990s, the idea that the Internet might actually overshadow traditional telephone service was simply unthinkable". It was impossible to set aside the huge amount of accumulated corporate experience on telephony and imagine a world where Internet dictates the market.

Unfortunately, such disruptions are irreversible. Ignore them: they will come back and haunt you with full strength. When an internet user has experienced the ease of e-mail communication, he won't revert to postal mail. When a user has established free phone conversations over the Internet using Spyke, he won't accept to pay for phone calls anymore. When teenagers see their friends carrying mobile phones, their parents will have a hard time convincing them that the old fixed house phone is good enough.

As a conclusion, when facing such disruptions, the only alternative is to take them very seriously and make the right turns as soon as possible. The more we wait, the more we will be, like AT&T and MCI, bound to be outdated and lose our bets. At the time of their disappearance, let's hope that we will derive some wisdom out of their experience.