From the course: How to Think Strategically
Disruption
(upbeat dance music) - Once you get to scale, there can be a lot of benefits, as we just discussed but that doesn't mean that market leaders don't lose their way. It actually happens all the time. Some of the most valuable companies in the world today weren't even on the map 20 years ago. And some of the most valuable companies then aren't market leaders now. So it's important to understand the patterns of how really successful companies lose their market position and become less successful over time. So we're actually going to go back to our original framework of picking our mountain, understanding the basis of competition and the capabilities required to climb it 'cause what we're going to find is that if any one of those dynamics changes, then your strategy can be rendered obsolete. So let's draw a quick picture. So let's imagine for a second that that's your mountain. We'll draw a little flag at the top and that's market leadership. This is you and your capabilities trying to figure out how to climb the mountain. And then each mountain has different terrain to get to the top. There are lots of situations when the size of the mountain changes, where the problem that used to be really important to many people around the world just isn't a problem anymore. One of the things that I remember is my grandfather, who loved photography, showing me how to put film in a camera. And there was a time when people that loved photography had their favorite place to get their film processed. But as cameras moved from being film-based to being digital, then all of those companies lost their relevance in the world. In fact, the mountain that they were serving didn't really exist in the same way. And it was really hard for them to compete. They needed to completely pivot. So the mountain can change. Another thing that can change is the terrain or the basis of competition, the thing that distinguishes winners and losers. Now, one of the things that's going on right now in the automobile industry is that what used to be a defining factor of great car companies built on combustion engine technology, there's a lot of consumers now that want electric vehicles. So imagine for a second that consumer behavior changes, and it changes in a way that renders your capabilities obsolete. Consumers all the time change what they care about, but when it comes into conflict with the capabilities that you've built, you can really be in trouble. And then finally, when capabilities change, even if the basis of competition doesn't, when there's a new technology on the market that means that the way to be effective in a certain area is no longer the best way, then you can really be caught flatfooted. There are lots of examples of this, whether it's, you know, mobile phone technology becoming a thing as opposed to just being browser based and internet. But my favorite example is actually skis. So there was a time when skis were made of wood. They broke all the time, they were super heavy, they weren't that durable, it was really hard to turn. And there was a guy named Howard Head and Howard came from aeronautical engineering. He had built a bunch of understanding of how planes were designed and what he realized is that the same technology that could be used to build amazing wings for planes could be used to build modern skis that weren't based on wood, that had different shapes and different durability. Consumer behavior didn't change. Actually people still care about skis that were light and durable. But the way that you built the best product in the ski market took on a completely new shape. So imagine for a second you're a ski company. Your entire technology is based on knowing how to work with wood. You may even own forests to source that wood. And now this guy comes along with airplane technology. That means that all the things you know how to do don't actually meet the mark. Now skis is just one example. Actually, Howard had took the same kind of thinking and applied it to tennis rackets and built a huge market share in that business as well. There are some subtleties to these examples that I want to go through 'cause I think they're really important. So we talked about consumer behavior changing and there's a very specific version of that called disruption. It's actually an idea popularized by a professor from Harvard Business School named Clay Christensen. And the whole idea is that oftentimes, market leaders lose because someone comes along and offers a substitute to their product that isn't quite as good but is lower cost or easier to use. And you can probably think of a ton of examples of this in your life, but a good one is cameras. There was a time if you wanted to buy a digital camera where you really wanted the best image quality that you could get. And that's what people were focused on when they decided what camera to buy. But then along comes mobile phones and they decide that a good enough camera that's built directly into your phone that's just at the ready whenever you need it actually gets the job done. They were willing to sacrifice a little bit of image quality for something that was less expensive and right in their pocket. This happens constantly in markets of being disrupted by a lower and easier to use product that gets the job done but perhaps not quite as well as what the market leader is focused on. There's another example of how markets evolve where what you actually find is that your mountaintop is actually a foothill in a much bigger mountain range. This happens a lot in software. When software as a service came onto the market, you saw a lot of startups, picking problems that customers had and building out very specific solutions to solve them one at a time. And there was a proliferation of solutions that companies would buy. But as the market got more mature, what you found is that customers really cared about how those products fit together. It wasn't enough to just serve one use case. You actually needed to serve a range of use cases in order to be best in the market. And so just like we talked about the value of scale and understanding how important it is to be big to be effective, there's also the same concept around scope. Do you understand the full periphery of this problem that you need to solve to be able to win in your marketplace? And that tends to change over time. And as market gets bigger, often time the scope of effective products tends to grow. As it turns out, there's actually the exact opposite of this dynamic which also happens called unbundling. Now, unbundling happens when there's a company solving a huge range of problems and someone realizes that actually there's a part of this problem that's really important to customers and that the market leader doesn't serve particularly well. A modern example of this is actually Instagram. Facebook built a number of different ways for people to share information, to communicate with their friends and family. And then Instagram came along and said, you know, actually, one of the most heavily used parts of Facebook is photo sharing. And Facebook has that in their product but it's actually not the core of what they're great at. So Instagram decided to build a different product focused on photo sharing, and they actually were able to build presence and market leadership in a subset of the overall problem that Facebook was trying to solve. And it became a race. Can Instagram build market share fast enough and a network effect like we talked about earlier? Or can Facebook catch up in their photo sharing capabilities? And Facebook decided to de-risk the situation by buying Instagram for over a billion dollars. There are many ways that companies lose their way but a very simple way to remind yourself of the different kinds of loss that can happen is to go back to this simple model. Has the size of the mountain changed? Has the terrain changed? Has the capabilities required to scale it faster than anyone else changed? 'Cause if one of those dynamics has evolved, then it's likely that your strategy needs to evolve too.