Why Entrepreneurs Should Use Revolutionary Trends To Beat Existing Corporations | Technological Leadership Institute
Remember companies like Control Data, Wang Labs and DEC. You will if you have grey hair. They were all disrupted by the PC revolution. The old AT&T, which sold long-distance calling, failed when long-distance was a free add-on. Borders, Barnes & Noble, Sears, Wards and many other store-based retailers have failed, or are failing, due to the Internet-based revolution.
Some have called this disruptive innovation and defined it as innovations being sold for lower prices. But not all innovations that cause disruption are sold for lower prices. Chipotle revolutionized the quick-serve industry from the top by finding the organic food trend for which consumers would pay more. Tesla has revolutionized the auto industry by “disrupting” from the top. Revolutionary innovations can disrupt from the bottom or the top, and they can offer a competitive edge to entrepreneurs, and often with higher margins.
More importantly, they handicap the large, existing corporations that dominate the industry by making their assets, organization and skills obsolete. This is the difference between “blue ocean” strategy and revolutionary innovations. Blue oceans assume that existing corporations can easily enter revolutionary trends. But when the new trend requires new skills that existing corporations don’t have, and make the old assets obsolete, and destroy the old pricing model, blue oceans can become shark-filled.
A result of revolutionary innovations is that we are seeing existential problems in various industries, including retail. And other industries such as healthcare, education and manufacturing are on the cusp of being revolutionized. GE, an icon of the last century, seems to be disintegrating before our eyes. Will it streamline its way to insignificance?
To understand revolutionary trends, I suggest going back to the technological forecasting techniques developed in the 1950s - 1960s, including envelope curves. I thought this technique was relegated to the ash heap of history. But it deserves a new look because it can explain many of the phenomena we are seeing, and offers a solution to entrepreneurs seeking growth ventures and corporations seeking growth potential.
Revolutionary innovations satisfy the same basic need as existing products but in a new way that changes the basic business model:
- Initially, the new revolutionary innovation is often worse than the old technology on the currently-accepted variable that defines market success (example: the early PCs had little power and were derided as toys by computer makers). The initial inferiority creates a false sense of complacency among incumbent corporations.
- But the technology is better on a new variable or variables (size and portability for PCs), and this newly important variable(s) appeals to a previously ignored or underserved segment.
- Then the revolutionary technology improves on the old market-defining variable – and destroys the old technology (PCs became more powerful and destroyed mainframes).
Here are some other examples:
Internet retail was initially worse in the experience but strong on the convenience for Internet-savvy customers. Then it improved the experience and started destroying in-store retail; and
Online cabs-without-cabs (Uber, Lyft) was initially risky because they violated local regulations. But when the new model was accepted, it went mainstream.
The trauma will spread. Revolutionary advances will destroy other old-line industries, including health-care, education and manufacturing, and create entrepreneurial opportunities. Existing giants often cannot fight back against revolutionary innovations without major disruptions. Existing business models, assets and skills may not be easily adaptable to the new business model. The old corporations may find that they are sitting on useless assets and useless skills. The revolutionary change often cuts costs, and may offer higher margins even with lower prices. Apple is a classic example. By eliminating the need to buy a physical CD, Apple cut costs. But its pricing strategy offered Apple high margins. Corporations need to know how billion-dollar entrepreneurs succeeded. Entrepreneurs need to know how to destroy the Goliaths using the revolutionary advances.
MY TAKE: For entrepreneurs, executives, and financiers, a key principle to remember is that it is nearly impossible to predict the right business model and strategy for revolutionary trends and innovations until some venture in the emerging industry finds the magic formula. But this emerging leader is usually one of many new ventures that were started. Before take-off, it is not possible to predict which one will dominate (see Law of Many Ventures. Experts need to admit that no one has the answers, and corporations need to start practicing the Law of Many Ventures.
Dr. Dileep Rao has more than 20 years of experiencing financing businesses and ventures using venture capital, leases, debt and subordinated debt. He also bought and turned around several companies. Since retiring, he has been writing, teaching, and hopefully thinking. He has also interviewed extremely successful entrepreneurs such as Glen Taylor and Bob Kierllin. Currently, he is writing books about how to build giant businesses without capital. Dr. Rao teaches in the Master of Science in Management of Technology degree program.
This article was originally written for Forbes, and republished with the author's consent.