I really appreciate your questions because they cut to the core issue at hand. In the case of both blockbuster and us steel, the "fad" question isn't really at issue. This is because in both cases there was technology in place that absolutely fundamentally reduces production cost, rather than a sudden change in consumer demands. The question for any company is whether or not to possess the capability to produce at lower cost. For both us steel and blockbuster the resistance came from short term marginal cost analysis in which the sunk costs in the new capabilities represented a relative reduction in short term profit margin caused by an increase in spending. The alternative, especially for us steel, was simply to lower their prices on the low end rebar, which did reduce their profit margin, but which didn't require new capital outlays. But even for blockbuster the first move was to reduce income rather than increasing capital outlays, which they did by eliminating late fees. It's easier to justify profitable operations that are slightly less profitable because of pricing pressure from competitors than it is to explain why all of the profits from one or multiple quarters is being diverted into new capital outlays for production capacities that essentially make existing assets obsolete and which aren't likely ever to operate at the same profit margins at which existing capabilities have historically been able to operate. It's possible in Blockbuster's case that customers would have simply not liked paying less to spend less time shopping for movies (although it's hard to imagine that such customers wouldn't at least represent some viable market share), but it's very hard to imagine how rebar consumers would refuse to buy rebar simply on the basis that it was produced at lower cost. In either case the question is whether your business is better off possessing a capability or better of saving the money in the short term that acquiring that capability would require. Both us steel and blockbuster would ultimately decide to copy their disruptors, but the tension caused by the marginal cost analysis is a tension the disruptors never had to deal with because they didn't have established margin expectations to compare their models against. They just new that if they made certain investments they would be rewarded with a lower cost production capability, and it seemed obvious that possessing such a capability would become a competitive advantage, so they went for it. This issue is key to the entire theory of disruptive innovation, because it's really the only advantage disruptors have over incumbents, that they don't have to justify capital outlays in light of historical margins, but instead are focused merely on the potential for their investments to be able to facilitate profitable operations in the future, whereas incumbents are haunted by their past success as an arbitrary metric used to evaluate their future potentials.
Wow! Thats quite in detail & to the point. Thanks for leaving a comment. Totally agree to the thought process & reasoning here.
When I read these books I try to place myself in the shoes of both the new-comer & the incumbent. As a new-comer I want to optimise for understanding gaps in the incumbents & preparing for the alt-cases. As an incumbent my first priority is survival. So I think of alternative roads that could have been taken, & the road-blocks there of.
I agree that the margins/profits of the past create such a large anchor that it often becomes difficult for the incumbent to move at all. One of the prime reasons I have figured out over analysing multiple companies that the cost structure(primarily overheads & not direct costs) of the incumbents are so fixed in place that even moving to the new technology / ways doesn't really work for them. For example, the compensation of their top management, distribution or sourcing agreements which were fixed at a higher cost with some kind of lock-in/exclusivity just doesn't allow them wiggle room.
One of the classic cases a company avoiding this from India is CocaCola. When entering the market, to boost supply they had bottling agreements at a really high cost base. When competition came in, these bottlers were not willing to negotiate even when the new rates/terms were still really good. They had to literally strong-arm them or else it would have bled to death.
This is such a vast topic with a lot more nuance. 🙂
I find it particularly interesting how so much of the impact of Clayton Christensen's work seems to have manifested on the startup side rather than the incumbent side. I get the sense that he really was writing with the incumbents as his primary audience, and that he hoped to convince them to abandon marginal thinking and just accept that they need to be constantly investing in innovations precisely tuned to customer's "Jobs to be Done," even if those innovations will displace/disrupt existing operations. Either displace yourself or get displaced by the upstart competition seems to be the general motto.
And I get the sense that he was motivated to address the incumbents more than the startups because at bottom he was motivated by the sense of progress we only really see him address directly in the Prosperity Paradox. In Prosperity Paradox the whole argument is that when capital is allocated to the development of capabilities that open up new markets to serve hitherto non-consumers it drives an increase in general prosperity, yet such investments are often not made by incumbents because of marginal analysis. So here we see Christensen's problems with marginal analysis connecting directly with a deeper societal mission he was undertaking, to encourage the allocation of capital towards investments that actually create widespread prosperity rather than to investments that simply increase profit margins compared to an arbitrary historical benchmark. This mission explains why he was more focused on incumbents as an audience than on startups, because he saw incumbents as already possessing the capital to make the prosperity-driving investments that would lead to an economy better tuned to serving broad human interests.
It's just an irony because so much of his work describes precisely why incumbents are resistant to make investments in capabilities that serve non-consumers or over-served segments that the main point that dispersed into the collective awareness of the business class was simply that incumbents can be targeted for disruption. And this accordingly inspired a whole generation of startups to do just that. Meanwhile his larger economic vision seems to have been mostly filtered out of the general awareness of the key insights relating to "disruptive innovation." Which really is unfortunate because I think that his insights in Prosperity Paradox are of the most potential significance to society.
I really appreciate your questions because they cut to the core issue at hand. In the case of both blockbuster and us steel, the "fad" question isn't really at issue. This is because in both cases there was technology in place that absolutely fundamentally reduces production cost, rather than a sudden change in consumer demands. The question for any company is whether or not to possess the capability to produce at lower cost. For both us steel and blockbuster the resistance came from short term marginal cost analysis in which the sunk costs in the new capabilities represented a relative reduction in short term profit margin caused by an increase in spending. The alternative, especially for us steel, was simply to lower their prices on the low end rebar, which did reduce their profit margin, but which didn't require new capital outlays. But even for blockbuster the first move was to reduce income rather than increasing capital outlays, which they did by eliminating late fees. It's easier to justify profitable operations that are slightly less profitable because of pricing pressure from competitors than it is to explain why all of the profits from one or multiple quarters is being diverted into new capital outlays for production capacities that essentially make existing assets obsolete and which aren't likely ever to operate at the same profit margins at which existing capabilities have historically been able to operate. It's possible in Blockbuster's case that customers would have simply not liked paying less to spend less time shopping for movies (although it's hard to imagine that such customers wouldn't at least represent some viable market share), but it's very hard to imagine how rebar consumers would refuse to buy rebar simply on the basis that it was produced at lower cost. In either case the question is whether your business is better off possessing a capability or better of saving the money in the short term that acquiring that capability would require. Both us steel and blockbuster would ultimately decide to copy their disruptors, but the tension caused by the marginal cost analysis is a tension the disruptors never had to deal with because they didn't have established margin expectations to compare their models against. They just new that if they made certain investments they would be rewarded with a lower cost production capability, and it seemed obvious that possessing such a capability would become a competitive advantage, so they went for it. This issue is key to the entire theory of disruptive innovation, because it's really the only advantage disruptors have over incumbents, that they don't have to justify capital outlays in light of historical margins, but instead are focused merely on the potential for their investments to be able to facilitate profitable operations in the future, whereas incumbents are haunted by their past success as an arbitrary metric used to evaluate their future potentials.
Wow! Thats quite in detail & to the point. Thanks for leaving a comment. Totally agree to the thought process & reasoning here.
When I read these books I try to place myself in the shoes of both the new-comer & the incumbent. As a new-comer I want to optimise for understanding gaps in the incumbents & preparing for the alt-cases. As an incumbent my first priority is survival. So I think of alternative roads that could have been taken, & the road-blocks there of.
I agree that the margins/profits of the past create such a large anchor that it often becomes difficult for the incumbent to move at all. One of the prime reasons I have figured out over analysing multiple companies that the cost structure(primarily overheads & not direct costs) of the incumbents are so fixed in place that even moving to the new technology / ways doesn't really work for them. For example, the compensation of their top management, distribution or sourcing agreements which were fixed at a higher cost with some kind of lock-in/exclusivity just doesn't allow them wiggle room.
One of the classic cases a company avoiding this from India is CocaCola. When entering the market, to boost supply they had bottling agreements at a really high cost base. When competition came in, these bottlers were not willing to negotiate even when the new rates/terms were still really good. They had to literally strong-arm them or else it would have bled to death.
This is such a vast topic with a lot more nuance. 🙂
I find it particularly interesting how so much of the impact of Clayton Christensen's work seems to have manifested on the startup side rather than the incumbent side. I get the sense that he really was writing with the incumbents as his primary audience, and that he hoped to convince them to abandon marginal thinking and just accept that they need to be constantly investing in innovations precisely tuned to customer's "Jobs to be Done," even if those innovations will displace/disrupt existing operations. Either displace yourself or get displaced by the upstart competition seems to be the general motto.
And I get the sense that he was motivated to address the incumbents more than the startups because at bottom he was motivated by the sense of progress we only really see him address directly in the Prosperity Paradox. In Prosperity Paradox the whole argument is that when capital is allocated to the development of capabilities that open up new markets to serve hitherto non-consumers it drives an increase in general prosperity, yet such investments are often not made by incumbents because of marginal analysis. So here we see Christensen's problems with marginal analysis connecting directly with a deeper societal mission he was undertaking, to encourage the allocation of capital towards investments that actually create widespread prosperity rather than to investments that simply increase profit margins compared to an arbitrary historical benchmark. This mission explains why he was more focused on incumbents as an audience than on startups, because he saw incumbents as already possessing the capital to make the prosperity-driving investments that would lead to an economy better tuned to serving broad human interests.
It's just an irony because so much of his work describes precisely why incumbents are resistant to make investments in capabilities that serve non-consumers or over-served segments that the main point that dispersed into the collective awareness of the business class was simply that incumbents can be targeted for disruption. And this accordingly inspired a whole generation of startups to do just that. Meanwhile his larger economic vision seems to have been mostly filtered out of the general awareness of the key insights relating to "disruptive innovation." Which really is unfortunate because I think that his insights in Prosperity Paradox are of the most potential significance to society.
That’s a really nice perspective. I never really thought about the motives of the author. Makes sense. Thanks!