David Ltd vs Goliath Inc: how start-ups beat corporate giants

It seems like the word “Innovation” is on everyone’s lips nowadays. My definition of innovation in the context of business is: “the development and commercialisation of new products or services”.

For most companies in “developed economies” (for lack of a better term), a strong innovation capability is no longer just a “nice-to have” but a requirement for survival. There are countless examples of once powerful corporations that have learned this the hard way, by failing to adapt their products and services to new market demands or changes in the competitive environment.

Take the example of Kodak, this industrial giant once defined the photography industry and it is now filing for chapter 11 because they failed to adapt to a new disruptive technology: digital cameras (they did try to jump on the digital bandwagon when they realised their mistake, but too late).

When such companies are at the peak of their growth and success it seems inconceivable they could ever disappear or let smaller competitors steal any significant market share away from them. But times and again the David vs Goliath story repeats itself: nimble, agile, quicker-to-react, hungrier competitors are able to take on these invincible giants.

How does this happen? Let’s look at the theory. The chart below illustrates the typical life cycle of an industry.

Pic 1

Of course the definition of an “industry” can vary a lot, depending on how specific you are. For instance, when talking about the photography industry, do you mean cameras in general or more specifically analog cameras? The lifespan of industries also vary a lot, from decades to centuries. For instance, the oil extraction industry has been going on for almost a century now and experts are still arguing about when this industry will enter its decline phase (forecasts depend based on estimates of remaining oil reserves, consumption trends and evolution of extraction technologies) whereas the mobile phone industry is only four decades old and has already undergone one cycle as smart phones are progressively replacing feature phone. However, the maturity cycle described in chart above generally holds true.

The tricky bit, of course, is how to get the timing right: how do you know exactly where you stand in the cycle as of today, and what the future holds for your industry? In hindsight things always seem obvious and it is easy to post-rationalise. But let’s put ourselves in the shoes of Gordon, the CEO of Goliath Inc., a corporation that has managed to establish itself as a dominant player in the widget industry, and reached a pretty big size in doing so. Goliath Inc. used to be a small start-up like any other, addressing the needs of a small niche of customers of the widget market place, the so-called early adopters (i.e. geeks happy to try anything new as long as it seems cool enough). However, Goliath Inc. was then successful in “crossing the chasm”: i.e. transitioning to the growth phase by capturing the interest of the so-called early majority of customers. One thing led to another, for some years Goliath Inc. rode the growth wave, as more and more customers flocked to the new and superior widget introduced by Goliath Inc. Of course this success very quickly caused competitor reaction as other players entered the market to get a piece of that growing cake and legacy competitors also tweaked their offering to try to remain relevant. But Gordon sailed through this competitive environment as well as he could and defended the leadership position of Goliath Inc.

This brings us to today. Over the years the collective revenues of participants in the widget industry have followed the curve shown below, and we are now located on point A.

Pic 2

What happens next?

  • Goliath Inc. gets complacent! When you are at the top of the curve it’s really difficult to see how things could ever go bad. You have to understand how tempting it is for the Gordon to keep on using the same recipe that brought him success in the past. It is also easy for him to kid himself into thinking that he still understands perfectly the user needs and requirements in the widget market: “I am the dominant player in this market, who else could possibly know more than I and my A-team of executive managers, filled with Harvard MBAs?”. And yet, year after year, the A-team spends less time on the field, talking and listening to customers, witnessing how the widgets are used in practice and instead spend an increasing amount of time strategising in fancy corporate meeting rooms, on the top floors of Manhattan skyscrapers. Sadly, even if the A-team does pay attention to the evolution of customers’ needs, this is not of much help because…
  • The customers of Goliath Inc. get complacent too! In a mature industry the vast majority of customers are of the “Late Majority” or even “Laggard” type, i.e. they are mostly happy to accept the product/service on offer without much afterthought. Gordon’s team is hardly going to come up with a breakthrough next generation of widgets by relying on the feedback they get from these customers…
  • The diversification trap: to make things worse, Goliath Inc. by now participates in not just one but several industries, each with its own intricacies and a different maturity curve. In fact, as Goliath got bigger and experienced ever-slowing growth Gordon decided to go on a buying spree. The logic went as follows: “What better way to diversify than to acquire another company? This would definitely bump up our sales, right? My deal advisor from Wall Street has identified the right target company and his analysis shows that the deal is justified: there is a $20 million potential synergy (!). I feel Goliath Inc. is going to become once again the darling of the stock market”. Of course mergers and acquisition deals very often prove to be value-destroying and synergies rarely materialise out of the thin air they are made of. Unfortunately, by the time this has become obvious to Goliath Inc. the Sirens of Wall Street are long gone (and you can be sure they didn’t forget to cash in their advisory fees). As Goliath Inc. fell into this diversification trap (several times), the A-team inevitably lost its focus. The bureaucratic burden got heavier and heavier. Next thing you know, strategy and management consultants were called to the rescue and asked to make sense of the situation. Poor old Gordon is still trying to interpret that 1-million dollar slide that was supposed to deliver “the answer”:

Pic 3

Looking at it this way, you can understand how the thousands of small start-ups experimenting with new products and services in their garage went largely unnoticed by the A-team of Goliath Inc….

Pic 4

That is until one of these start-ups, David Ltd, found “the next big thing”, and in one fell swoop made irrelevant the widget industry, the one in which Goliath Inc was once making millions…

Pic 5