The only two measures that matter

On the backdrop of the boundless creativity of scientists, technologists and entrepreneurs (often one and the same) a cottage industry of management theories has emerged. Each theory introducing its own catalogue of acronyms, graphs and tools to explain successes and failures. Chief among these are the Blue Ocean strategy, Business Model Generation and Lean Startup methodologies that deservedly attracted many followers.

The Disruptability Curve presented in my previous blog, is a modest addition to this collection. In this blog post I’ll explain how it can be applied to explaining the competitive position of companies. In the next blog I’ll demonstrate how it could be used to focus the innovation efforts.

The Disruptability Curve has two axes. The Y axes denotes the barrier of entry to the industry. It is akin to the level of monopoly the company effectively commands. This could be due to a favorable set of regulations, processes, brand, network and technologies or any combination thereof. Some companies enjoy a monopolistic position due to (historical) regulations. Railway, postage and utility companies often exemplify this. Others such as Google and Facebook benefit from a combination of technology and network affect. Microsoft had a monopoly on PC operation systems. Some companies, such as Apple, rely on a strong brand culture that effectively blinds their fans to the very existence of viable alternatives. In the B2B world, there are many companies that control a section of market and remain mostly unknown to the greater public. YKK controls the unglamorous zipper market, through a combination of superior process (quality control and competitive manufacturing) and brand power scaring away competitors.

But those are the lucky few. Most companies must contend with a weaker barrier to entry. To compensate for that they do what companies love least: surrender value to consumers. This is represented by the second axes on the curve which measures the degree of responsiveness to consumer needs. 
The two axes are in some ways poles apart. The first measures the relative value that companies can extract from consumers and the other the relative value that consumers get from the company. The tendency is for the two to compete, hence the Equilibrium Field, follows a down sloping line depending where the balance of power lies. Companies should aim to be on or above the equilibrium curve. Be under this line — and you are not long for this world.

The reason is simple. Take the company in position A. It is under the Equilibrium Field. This company has little protection from competition, and surely enough, soon appears company B. It offers better value to consumers. The consumers have no reason to prefer company A and all the reasons to prefer company B. Good bye and good riddance company A.

Why a company on the line can survive is a little more complex. Say hello to company C. It is on the Equilibrium Field. Suppose it is a regional bank. It is protected from new competition by a combination of regulations, networks, brand etc. Company B, a Fintech, might attract some consumers due to better features and even lower prices for some products. But, at least to start with, most consumers stay put. Maybe because they are conservative, or because moving is too complex, or because company B only solves a small set of the consumer needs. That is in effect a reflection of company C’s staying power. However, with time, this protection might be eroded, and company C could slip under the line (assuming it does not take any step to improve services). Such a scenario will spell doom for company C. The monopolistic position does not guarantee a lifelong protection. But it provides companies with sufficient time to take measures against new competition. Company B, on the other hand, increases its brand, network and other forms of monopolistic power and begins traveling up and left along the curve.

Being above the line ensures survival — hence the name of the curve.

The position of company B is rather typical. Unless born under auspicious circumstances, a merger or spin off of existing companies, or by government decree, new companies have little monopolistic protection. To survive they must offer superior products from the customer prospective. With time, (almost) all surviving companies shed off any lofty aspirations toward customer welfare and concentrate instead on protecting their turf. This very act provides the opportunity for a new wave of startups.

Consider Microsoft & Apple. Back in the early 1980’s, both firms understood the unifying importance of software and the great potential of personal computing. But their ways quickly diverged. Apple concentrated on (relatively) high-end quality products while Microsoft gained the upper hand by democratizing computer ownership and expanding the market. As shown in the figure below, Microsoft was more attuned to consumer real needs and hence is further to the right. By forging an agreement with IBM for supplying DOS on IBM PC’s, it cemented its monopolistic power. By mid-1990’s Microsoft is way above the line and is the most admired company of the time. Apple by comparison stayed a niche player.

By the early 2000’s Microsoft star has waned. Its monopoly is even stronger, but its products are no longer loved and its efforts are spent on ruthless measures to dispel perceived competition. (remember Netscape?). Its new products were usually met with howls of despair rather than joy.
Apple at that time had an epiphany. It leveraged on its reputation for excellent, and concentrated on unmet consumer needs, revolutionizing the market on its way. In 2001 it introduced the iPod + iTune combination, and followed the trick again with the iPhone and iPad. By doing so its increased its brand appeal many folds over. Its market share increased and it became the highest value company. But nothing lasts forever. Like Microsoft in the early 2000’s, Apple is now using its impressive mountain of cash to cement its position rather than caring for its customer base.

Another happy customer

Similar calculations could explain the position of any company. In the next blog post I will demonstrate how these considerations should be used to determine the innovation portfolio of a company

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