Learning by Shipping

I was talking with a founder/CEO of an enterprise startup about what it is like to disrupt a sizable incumbent. In the case we were talking about the disrupting technology was losing traction and the incumbent was regaining control of the situation, back off their heels, and generally felt like they had fended off the “attack” on a core business. This causes a lot of consternation at the disrupting startup as deals aren’t won, reviews and analyst reports swing the wrong way, and folks start to question the direction. If there really is a product/market fit, then hold on and persevere because almost always the disruption is still going to happen. Let’s look at why.

Incumbent Reacting

The most important thing to realize about a large successful company reacting to a disruptive market entry is that every element of the company just wants to return to “normal” as quickly as possible. It is that simple.

Every action about being disrupted is dictated by a desire to avoid changing things and to maintain the status quo.

If the disruption is a product feature, the motion is figuring out how to tell customers the feature isn’t that important (best case) or how to quickly add something along the lines of the feature and move on (worst case). If the disruption is a pricing change then every effort is about how to “manage customers” without actually changing the price. If the disruption is a new and seemingly important adjacent product, then the actions focus on how to point out that such a product isn’t really necessary. Across the spectrum of potential activities, it is why the early competitive responses are often dismissive or outwardly ignore the challenger. Aside from the normal desire to avoid validating a new market entry by commenting, it takes a lot of time for a large enterprise to go through the work to formulate a response and gain consensus. Therefore an articulate way of changing very little has a lot of appeal.

Status quo is the ultimate goal of the incumbent.

Once a disruptive product gains enough traction that a more robust response is required, the course of action is almost always one that is designed to reduce changes to plans, minimize effort overall, and to do just enough to “tie”. Why is that? Because in a big company “versus” a small company, enterprise customers tend to see “a tie as a win to the incumbent”. Customers have similar views about having their infrastructure disrupted and wish to minimize change, so goals are aligned. The idea of being able to check off that a given scenario is handled by what you already own makes things much easier.

Keep in mind that in any organization, large or small, everyone is at or beyond capacity. There’s no bench, no free cycles. So any change in immediate work necessarily means something isn’t going to get done. In a large organization these challenges are multiplied by scale. People worry about their performance reviews; managers worry about the commitments to other groups; sales people worry about quarterly quotas. All of these worries are extremely difficult to mitigate because they cross layers of managers and functions.

As much as a large team or leader would like to “focus” or “wave a wand” to get folks to see the importance of a crisis, the reality of doing so is itself a massive change effort that takes a lot of time.

This means that the actions taken often follow a known pattern:

• Campaign. The first thing that takes place is a campaign of words and positioning. The checklist of features, the benefits of the existing product, the breadth of features of the incumbent compared to the new product, and so on. If the new product is cheaper, then the focus turns to value. Almost always the campaign emphasizes the depth, breadth, reliability, and comfort of the incumbent’s offer. A campaign might also be quite negative and focus on a fear, compatibility with existing infrastructure, or conventional wisdom weakness of a disruptor, or the might introduce a pretty big leap of repositioning of the incumbent product. A good example of this is how on-premises server products have competed with SaaS by highlighting the lack of flexibility or potential security issues around the cloud. This approach is quick to wind up and easy to wind down. Once it starts to work you roll it out all over the world and execute. Once the deals are won back then the small tiger team that created the campaign goes back to articulating the product as originally intended, aka normal.
• Partnership. Quite often there can be a competitive response of best practices or a third-party tool/add-on that appears to provide some similar functionality. The basic idea is to use someone else to offer the benefit articulated by a disruptive product. Early in the SaaS competition, the on-premises companies were somewhat quick to partner with “hosting” companies who would simply build out a dedicated rack of servers and run the traditional software “as a service”. This repotting plants approach to SaaS has the benefit that once the immediate crisis is mitigated, either the need to actually offer and support the partnership ends or the company just becomes committed to this new sales channel for existing products. Again, everything else continues as it was.
• Special effort. Every once in a while the pressure is so great internally to compete that the engineering team signs up for a “one off” product change or special feature. Because the engineering team was already booked, a special effort is often something carefully negotiated and minimized in scope and effort. Engineering minimizes it internally to avoid messing up dependencies and other features. Sales will be specific in what they expect the result to do because while the commitment is being made they will likely begin to articulate this to red-hot customer situations. At the extreme, it is not uncommon for the engineering team to suggest to the sales organization that a consultant or third-party can use some form of extensibility in the product to implement something that looks like the missing work. The implications of doing enterprise work in a way that minimizes impact is that, well, the impact is minimized. Without the proper architecture or an implementation at the right level in the stack, the effort ultimately looks incomplete or like a one-off. Almost all the on-premise products attempting to morph into cloud products exhibit this in the form of features that used to be there simply not being available in the “SaaS version”. With enough wins, it is almost likely that the special effort feature doesn’t ever get used. Again, the customer is just as likely to be happy with the status quo.

All of these typical responses have the attribute that they can be ignored by the vast majority of resources on a business. Almost no one has to change what they are doing while the business is responding to a disruptive force. Large incumbents love when they can fend off competitors with minimal change.

Large incumbents love when they can fend off competitors with minimal change.

Once the initial wave of competitive wins settles in and the disruptive products lose, there is much rejoicing. The teams just get back to what they were doing and declare victory. Since most of the team didn’t change anything, folks just assume that this was just another competitor with inferior products, technology, approaches that their superior product fended off. Existing customers are happy. All is good.

Or is it?

Disruptor Persevering

This is exactly where the biggest opportunity exists for a disruptive market entry. The level of complacency that settles into an incumbent after the first round of victories is astounding. There’s essentially a reinforcing feedback loop because there was little or no dip in revenue (in fact if revenue was growing before then it still is), product usage is still there, customers go back to asking for features the same as they were before, sales people are making quota, and so on. Things went back to normal for the incumbent.

In fact, just about every disruption happens this way–the first round or first approaches don’t quite take hold.

Why is this?

• Product readiness can improve. Obviously the most common is that the disruptive product simply isn’t ready. The feature set, scale, enterprise controls, or other attributes are deficient. A well-run new product will have done extensive early customer work knowing what is missing and will balance launching with these deficiencies and with the ability to continue to develop the product. In a startup environment, a single company rarely gets a second shot with customers so calibrating readiness is critical. Relative to the broader category of disruption, the harsh reality is that if the disruptor’s idea or approach is the right one but the entry into the market was premature, the learning will apply to the next entry. That’s why the opportunity for disruption is still there. It is why time to market is not always the advantage and being able to apply learning from failures (your own or another entry) can be so valuable.
• Missing ingredient gets added. Often a disruptive product makes a forward-looking bet on some level of enterprise infrastructure or capability as a requirement for the new product to take hold. The incumbent latches on to this missing ingredient and uses it to create an overall state of lack of readiness. If there’s one thing that disruptors know, it is not to bet against Moore’s law. If your product takes more compute, more storage, or more bandwidth, these are most definitely short-term issues. Obviously there’s no room for sloppy work, but by and large time is on your side. So much of the disruption around mobile computing was slowed down by the enterprise issues around managing budgets and allocation of “mobile phones”.  Companies did not see it as likely that even better phones would become essential for life outside of work and overwhelm the managed phone process. Similarly, the lack of high-speed mobile networks was seen as a barrier, but all the while the telcos are spending billions to build them out.
• Conventional wisdom will change. One of the most fragile elements of change are the mindsets of those that need to change. This is even more true in enterprise computing. In a world where the average tenure of a CIO is constantly under pressure, where budgets are always viewed with skepticism, and where the immediate needs far exceed resources and time, making the wrong choice can be very costly. Thus the conventional wisdom plays an important part in the timeline for a disruption taking hold. From the PC to the GUI to client/server, to the web, to the cloud, to acceptance of open source each of these went through a period where conventional wisdom was that these were inappropriate for the enterprise. Then one day we all wake up to a world where the approach is required for the enterprise. The new products that are forward-looking and weather the negatives wishing to maintain the status quo get richly rewarded when the conventional wisdom changes.
• Legacy products can’t change. Ultimately the best reason to persevere is because the technology products you’re disrupting simply aren’t going to be suited to the new world (new approach, new scenarios, new technologies). When you re-imagine how something should be, you have an inherent advantage. The very foundation of technology disruption continues to point out that incumbents with the most to lose have the biggest challenges leading through generational changes. Many say the enterprise software world, broadly speaking, is testing these challenges today.

All of these are why disruption has the characteristic of seeming to take a much longer time to take hold than expected, but when it does take hold it happens very rapidly. One day a product is ready for primetime. One day a missing ingredient is ubiquitous. One day conventional wisdom just changes. And legacy products really struggle to change enough (sometimes in business or sometimes in technology) to be “all in” players in the new world.

Of course all this hinges on an idea plus execution of a disruptive idea. All the academic theory and role-playing in the world cannot offer wisdom on knowing if you’re on to something. That’s where the team and entrepreneur’s intuition, perseverance, and adaptability to new data are the most valuable assets.

The opportunity and ability to disrupt the enterprise takes patience and more often than not several attempts, by one or more players learning and adjusting the overall approach. The intrinsic strengths of the incumbent means that new products can usually be defended against for a short time. At the same time the organization and operation of a large and successful company also means that there is near certainty that a subsequent wave of disruption will be stronger, better, and more likely to take hold simply because of the desire for the incumbent to get back to “normal”.

–Steven Sinofsky (@stevesi)