There is a cottage industry in conducting executive tours of Silicon Valley, and now increasingly San Francisco SOMA, to expose teams from other parts of the planet to what is admittedly a uniquely successful culture of innovation and wealth creation. I’m all for it up to a point. Where I part company from the herd is with the notion that global corporations have a chance in hell of playing the same game. They don’t. Here’s why.
To quote a hopefully soon-to-be would be candidate for president, Silicon Valley’s version of the innovation game is rigged! That is, it is specifically designed around a venture capital oriented ecosystem that is uniquely aligned to support investments in disruptive innovation. The limited partners who fund VCs want their money put into these high-risk, high-reward endeavors. The VCs that parcel out that money interview entrepreneurs to pick the best ideas, plans, and teams to prosecute a disruptive innovation. The ecosystem of service providers needed to support these fledgling enterprises is deeply experienced in navigating the economic gyrations brought on by the Technology Adoption Life Cycle. And when any individual joins one of these companies, he or she knows their sole mission in life is to bring the targeted disruptive innovation to scale as fast as possible, come hell or high water, Devil take the hindmost. Now, I ask you, where else in the world could you expect to find this kind of alignment?
Most companies in most economies in most places live by sustaining innovation, not disruption. Successful investments are typically medium-to-low risk with medium-to-high rewards. They do not involve going through a bet-the-company J-curve, that deep and harrowing financial trough from which only a fraction of traveler’s return. Financiers from traditional economies do not want the companies they invest in to take this route—they want steadier ROIs from more proven paths. The executive teams who run these companies developed their considerable expertise prosecuting opportunities of just this sort. The workforce’s who report in to them are not prepared to work crazy-long hours in pursuit of some visionary dream, nor do they want them to. They want them to show up, be present, do real work, and then go home and spend time with their families, loved ones, and significant others. That’s what economic stability is all about.
So, when a disruptive innovation does cross the chasm and breaches the defenses of one of their mainstream marketplaces, it should come to no one’s surprise that it is not being led by any currently successful established competitor. Frankly, such organizations all have better fish to fry. BUT, once a disruption has breached the mainstream market’s defenses and taken hold, then the game is dramatically changed. The old way is now under existential threat, the established ecosystem is no longer economically viable, and customers are looking to their traditional vendors to see if they can and will adopt the new playbook.
Now, the good news here is that customers do not like to switch vendors. This means, if you and your ecosystem of partners can stand down from your old positions of power and take up the new modus operandi, then your prospects of defending your turf are actually quite good. You don’t have to introduce a disruptive new business model of your own to do this, but you do have to catch up—and smartly too! This means you have to incorporate enough of the new technology to modernize your operating model, to blunt the appeal of the disruptor by stealing a bit of their thunder. That is, your goal is not to differentiate in order to win new customers—that’s the disruptor’s playbook. They want the customers you have. Your goal instead is to neutralize the opposition’s appeal in order to keep your existing customers loyal to you. Differentiation and neutralization call for two very different playbooks. Silicon Valley is the master of the first. You need the second.
For that, you should look outside the Valley to a company like Microsoft, one that has spent the entire arc of its history protecting the extraordinary customer base it was gifted by the near-universal adoption of the IBM PC. Without exception its most successful products were born out of neutralization, not differentiation. That is, Windows neutralized the Macintosh OS, Windows NT neutralized Novell, Office neutralized WordPerfect, Lotus 1-2-3, and Persuasion, Outlook neutralized cc:Mail, SQL Server neutralized IBM DB2 and Oracle, and Internet Explorer neutralized Netscape Navigator. In every case, Microsoft was quick to clone just to get something vaguely competitive into the market asap, and then worked relentlessly first to bring its product up to speed and eventually to surpass the original disruptor. And all along the way, it leveraged its existing market position to bundle early offerings in for free, monetizing them downstream either on their own or by virtue of them sustaining the price premium of the suites they had been incorporated into.
By contrast, Silicon Valley companies that have found themselves under a comparable attack have often tried a different tack. They have sought to out-innovate the innovator, to leapfrog the freakin’ toad that just leapfrogged them! Yahoo wanted to out-innovate Google with social search. Sun and HP wanted to out-innovate Intel with Spark and PA-RISC. eBay wanted to out-innovate Amazon by buying Skype. But when the barbarians are at the gates, there is no time to invent a new weapon or experiment with an unproven one—you have to co-opt the one they are using against you.
So, yes, please do come to Silicon Valley and take away whatever lessons you can incorporate successfully into your current enterprise. Everyone needs to differentiate eventually. But you might extend your trip up to Redmond to learn a trick or two from the folks up there as well.
That’s what I think. What do you think?