The Incumbent Disadvantage

Today’s big players were once scrappy upstarts. Netflix took on the Blockbuster giant. Amazon took on the publishing industry & then Walmart. And just as surely, they will one day be slain by new, and tiny organisations. It is inevitable that large incumbents are eventually eaten by small underdogs. This is what Clayton Christensen called the innovator’s dilemma.

This pattern seems contrary to reason, contrary to nature even. Large predators kill small prey, and rarely vice-versa. Large organisations should have all of the resources, contacts, brand presence, and momentum. They’re established in the mind of the consumer, and have the staff, assets and freedom to do whatever they wish. Yet, like the circle of life, we see continual growth, dominance, destruction and death as incumbents are beaten.

So why is it that behemoths with the world at their fingertips can be toppled by insects at their feet?

Organisations are built to relentlessly pursue a goal

Organisations are a collection of people that group together with a single, shared mission. The success of the company is largely determined, at least in the beginning, by the accuracy & originality of the hypothesis which inspired that mission, and the alignment behind it of all involved. Belief in the mission is vital, through the many times when it just isn’t working yet.

The organisation is then constructed, like a machine, to pursue the mission. In order to ensure alignment of others to the mission, the organisation grows around incentives. These can be explicit, like sales targets, or implicit, like the success of a manager on the efficiency or effectiveness of their team.

Over time, successful organisations develop competitive advantages, points of leverage they can uniquely utilise. For example large news organisations such as the BBC have world-wide renowned, access, talent and coverage. This secures their position in the market, gives them an unfair, inimitable advantage over competitors and new comers. It would be incredibly difficult to beat the BBC at the game they are playing, of mass media production broadcasting. Warren Buffet calls these insurmountable advantages “moats”.

Organisations build environments, structures and infrastructure around their advantages, strategy and goals. Factories are build in specific layouts, with transport and machinery all appropriate to their batch and order sizes. Media companies construct large studios with expensive static cameras.

With this insight into the machinery of an organisation, we can think a little more clearly about how it responds to changing circumstances.

Mission accomplished

The organisation, you’ll remember, has been rewarded for getting their head down and chasing their mission. The mission was based on a hypothesis, some insight about what consumers want or need. They’ve come a long way since that hypothesis though. The mission is baked into the organisation: both the people that work there and the structures they’ve built. The mission is still front of mind, but the conditions of the hypothesis are long forgotten. They are large, established. Hasn’t the hypothesis been proven correct?

Humans used horses for transport for millennia. The “hypothesis” around horse-based transport was that they are the fastest, affordable animal that can endure our weight over distances we’d prefer not to walk, and therefore the best mode of transport. By the 1800s, horses were established as the way to travel. The “mission” of stable owners & cart makers was to provide horse transport options to any traveller that needed it, just as they had forever. The mission had been an unconditional fact of human civilisation. Why should they expect any change?

But all conditions, even conditions which have stood for thousands of years, change. The rise of the automobile wiped out the horse-transport industry in a number of decades. That is, the market went from steady growth, to turn, dip & die in less than 1% of the time it had been around.

Few would have predicted such a dramatic extinction of this mode of transport, because everybody had been raised on the established way as fact. Companies, their directors and staff have accepted their company & its mission as succeeded, accepted, fact. All hypothesises, even proven theories, have conditions & qualifications. These are easy to forget when we live inside the lines of those conditions. But life & lifestyles change, those conditions are violated, and everything is left to play for.

Too big to fail

When they’ve spent the last decade relentlessly pursuing their mission, and they’ve succeeded, why would they question that mission now? Blockbuster KNEW they could make money renting DVDs from their stores, because they’d done it for years. Polaroid KNEW that film cameras were a huge business they dominated. Their belief had been validated.

The Certainty-Longevity Matrix

Organisations spend effort, time and resources to move towards their goal. They train staff, purchase assets and setup entire international structures. They sign deals & lease property. They are invested heavily in the current approach.

And it’s working. They’re making great money, they’ve beaten competitors and they lead the field. They’ve established competitive advantages making it almost impossible to challenge them. They’re safe and unshakeable.

Why would anyone give that up, because of some much smaller, tangential opportunity?

Why would Polaroid threaten their enormous film-photography monopoly to sell digital cameras to a few nerds that might buy them? Why would Microsoft build a cloud-first version of their Office software, when few people had internet fast enough to even use it, while their Office products dominated the market and made them billions?

The new way is unknown, tiny & risky. The current way makes great money, and they’ve become great at doing it. Who would choose to change direction under these circumstances?

This is something I call the certainty-longevity matrix. The more certain & established something is, the larger its probabilistic returns in the short-term, and the less likely it is to provide such returns in the long term. In contrast, uncertainty may offer little reward now, and no guarantee of reward ever, but the potential future rewards are much larger.

What the certainty-longevity matrix shows us is that the only certainty in the long-term is that sitting still is the same as rolling downhill. But in the short-term, it might look like the exact opposite.

There’s no need to change until there’s a NEED to change

So organisations beat on against the changing current, because they’ve built big & powerful boats, and they hardly notice the shift at first.

A few tiny companies find a new way, but there’s hardly any customers and they aren’t making much money. E-Readers were for unsophisticated geeks weren’t they, and Reddit was a rounding error to Yahoo.

And then suddenly they boom, and they’re taking your business. The new way is cheaper & easier for consumers. The companies scale a little more easily, and they seem to do more with less. Now the incumbent is worried.

At this point they might make a token effort to keep up. Waterstones makes a deal with Kobo, Blockbuster brings out “Total Access”, and mini-cabs bring out their own app. But it’s a little too late, and you can tell that their heart isn’t really in it.

If it’s not broken, don’t fix it – every disrupted company

Incumbents wait until the uncertainty has solidified into certainty. Unfortunately, by then it’s too late.

The old goal is embedded into behaviours…

That doesn’t give incumbents the credit they might be due. Sometimes, even very large companies do act early, and try to innovate. A number of large car companies saw the rise of electric cars, and more or less reluctantly got on board, for example. Sometimes, there is willingness to change direction.

The problem they face though, is that they weren’t constructed for this business, they were constructed for the old business. The old goal, the old approach, it was baked into every part of the company.

Staff were selected and trained for a specific business. They had expertise at doing the old thing really well. They don’t know the new thing, and they have reputations for being competent. When their job dramatically shifts, they resist, because they don’t know how to do it, at least not as well as the old way. Students tend to study the topics they already know best, because humans like to do things well.

And of course there are incentives to consider. Remember that all organisations use a mixture of incentives to align everyone toward the same goal. That is, the incentives ensure they are all rowing in the same direction. When a company wants to change approach, it can take a while for incentives to shift too. Usually, the old incentives will still remain in place, and staff were better at meeting the old incentives. BP sales people might be incentivised to sell solar panels, but they’re much better at selling oil. They have the contacts and the experience. So they keep selling oil and get rewarded for it.

When a company tries to change direction, there is significant and long-lasting resistance from its staff. Like a car turning sharply on a skid-pan, they face in a different direction, but they continue to head sideways towards the barrier.

…and into structures

Organisations build everything with their goal in mind. That’s encouraged. Everything should “add value”. They build large factories because large factories are more efficient. Their vans perfectly fit their batch sizes. Sales offices are built inside DIY stores because trades people are the desired customer. Shops are built with low-lighting to create an intimidatingly cool vibe. They optimise acutely for one mission.

Then things change. Now they want to do smaller batches but the factories weren’t built that way. The product is now focused at young people, who never go to DIY stores. The shops need to broaden their appeal, but the lighting can’t be changed without closing for a month.

The structures have goals embedded. A goal can change in an afternoon, but physical structures usually can’t.

Advantage Inversion

An organisation compiles & builds competitive advantages into the DNA of the company.

It makes them a ruthless, formidable competitor. It would be very hard to out-compete Sainsbury’s & Tesco in the UK supermarket industry. They have a retail presence in every city & town in the country. They have enormous warehouses that supply unfathomable volumes of product to their stores with seamless efficiency. Even in the difficult industry of weekly grocery delivery, they pull no punches.

They achieved this feat by establishing advantages, flags in the ground, mostly a virtue of their size. Their aforementioned network of stores & transport logistics. Their mass-market approach means they can squeeze margins and out-price smaller stores. The size of their stores permits a range of selection afforded by no smaller retailer. Peter Thiel would call this size advantage “escape velocity”.

But advantages in one pursuit is often a disadvantage in another.

Indeed, Malcolm Gladwell wrote an entire book on the topic: David & Goliath. David’s size was a disadvantage in a sword fight, but made him a difficult & agile target from a distance. Richard Branson, who has dyslexia, turned his difficulty to read large documents into a desire for simplicity and clarity that now defines the Virgin brand.

The rise of On-Demand Grocery was inevitable. We already had food delivery bringing you meals in minutes, and Uber giving you a lift with the press of a button. Getting your groceries on demand was a matter of when.

The large supermarkets, Tesco & Sainsbury’s, seemingly had significant competitive advantages in the on-demand grocery market. Their assets & existing technical teams meant they could develop the software. They have an existing chain of warehouses supporting everything a consumer might want, and a driver network already doing weekly shop deliveries.

But these advantages were specific to the large grocery-shop market. In the world of on-demand, they were disadvantages. The warehouses were too large for pickers to find everything in 10 minutes, and the large delivery vans didn’t suit the small orders typically placed on demand. The warehouses were national, but centralised for a region. They were much too far away from the towns they needed to serve to deliver in the typical 10-30 minute on-demand time constraint.

A sports car would be superb in a highway chase, but cross country, it would be worse than travelling on foot.

Advantages only apply in their contexts.

Disrupting yourself

The incumbent disadvantage is not an unbreakable law though. There are plenty of examples of companies who have been able to buck this trend, and we might spot some familiarities between them.

Netflix is the famous example. Starting out with DVDs they pivoted to online streaming, killing their existing business. That said, Reid Hastings, the Netflix founder, had predicted the rise of streaming, and prepared the company to be ready for that shift as soon as internet capabilities allowed. Netflix became the predominant and eponymous streaming competitor, putting itself out of business as a DVD shipper.

Lego, a company set to die in the late 2000s, pivoted into a cultural brand, doing deals with media companies to create the Lego movies and themed Lego sets which has led them to thrive.

Unlike Polaroid, Fujifilm reacted quickly to the rise of digital cameras, and remain a significant player in the photography and print industries.

These brands all showed not just a willingness to change, but an expectation that they would have to. Reid Hastings had a time-horizon on the DVD delivery business, at which point he disrupted it before anyone else could. Like Lego, Netflix was able to leverage their brand into a new market, by delivering the same end service, with an improved experience.

Incumbents rarely change the world

We are all incumbents somewhere. Companies, charities, governments and people too. That’s why Presidential challengers always pledge change. If you run the local History Society, you’re probably going to keep on running it just the way you have done. The status quo suits you.

Time and tide wait for no one.

Time passes & tides shift. It’s inevitable. You can bury your head and pretend things will always be this way, or you can predict change, prepare for it. Keep yourself agile, change your mind when conditions change, and leap at new opportunities while you stand stable on existing ones.

Jump before you are pushed. Change or you’ll be changed. Stay humble or you will be humbled.

Occasionally I send out an idea & ask for your thoughts.