Key Principle
Disruptive entrants fail not because of bad technology but because of bad preparation. Three dimensions -- strategy process, hiring, and funding -- determine whether a firm lands on a disruptive or sustaining trajectory. Getting any one wrong pulls the venture toward large, obvious markets where incumbents hold every advantage.
Why This Matters
- Developing new products is hard; finding new markets is harder; identifying large existing markets is easy. Entrants naturally drift toward sustaining positions.
- The preparation regimen -- not the business plan's polish -- predicts whether drift occurs.
- An external diagnostic (Table 3-1) lets investors detect misalignment before capital is committed.
Core Framework: Three Preparation Dimensions
1. Deliberate vs. Emergent Strategy
- Deliberate strategy is top-down and plan-driven. Emergent strategy "bubbles up from below" as the firm responds to market signals. (Ch. 3)
- In new-market disruption, emergent strategy fits because it keeps investments small, stages funding contingent on progress, and tests assumptions rather than assuming them.
- The critical flip: once market signals clarify, firms must shift to deliberate strategy with "rigorous and disciplined" execution. (Ch. 3) Timing this flip may require different managers for each phase.
2. Schools of Experience (Hiring)
- Morgan McCall's theory: "Managers are made more than they are born." (Ch. 3)
- Relevant experience for disruptive ventures: operating under high uncertainty, finding unanticipated customers through experimentation, solving problems resourcefully without much money, and building teams from scratch with skills matched to task.
3. Funding Source Alignment
- The critical variable is not VC vs. corporate capital but whether the investor's values permit patience for growth while demanding early profitability.
- Excessive funding is doubly destructive: it forces pursuit of large markets to generate returns, and it allows companies to follow a losing strategy for too long.
- "Good money providers are those who help a company spend a little and learn, until it has a viable strategy and business model." (Ch. 3)
Good Examples
- Palm Pilot: Over $1B was invested trying to crack the PDA market. Apple spent $350M on Newton; GO Corporation spent $75M -- both failed. Palm spent less than $3M and won. Its failed Zoomer PDA taught Palm that people wanted a complement to the computer, not a replacement; conserved cash allowed a second attempt. (Ch. 3)
- Bell vs. Western Union: Alexander Graham Bell disrupted Western Union by targeting customers communicating within a two-to-three-mile radius -- a completely separate value network. Structural separation, not technology, was the decisive factor. (Ch. 3)
- EMC, Cisco, Bloomberg, Schwab: All self-funded or achieved profitability before attracting outside capital -- demonstrating patient-for-growth discipline. (Ch. 3)
Counterpoints
- Wireless carriers: Built complementary systems with high wireline overlap, making co-option the natural incumbent response. A disruptive path would have required a freestanding network targeting nonconsumers who tolerate inferior quality. (Ch. 3)
- 1996 Telecom Reform Act entrants: Billions invested on untested assumptions of easy access to incumbents' network elements. Almost all failed. (Ch. 3)
- Spinout misapplication: Spinouts fail when subjected to the parent's values or growth expectations. The prescription is narrow -- "It is only when a firm has neither the skills to go after an opportunity nor the motivation to develop it internally that a spinout organization makes sense." (Ch. 3)
Key Quotes
- "The one thing managers can know for certain is that they do not know how a market will evolve." (Ch. 3)
- "Alarm bells should ring when an investor sees a well-researched, highly polished business plan and a company showing a great deal of confidence in the numbers in uncertain circumstances." (Ch. 3)
- "Categorizing money as venture capital versus corporate is cutting the world the wrong way." (Ch. 3)
- "When overlap is nonexistent or weak, companies have the best chance of harnessing asymmetric motivation and creating asymmetric skills." (Ch. 3)
- "Throwing money at the problem is often exactly the wrong thing to do." (Ch. 3)
- "Only a robust, repeatable process separated from the mainstream values that stifle the prioritization of disruptive opportunities can create wave after wave of disruptive growth." (Ch. 3)
Rules of Thumb
- If a business plan assumes a billion-dollar market without naming testable conditions, treat it as a red flag -- emergent strategy has been abandoned prematurely.
- Hire for the right "school of experience," not the most impressive resume. Match past challenges to future ones.
- Evaluate investors on values, not label. Ask: patient for growth, impatient for profit?
- Fund enough to reach initial market, not more. Early profitability is a discipline mechanism -- "businesses that are unprofitable for several years often never become profitable." (Ch. 3)
- Minimize value-network overlap. Shared suppliers, channels, or sales forces with incumbents erode asymmetric motivation and invite co-option.
- Reserve spinouts for situations where the parent lacks both skills and motivation. In sustaining situations, separation denies the venture the parent's capabilities.
- Building serial disruption capability requires separating the strategy-making process itself -- not merely departments or budgets.
Related References
- McGrath & MacMillan, "Discovery-Driven Planning," HBR (1995)
- McCall, High Flyers (1998) -- schools of experience framework
- Burgelman, Strategy Is Destiny (2002) -- emergent/deliberate strategy origins
- Christensen & Raynor, The Innovator's Solution (2003), chs. 7-10