Why Waiting Until A New Business Model Is Proven Doesn't Work

from the it's-why-you-need-to-start-early dept

One of the criticisms of our business model discussions here is something along the lines of "but how will this replace the $x billion already made." Or, alternatively "well, how can you expect anyone to switch until you show that it will replace what they already are doing?" The answer, of course, is that by the time you know that a new business model will work well enough, it's too late. It means one of two things have happened: either a competitor has figured it out and taken over the market or your existing business model is too decimated to have enough left to make the switch. This is the nature of so-called "Creative Destruction."

This point is highlighted in a recent NY Times article about how Netflix tries to avoid creative destruction by experimenting with new models well before they need to, and well before the old model has lost steam. The article compares Netflix to Blockbuster, which highlights this perfectly. Even though Blockbuster did see the success of Netflix and how the market was changing, it was very slow in embracing it, and never did so whole-heartedly. And even though it has a service quite similar to Netflix's, it has a lot fewer users and is struggling financially.

The article highlights this with Kodak as well:
Kodak saw digital photography coming. It even invented some of the earliest such technology, in 1975. Kodak just misjudged how fast consumers would give up on film and start snapping up digital cameras. And it misjudged its ability to outrun both trends.
Indeed. In 1997, I did work with a professor who was consulting for Kodak, and we did a detailed report on why Kodak needed to embrace digital now. The response? Kodak told us "yes, yes, digital is important, and we'll be ready to switch, but right now, chemical processing of photos is so much cheaper, there's no reason to change yet." And, they were right that it was a lot cheaper, but they were wrong about the time to start switching.

There are a few reasons for this:
  1. Companies always misjudge the speed of trends, especially the rate of change. Things like digital revolutions start out slowly, and the quality seems bad. So companies in legacy businesses figure they have a long time to make the change. But the rate of change increases rapidly, especially once it "tips" and reaches a critical threshold. At that point, if you're not fully invested in the new business, you're, way, way, way behind.
  2. It's difficult to really understand the new technology/market unless you're playing deeply in the space. This is the same thing we noted with people who claim that patents are necessary because once a good idea comes along others will just copy it. In many cases, that's not possible. That's because the truly innovative ideas require some real hands-on experience. Watching others do it is not the same thing.
  3. It's very difficult, culturally, to build up businesses that cannibalize your existing cash cows. The skill sets may be different, and people begin to recognize that these "new" people may be working on projects that replace the "old" people. That leads to a lot of resentment and makes it really difficult to actually hire the good new people -- since they recognize they're going to face those kinds of institutional restrictions. For them, it's just easier to go to a "native" company that has bet entirely on the new offering.
All of this impacted Kodak:
Even when Kodak wanted to change, it couldn't, said Mr. Lucas, who has studied the company. "It was so large and had been so successful for so long that it was difficult to bring in people with a digital background."

Kodak has had to take draconian steps to survive. It closed labs and factories and laid off 60 percent of its staff of 60,000.
Indeed, Kodak is impressive in that it actually has been able to shift... even if it took a lot longer than necessary, and even now it's considered to remain behind other players in the space.

This is, of course, the typical Innovator's Dilemma, but it helps explain why so few companies are able to survive the innovator's dilemma. Even if they know about it, they think they can wait. They think that they shouldn't invest heavily in those new technologies and new markets until there's a clear path to profitability, or a clear plan for how it "replaces" what's already there. The problem is that by the time they have the answers to those questions, it's too late.

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  1. icon
    Mike Masnick (profile), 14 Aug 2010 @ 8:58pm

    Re: what companies dont struggle with transitions ? IBM ?

    Again, you claim expertise in business, law and everything copyright, I am led to wonder what businesses you have started or run, how successful they were. If you have been required to create and submit a business plan for proposal by a lending group or investor ?

    Bizarre. You asked this same question a few weeks ago, and I answered it. I honestly don't know why you are asking it again.

    Yes, I have started and run a rather successful business (the one that produces this blog), and I have raised over 7 figures in investment money from a variety of investors.

    Ever created content of value? Even designed anything that you value as a "great design" ?


    Even gained a patent ? Either for yourself or for a company you worked for?

    No, because I don't believe patents are a good use of money. However, we have designed multiple offerings for which our lawyers suggested we get a patent. We chose not to on principle.

    Ever designed something new and unique ? ever built it ?


    Have you ever been in private industry, and worked extensively with the local university in developing new technologies ? To gain an understanding of the level of cooperation between industry and acadamia ?

    Yes, on both of those.

    Ever written a unique and novel computer program to do something no one else has thought of ?

    I did not write the code, but I have written the product spec for multiple pieces of software that I came up with which was then designed, built and successfully brought to market by teams I lead. The software we built today is currently in use by some of the largest companies on the planet.

    I can make an assumption that you have done little or none of those things.

    You would assume incorrectly.

    If you honestly believe in what you say, PUT THEM INTO PRACTICE,,, ACT ON THOSE GOOD IDEA's.

    I have and continue to do so.

    If your plan is so good, adopt it yourself !!!

    I have and continue to do so.

    Why just talk about it, and bag out those that are actually doing it ?

    I have adopted it and continue to do so.

    What do you provide that a laywer does not provide?

    I have no idea what this means.

    You generate words, you talk and talk but what do you DO ?

    I've built a rather successful company that works with lots of the largest companies on the world, supports a decent staff and is profitable. You?

    The most convincing argument you could produce for your ideas of markets is to ENTER THE MARKET YOURSELF.

    I have. Why do you keep pretending I have not.

    Show us in real terms how your plans were in the REAL WORLD, and not the hypothetical world of techdirt.

    I have and continue to do so, and they seem to work great.

    Ive spent my entire career as an engineer, in electronics, communications and computers. At least I walk the walk, I have not spent years trolling hundreds of blogs trying to cobble up a utopian world what you see from your office.

    Interesting. Considering you've spent the last few months attacking me for not understanding business and economics -- and now you point out that you've never worked in business or economics yourself. I don't have a problem with people not having worked in a field understanding it, but it does seem rather hypocritical of you in this very post to say i can't comment on business models without having started and run a business... and then you yourself admit that you are an engineer not a business person. Funny.

    there is a world beyond your PC, and mabey you should go out and experience it a bit, find out what the real world people do, and what they care (and DONT care about).

    I'm doing fine out there in the real world, Darryl.

    Sub-prime loans, US Debt, Enron, Madoff, BP Oil Spill, greace financial crisis. US car industry, global warming...

    Quite familiar with all. Not sure what this has to do with anything.

    And all you can do if find an ancient myth that Kodak was slow to adapt as an example of how being slow to market is a killer.

    Actually, it was the NY Times that reported on that, and it did so correctly. You still don't appear to have actually read my post, but I worked with Kodak as a consultant in the 90s. I was there. I know what happened.

    Why not use the Enron "mark to market" scheme, and pre-emp the business model alltogether ? It worked for Enron for awile.. !!!!!...

    Do you even know what mark to market means?

    No, its just so much easier to go after Kodak, and sit there typing your idea of Utopia, without even giving concrete examples, or actually DOING IT YOURSELF...

    Again, Darryl, I have gone out and done it myself.

    Just like you idea that you think big artists got big by winning some lottery, WHAT A JOKE. Mike do you believe that ?

    You seem to read headlines, but don't deal well with the details.

    Or might you think they are the ones who worked hardest, practiced, had the telent, and got the breaks.

    I don't deny that they have talent. But there are tons of talented, incredibly hard working musicians who don't become huge successes.

    Do you think they were born any more advantaged they the ones who do not make it.

    Perhaps in some cases, but I know plenty of unsuccessful musicians who come from good backgrounds.

    Dont you think the same applies to CEO's, only a very small group of people get to the top, they have got there by hard work and dedication and talent. Not by a lottery.

    Quite different, actually. The ability to become a CEO did not, in the past, depend on 5 gatekeepers. The ability to be a rockstar did. It no longer does. That's the point.

    You dont get to pick and choose who people like or what they want to buy..

    Nor have I ever said I did. Kind of a non sequitur there Darryl.

    So again, you appear to completely miss the real world, for some utopian idea. Of everyone being equal as a right.

    Again, I have never said any such thing. Where have I ever said that Darryl? Answer or admit you were wrong.

    So please, Mike, put your words into actions, show us all how it is done. You appear to have all the idea's. You must be rich.

    I'm doing alright. You seem to make a lot of really, really bad assumptions. Almost every assumption you made in this comment is wrong.

    Let's see if you will admit you were wrong. Somehow I doubt it.

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