You're a dominant player in your market. You're making fat margins. Everyone uses your products. Why worry about a pesky little new entrant in your market, one that is charging less but delivering less functionality and value than you are? If you lower your price to match them, you'll just be cannibalizing your own margins, right?
This competitive scenario and its implications is well-documented by one of my favorite business authors and speakers, Clay Christensen of Harvard. His Innovator's Dilemma laid out a framework that makes "disruptive innovation" (as compared to incremental innovation) predictable.
Christensen writes that the dominant player in an industry seems to have little incentive to develop disruptive innovations. Why? Because there is too much internal pressure to be self-protective. Often these disruptive innovations lead to cheaper solutions that fit the marketplace better. Many executives inside the company whose products/services would be cannibalized by the new innovation will fight it, often to the point that it dies on the vine.
Meanwhile, an upstart competitor with nothing to lose has no problem at all chasing the low-end. By offering a product/service that better fits the price range and needs of these low-end customers, they build market share. Soon, that disruption has taken hold and starts to seriously threaten the status quo. Christensen provides many good examples of this, such as the PC's growth at mini-computers expense.
Today, a major case study in the making is occurring right before our eyes. Microsoft, long dominant with PC and server applications, is seeing new Internet-based services ("cloud" services) such as Google Docs, Google Sites and Zoho.com offer a barrage of new "good enough" services. In many cases the services are free, supported by ads and/or fee-based add-on services.
Microsoft execs are certainly aware of the "disruptive innovation" model, and their Live Services strategy - lead by industry legend Ray Ozzie - has been an attempt to begin offering lower-end, often free online services. Unfortunately for Microsoft, their efforts have been clunky and not well accepted by the marketplace in most cases. Ozzie's challenge is to get a very large company back into a startup mentality to focus on their own disruptive innovations.
You may only be a dominant player in a smaller market, even a local one. But beware of competition that seems to be harmless today; it could be the disruptor that changes the playing field in your market.
Comments