Small fish eats big fish

I read the Innovator's Dilemma (by Clayton M. Christensen) many years ago. Nevertheless, I think this is a great book, very relevant and a great opening to this new post. The book copes with the following question:

Why do great companies, that are well managed, have their antenna up, invest in great new technologies lose market dominance?

In simple words - how come a small fish eats the big fish?

The books then discuss a phenomenon called disruptive technology which is a new technology that is not necessarily very good in many aspects, it is cheap, it is not based on the need of the current market, it offers a new benefit to a non mainstream customer

The disruptive technology is not "under the radar" it is very visible, but no one grasp it as an attack. Then suddenly after several years, the company that develops this technology becomes a giant that takes over the market.

Example: the 5.25 inch hard drive that took over the 8 inch hard drive

The new 5.25 hard drive, in its early days:

• Had smaller size
• Performed lousy! Slow and much less capacity than the 8" drive
• Was more expensive per megabyte!
• Mini computers clients hated it (so why producing it)

However, at the time, the PC market started to grow and the size of a hard drive was important for them. Therefore, PC manufacturers needed smaller hard drives.

In addition, the facts that the 5.25 hard drive had less capacity and was slower was not so bothering for the new market of PC users since home users were much less demanding than business users.

Finally, even though the cost per megabyte was higher, the total cost per hard drive was cheaper since the hard drive contained less capacity.

As time passed by, the hard drive became faster, larger, and cheaper (technology tends to improve very fast). And .... they took over the market since now the mainstream clients wanted them as well.

Then came the 3.5 inch and of course they did not concerned the PC market, but then laptop market emerged. The story repeated itself. What do you think you have inside your PC today? 5.25" or 3.5"? The story continues to 2.5 inch drive and so on. Nowadays Apple is using flash solid state drives in their iPads. What will this do?

Why am I telling this?
Well, first, I think this is very interesting and that the book is worthy of reading and internalizing.

Second, I think that during the last several years, we see this happening in many other aspects of life which are more interesting to me than hard drives.

Each time, we see a giant company and we say "They cannot be defeated". Several years after, some start-up shakes them badly.

Think of

• What Google did to Microsoft. A search company that disrupted an operating system company
• What Facebook is doing to Google. A social company to a search engine. Today it is easy to understand how can Facebook compete with Google. No one can deny that Google has been investing huge amount of money and energy in its search engine and in many other technologies and yet it failed to recognize the threat on time
• Think of what Groupon will do and to whom. The started as a coupon based, social buying to local business. But they can and probably will change dramatically the way companies advertise and attract clients. Groupon is only 2 year old.
• See what twitter does to news networks
• What Facebook credit for virtual goods will do to banking? They can be the bigger bank on earth.
• Zinga - they started as a parasite of Facebook but now they can be the social gaming network. Hey, they can even make a console soon and compete with Playstation, Wii and Xbox
• What Rovio with their lovely angry birds and their new in-app-purchasing platform will do to micro payments'
• What amazon.com and salesforce.com are doing using their cloud computing infrastructure to hardware and middle tier providers.

Things are happening rapidly. Companies and investors do understand it. You can see it when companies refuse to be bought for a very nice figures by Google and Facebook. Companies reject Billion Dollar exit deals.

This is a huge opportunity to entrepreneurs. We can think big again. We can change the world. We just have to be very creative about the angle we choose to attack the market and they way we define a market.

One mistake you should not do is: never threat directly the big fish.
If you are going directly into its market, you are bound to lose. This mistake was made by Netscape, they threatened Microsoft directly by revealing the potential of a web browser to become the next operating system. Even though Microsoft woke up very lately to adopt the internet and was damn  slow, they won the battle. They could not afford to lose, so they did whatever it took.

Amir