The Story of Lester
This is also a cycle of disruption. Disruption happens subtly at first. A new innovation comes along and provides a solution for an unserved or underserved constituency. Back in 1894, it was the car disrupting the horse. At first, the cars were slower than the horse and less reliable. If you fed the horse (call him, Lester) and kept him in good health, he was little trouble, but the car had all kinds of issues early on and so there were few takers, and as the chart shows, few firms were making cars then.
The money from the initial novelty/status sales gave the early manufacturers the money to improve the product. The car became more reliable and faster, eventually becoming a better tool than the horse. As the idea caught on, money poured in and more firms emerged with different concepts, and over the next 25 years, the number of firms peaked. At that time, the new dominant design was “chosen” by the marketplace. Lester the horse was put out to pasture along with the firms that did not offer the all-steel internal combustion engine alternative, leaving about 15 firms competing to provide the innovation to the market.
Software-as-a-Service as a Disruption
Software-as-a-Service was (and still is) a disruption. The model was very unpopular at first. Legacy IT people thought moving workloads to the cloud was dangerous, a security risk, uncomfortable. Early SaaS versions of applications burdened with bandwidth issues, were shunned by big business. But small and medium-sized businesses that didn’t have the money for an army of IT people, underutilized hardware and software and air- or water-cooled data centers, thought it was a great idea.
“I just simply ‘rent’ a state-of-the-art application for my small manufacturing facility, my two salespeople and my accounting department of one? Sign me up!”
For a couple hundred dollars a month per user they had the use of better applications than they could have imagined. Maybe not as robust as the big IT shops, at first, but they weren’t going to get that anyway. Initially, SaaS ERP applications paled in comparison to the established on-premise, highly customized versions running at gigantic manufacturers. Hint: This was the ‘marching up the hill’ phase in the Utterback chart.
Over time, however, the money generated from the small and medium businesses fueled the improvement of capability, bandwidth improved and the “SaaS” disruption became a better alternative than the on-premise version. My 2021 research demonstrated a significant profitability advantage for firms that deployed more than 50% SaaS applications in their infrastructure over those that deployed under 50% SaaS. As software innovation (or software disruption) becomes a better alternative, it is widely adopted and becomes the dominant design. In terms of the automobile, the all-steel ICE engine was established in the early 1920s, and 100 years later, it is still dominant, but today electric cars are mounting a significant challenge and the established vehicle producers have joined the fray. A very strong recipe for change.
Good Customers and the Struggle to Change
Status quo bias, which is the hesitation toward a new innovation, is crazy to me. I loved the idea that I could read what I wrote before I printed it out, so much time saved! Obviously, a lot of people saw the value. We will talk about different adopter categories in another article but quickly; what was the main difference between me and the secretary? Typing was the secretary’s job and the secretary was good at it, unlike me. The dominant design facilitated the secretary’s efficiency. Learning a different solution meant training, and what were they going to do with all those typewriters anyway? Typing was a peripheral thing for me. I don’t even think I had my own typewriter. I had different priorities and typing a paper was painful and rewrites were devastating. We had different skills and different needs. And so different solutions appealed to us. If the secretaries had known that their bosses would type their own correspondence one day, they might have been more interested in a newer way of doing their job that left them more time to learn new things. But, that would have been a preposterous notion at the time.
Google Docs (Google Suite) appealed to people who couldn’t afford Microsoft Word, or who wanted to collaborate on a document. Google Docs was free and had a simple feature that allows multiple collaborators to work on a document at the same time using the internet. Over time, people used Google Docs more and more and so Google developed an entire line of productivity applications. They were taking aim at Microsoft. Today, Google has hundreds of millions of users. We will talk more about responses to disruptive innovation in another future article but suffice to say, Microsoft is still doing fine. They added a function that allows users to collaborate on a document. I have never been able to get it to work but people insist it does. They also introduced Microsoft 360 which leverages the cloud. Over time, they recognized the necessity of acknowledging the Google threat. I’m sure this was not easy for them because customers, especially top customers, might not help at all. You can imagine the conversation:
Microsoft Rep: “So Sally, we are hearing about this Google Docs thing, and we were wondering what you thought about it?”
Sally: “That ridiculous ‘application’, if you can call it that, it’s like the first version of Word you introduced like 20 years ago. Why would we go backward?”
Microsoft Rep: “Well, yes, you’re right, it doesn’t do much, but they have millions of users now. You guys aren’t even looking at it?”
Sally: “Of course not! We are not going to have our confidential correspondence sitting in the “cloud” or God knows where? It only has 15 fonts, what if you need the other 400, then what? And don’t even get me started on the rich editing capabilities. The research department has threatened to walk out as a group if we even bring it up.”
Microsoft Rep: “Good to hear! You are absolutely right!”
This is a very typical interaction regarding a new disruption between top customers and the current dominant design provider. Just like the guy who sold horses back in 1894.
Identifying Consumer Wants vs. Market Needs
Existing customers are not the market for disruptive innovation, so the dominant design provider rarely hears about the true potential. Remember what Henry Ford said, “If I had asked them what they wanted, they would have said a faster horse.” Solution providers must see the disruption themselves and literally ignore their top customers. We know that the dominant design providers are rarely blind to the new disruption. Kodak knew about the digital camera; the mainframe and minicomputer guys knew about the PC. There are usually people in the company that see the potential and might even be at a level that can bring it up, but it’s hard to do something about it.
In a past article, we talked about Clay Christensen’s The Capitalist Dilemma. Threatening an existing revenue stream of business to introduce a product that has the potential to cannibalize your existing customer base is a tough conversation to have with your board of directors but if you don’t, the market will decide for you. It happens all the time. Just ask Lester!