Can Incumbent Companies be Disruptors?

Business disruption through technologies they never saw coming is fascinating to me. I have been fortunate enough to be in the technology and communications spaces at a time when the pace of change has been breathtaking.

Consider for example in the 1980s when Rockwell one of the leading ACD manufacturers collaborated with IBM to enable computer-telephony integration or CTI. As a point of reference an ACD is an automatic call distributor and is the machine that asks you to press one if you are calling about domestic travel and so on. Now the reason CTI was important had to do with the ability to pull customer data from a contact management database so the call center worker knew who was calling in advance of the call. And these systems were far from cheap – they cost millions and Rockwell and IBM had a nice revenue stream because call centers could justify these huge bills because they reduced the amount of time agents spent on the phone as data entry time was minimized.

But less than ten years later Microsoft and Novell the leading OS vendors at the time decided they would telephony-enable their operating systems through protocols named TAPI and TSAPI allowing an off the shelf server to do CTI.

In less than a decade customers benefitted not only from Moore’s Law which reduced prices dramatically but from a shift from proprietary to open systems. Rockwell’s leadership position which they held for more than a decade was gone overnight. And although the company tried to be competitive by launching a PC-based phone system, they were never able to overcome changing market forces.

Interestingly Rockwell’s pain was Dialogic’s gain as the company made DSP resource boards the essential components allowing communications systems to be integrated into servers and PCs. These high-margin boards sold like hotcakes in the nineties as companies used them to build all sorts of solutions such as of course ACDs and international call back systems – where an international caller would make a call to the US and hang up after the first ring. At that point a US originated call was made enabling the caller to connect to their party at much lower US rates.

Then one day an Israeli company VocalTec decided to take these DSP resource boards and use them to construct VoIP gateways and this development took the communications market into uncharted territory as Intel saw all the ruckus and decided they needed Dialogic and went out and purchased them. The theory was DSP resource board technology could be integrated into the CPU.

Along the same lines HMP or host media processing was born allowing the processor in the server to do the job once only made possible by a standalone board packed with DSPs. Moore’s Law as you know is a powerful force and eventually multicore CPUs made short work of large-scale VoIP.

So we took a sophisticated hardware problem and turned them into software. Whenever that happens we generally know margins erode quickly. After all if a college kid can make a social network in his dorm room that about a trillion people are using – anything and I mean anything can be done with software with far less resources than hardware.

So we went from DSP resource boards for computer telephony which eventually enabled IP-telephony to IP telephony running on processors which eventually led to Skype.

Let’s summarize what happened here. Open systems helped decimate the margins in proprietary ACD market and Dialogic benefitted. Then Moore’s Law coupled with VoIP helped reduce the need for dedicated boards. Skye for its part made VoIP easy and became a multibillion dollar success.

The question is whether or not a rapidly evolving tech environment is one in which old leaders can remain at the top of the pack in the new world. Microsoft for example made serious inroads into the mobile phone space yet Google and Apple annihilated it there in short order. On the other hand, it is still trying to compete with its Bing search offering and yesterday in fact the blogs were abuzz with important people in the blogosphere saying they will switch from Google to Bing.

Bing is by no means a serious threat to Google but at least Microsoft is in the search game as a result of this offering and over time Bing could become a player in a market where Google is currently a monopoly.

It is my belief that corporate culture and marketing myopia contributes to the death of companies at the hands of disruption. In this piece on TMCnet the author goes on to describe how the “dictatorship of the customer” leads to corporate death. Moreover companies no comprehending how broad a market they are in face death. In other words railroads are in the transportation business not trains. There is a big difference.

For example Kodak saw years back that it was going to have to have an online photo service to offset its declining film revenue. It purchased Ofoto and really didn’t make it a much better platform. It didn’t expand it into a video sharing service for example. It could have developed YouTube and Facebook combined if it had the vision to see that photo sharing was just the beginning. But to Kodak its core business and culture was all about making money from the printing of photos not advertising supported content storage.

Moreover as Kodak began to expand into the online photo realm its retailers such as the pharmacies started to revolt as they now saw the photo processing company as a competitor.

Disruption is fun but its results on an industry are brutal.

Moreover in technology the disruption comes from everywhere. Tablets are hurting PC sales and more or less killed the netbook market. At CES this week the Samsung Galaxy Note turned out to be a killer product merging the best of a tablet and phone into a single device. Basically it takes two market segments revolutionized by Apple and disrupts them both with a “tweener” device.

I’d like to add that it is insanely difficult to predict the next big thing and even when you do timing is even more of a challenge. The first wave of VoIP companies perished, likewise the first laptop company died and the first successful social network was sold for less than $40M recently.

But there is an opportunity for executives to become more strategic in their thinking. After all, a laser like focus on customer satisfaction didn’t help the Wang Company when the PC was invented. On the flipside the tablet could have killed the Kindle but Amazon came out with a Kindle Fire and sells it at a loss allowing it to retain control of the book market and expand into new spaces.

Let’s be a bit more specific. Are newspapers in the business of selling ads or ensuring that advertisers get the best ROI on their investments? Seems to me they are in the business of connecting buyers and sellers – yet it doesn’t seem many of them think this way.

Are retailers in the business of having concrete stores with high rents or selling more products profitably to their customers than the competition? If it is indeed the latter then where is he global network of retailers allowing them to pool warehouse space and other assets to more effectively compete with Amazon? Where is the collective alternative to Amazon Prime which Macys, Wal-Mart, Target and others belong to?

As I have said before, it is better to be quick than right but I would add that if you are able to think strategically and then act decisively – without worrying about cannibalizing existing businesses you will have the best chance of surviving the eventual disruption you will face in your markets.

So yes, incumbent companies can be disruptors but only the best run companies who have tremendous vision and the ability to acquire, integrate and execute.

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