There’s a book published in 1986 entitled “Innovation: The Attacker’s Advantage” by Richard N. Foster. It’s one of the best books I’ve read on the topic of market disruption, although he doesn’t call it that. It has a bunch of great examples similar to what you cite.
The one thing he says that explains this scenario very clearly, and that probably applies in the vast majority of cases, is very simple: When a product reaches maturity at the top of the ‘S-curve’, the ROI of R&D begins to fall, sometimes precipitously, as companies attempt to defend against innovators.
The problem is, if the President of the company recognized this and stood up at a Board meeting and said, “Innovators are eating our lunch and putting our cash-cow at risk. So I believe we need to divest of our cash-cow and focus our R&D funding on new and unproven technology,” Foster argues that they’d be fired on the spot.
He also suggests that if a company is going to survive such a disruption, they should make a practice of selling off their cash-cows once they reach the top of the ‘S-curve’, which is the point where the ROI of R&D begins to go down relative to historical trends. (From a graphical standpoint, I think he said it’s where the tangent of the line at the top of the ‘S-curve’ that representing the ROI of R&D in a given technology drops below 45 degrees.)
While the solution is simple, it’s likelihood of happening is extremely small, which is what leads to the eventual implosion of said companies later on.
One memorable case study Foster describes in detail is the disruption that steel-belted radial tires caused in the American tire industry.
At the time, American companies held about 95% of the tire market in America, and their cash-cow was poly-ply tires. A little upstart company from Germany came along with a new tire design and attempted to squeeze into the market here. They had little luck and ran into brick walls at every turn.
They tried all sorts of things, and eventually put a set of tires on a Lincoln Continental and convinced an executive from Ford to take a ride in it. He was amazed at how quiet and smooth the ride was, and agreed to make the tires available as an option on their Lincoln models. They quickly caught on and became the default tires Ford put on their top-end vehicles. This was a small market and didn’t bother their tire vendors.
As might be predicted, Lincoln customers loved the tires and bugged their dealers to make them available for their other Ford vehicles, but Ford refused because they didn’t want to alienate their relationships with their tire vendors.
So this little company nobody had ever heard of, Michelin, started to open tire stores in close proximity to Ford dealers so Lincoln customers could buy tires that Ford refused to sell. Initially, they only sold tires that fit Ford vehicles. After a while, they made tires for other cars. Over time, they started gaining market share.
Foster says that every single one of the American tire manufacturers had R&D teams in place who had created steel-belted radials of equal or better quality to what Michelin sold. But the poly-ply tires were their cash-cow, and they were afraid to cannibalize sales of their cash-cow profits by selling these new tires that had no proven market or foreseeable long-term value to the company — the same way Kodak viewed digital imaging vs. their film business. All they knew was that Michelin was a small tire vendor that nobody had ever heard of with a newfangled tire that had an unproven future. And besides, they had a lock on all of the American car companies and there was no way these guys would put a foreign tire on American-made cars at the factory. If nothing else, the unions would prevent it from happening.
What they failed to take into account was the after-market. As word of these tires spread, people were replacing their poly-ply tires with Michelins instead. It didn’t help the American tire companies that Michelin was able to show consumers that steel-belted radials were actually safer than poly-ply tires. Foster said there were even documented cases of people driving new cars off of Ford dealership lots and heading straight to Michelin stores to get the tires replaced.
American tire companies began losing market share as Michelin built more stores selling replacement tires directly to consumers. They were at the top of the ‘S-curve’ in terms of what could be done with poly-ply technology, so their R&D funding was sucking up more and more dollars with less and less return.
Of course, they could have actually started to manufacture and sell their steel-belted radial tire designs. But instead they all scrapped their steel-belted radial R&D Departments in order to reinvest those dollars into better poly-ply tires, simply to keep from losing their cash-cow technology.
At one point, Foster shows where the entire American tire industry was losing 1% market share PER MONTH to steel-belted radials! Yet not one of their Presidents was willing to go in front of their Board and sound the alarm. Nor were they willing to cannibalize poly-ply tire profits for far lower profits by selling steel-belted radials. (This is what happens when you believe the size of your market is capped. You think it’s a zero-sum game and refuse to let go of a proven revenue stream even as it’s shrinking while your customers opt for other products. Indeed, you justify your actions to focus on your most profitable products BECAUSE the market is shrinking!)
Ultimately, steel-belted radials completely replaced poly-ply tires while not one American tire company would manufacture them. They had gone from 95% market share to under 10% in less than a decade. In the end, only one American tire manufacturer was left standing.
Foster also suggests that one of the reasons Asian car companies took off at that time was because they put steel-belted radials on their cars at the factory, and consumers preferred them. American car manufacturers resisted selling steel-belted radials on their new vehicles for years, and they lost a huge portion of their market to Asian car manufacturers during that time as well.
Coincidentally, this book was written in the early 80’s while the PC was still in its infancy, and nobody had yet realized that PCs were already in the process of disrupting mainframe computing companies like IBM, Amdahl, DEC, Univac, Honeywell, Cray, and CDC. It’s hard to imagine that IBM is the only one of those companies that still exists, but it’s cash-cow at that time — mainframe computers — are no longer a significant source of their revenue.
(It’s also hard to imagine that a $25 Raspberry Pi could emulate an old IBM 360 mainframe and even run its code faster than it ran back in the 70's!)
