[E15.1] Background: insights into revolutionizing an industry

Can everyone win and what does it take?

Fig. E15.1.1 Kiva robots inside an Amazon fulfillment center.

Dear Readers,

In this Series for Product | Strategy | Innovation I will share some insights into what it takes to revolutionize an industry, market, or product category. It is possible for teams to land on this objective to inspire others within and outside the team. But the bar is extremely high to truly revolutionize an industry at scale due to the requirements to do so.

This will be a 3-Part Series covering the following Parts:

1. Background: insights into revolutionizing an industry

2. Open-Source Development: why does this model dominate software as a utility?

3. Block: can it revolutionize financial services through Open-Source Development?

For Part 1 of the Series I will first provide some examples for what revolutionizing an industry looks like. Examples that are widely recognized have done so at tremendous scale to impact almost everyone. An outcome for a handful of these is a market capitalization surpasses $1 trillion because of their impact. Apple, Microsoft, NVIDIA, Amazon, and Meta Platforms are the top 5 companies in the S&P 500 as of September 1, 2024 based on their market cap. And all have surpassed $1 trillion at one point or another. And all have revolutionized their respective industry.

I will then share insights from disruptive vs. sustaining innovation. Although disruptive innovation is more common when revolutionizing an industry, sustaining innovation through incumbent organizations is the more common. One example of the latter was IBM continuously reimagining computing architectures by creating a separate division located in a new region to challenge assumptions about computing. This enabled transformations from mainframe computers to mini-computers to PC-computers.

And finally, I will share a Playbook to revolutionize an industry, market, or product category. This is less of a play-by-play sequence of steps and more about themes and traits. But one winning strategy is improving efficiency while also improving the user experience. You can add value with either, but when both happen together, the outcome can be rapid adoption and traction. Carpe diem!

E15.1.1 - Examples for revolutionizing an industry

My examples for revolutionizing an industry exclude Meta Platforms and Alphabet due to their advertising business model where you are the product to their Business-to-Business customers. And I’m excluding Microsoft due to their product-bundling strategy to commoditize point solutions. Both business models have worked effectively for these incumbents, but are extremely hard to replicate today because of the barriers to entry these companies have established.

1. Amazon: e-commerce & a Day 1 culture —> it started with books

2. Apple Computer —> Apple: consumer electronics starting with iPod & iTunes

3. NVIDIA —> Gaming to Bitcoin mining to AI with GPUs

4. Starbucks: personalized order to your specs with your name written on the cup of coffee

5. Southwest Airlines —> low-end, point-to-point airline travel to disrupt alternatives like travel by car or bus and to take budget-focused travelers from major airlines who use a hub and spoke model

6. Uber: Do It Yourself (DIY) driver-for-hire —> rideshare offered in someone else’s vehicle vs. driving your own vehicle for transportation locally from point A to point B.

7. Charles Schwab and Fidelity Investments —> DIY investing with discounted trading fees vs. full-service brokers

8. U-Haul: DIY long-distance relocation vs. full-service relocation services

9. Intuit: TurboTax for DIY tax returns, tax planning & e-filing vs. full-service accountants

10. LegalZoom: DIY legal services vs. full-service attorneys

I will only discuss Amazon, Apple and Starbucks out of this list, but the first 3 have all reached $1 trillion in market capitalization at some point. Southwest Airlines and Uber are related with their focus on transportation. And the last 5 companies on the list are all related by disintermediating full-service professionals from brokers to accountants to lawyers by allowing individuals to use technology to perform a service on their own.

Amazon

Jeff Bezos founded Amazon in 1994. The company enjoyed significant growth over the years after its online store launched in 1995. Bezos was inspired by the rapid growth of the internet in the early 90s and the potential e-commerce presented to challenge established retailer networks burdened with physical stores. But e-commerce would require a new business model and a different distribution model and supply chain to scale.

Jeff Bezos evaluated many product options for e-commerce including computer hardware, software, movies, books and music, but settled on books because of the long tail of many unique book titles of interest to a small number of passionate readers beyond mainstream best-selling books sold in very high volumes. The neighborhood bookstore could easily service the demand for a narrow range of high-volume best-selling books, but could only special order low-volume book demand due to on-site inventory challenges.

The state of Washington did not charge a sales tax where Amazon was based near Seattle, so sales were tax-free on Amazon for many years. Staff in the neighborhood bookstore could also not easily recommend other books on topics with a narrow band of interest due to the vast number of such topics. But Amazon with its focus on the customer allowed passionate readers to create reviews so its customers could rate the books they were reading to benefit others. This also allowed Amazon to characterize what books were of interest to readers who read the same book.

Amazon has gone on to drive significant growth through new growth horizons with the addition of Amazon Web Services and Prime, but its relentless focus on 1) customers, innovation and agile development through its “Day 1 culture” and 2.) starting as a marketplace focused only on books are the foundation of Amazon revolutionizing commerce.

Apple

Steve Jobs, Steve Wozniak, and Ronald Wayne co-founded Apple Computer, Inc. in 1974 with a focus on personal computing. Steve Jobs introduced the Macintosh in 1984 to revolutionize how we interact with a computer. When Steve Jobs returned to Apple, he launched the Think Different campaign in 1997 to highlight Apple’s unique approach to technology and design.

Apple used the Think Different campaign to launch the iMac line of computers. Steve Jobs said the “i” stood for internet, individual, instruct, inform, and inspire and expanded into music in January 2001 with iTunes and consumer electronics in November 2001 with the iPod.

iTunes initially launched as a media player for macOS computers, but eventually expanded to include PCs running the Windows operating system. iTunes was used to purchase, download, play and organize digital media on computers and supported mobile devices.

iPod was launched later in the same year as iTunes and revolutionized portable media players by storing 1,000s of songs and playing music with an innovative click wheel and display for around $399. The iPod series expanded to include the original Classic, smaller Nano, and no-display micro-sized Shuffle, and larger Touch.

iPhone leveraged worldwide mainstream adoption of iTunes and iPod plus Apple’s iOS unix-based operating system, cellular phone service, apps, and internet explorer for mobile devices. An estimated 2.6 billion iPhones were sold from the 2007 launch through mid-May 2024.

Apple dropped Computer from its name in 2007 to become Apple Inc to reposition its brand for a much broader range a products. Apple launched the iPad in 2010 to expand the runaway success of the iPhone with larger displays. All iPad models included connecting to wifi, but some models also included cellular service just like an iPhone.

Apple’s ecosystem of consumer electronics products led to a greater focus on services enabled by the mainstream adoption for billions of these products sold worldwide. Apple TV+, Music, Arcade, Fitness+, News+, Podcasts, Books and App Store drove $24 billion (26%) out of $91 billion of revenue in Q2 2024 compared to iPhone’s $46 billion (51%) and MacBook’s $7.5 billion (8.2%). The Apple brand’s walled-garden of vertically integrated products and services creates building a wider moat and barriers to entry.

Starbucks

Just as Amazon and Apple reimagined the user experience to revolutionize their respective industries, Starbucks reimagined a commodity product served in homes, restaurants, and neighborhood cafes worldwide with coffee. Starbucks key differentiators for its premium products include quality across its supply chain and production process with baristas. But the real reason customers return on a recurring basis to Starbucks is their name hand-written on the cup to personalize the customized order made to their exact specifications.

Overtime, the number of options and calorie counts on the menu have grown out of control, but the incoming CEO Brian Niccol from Chipotle has a history of focusing a menu on the key selections that drive customers into stores while improving margins over time. Attention on the user experience will be important for Starbucks to continue revolutionizing the food & beverage industry with intense competition for a commodity product.

E15.1.2 - Disruptive vs. Sustaining Innovation

Harvard Business School (HBS) Professor Clayton Christensen and Harvard Professor Joseph Bower coined the term Disruptive Innovation in a Harvard Business Review paper in 1995 to describe how new entrants can displace established incumbent businesses. Professor Christensen continued to advance the theories and principles of Disruptive Innovation until he passed in January 2020. His work continues through the Clayton Christensen Institute, Innosight, and Rose Park Advisors.

Low-End Disruption

The research that led to Disruptive Innovation was the focus of Christensen’s doctoral dissertation at HBS that led to his DBA in 1992 based on why successful companies fail. He used the fast-paced disk drive industry to generate his theories. This work led to the popular book Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by Professor Clayton Christensen.

A key concept of this first book was Sustaining Strategy vs. Low-End Disruption. The strategy by incumbent companies to sustain growth in an Incumbent Market often revolves around prioritizing their best customers to implement new features to meet their own requirements for growth. This can drive more features at higher prices over time in the Incumbent Market. Low-end disruption often puts more focus on doing a more limited set of core features exceptionally well and often at a lower cost. This enables wider adoption through more efficiency to improve the user experience at lower prices.

Example for Low-End Disruption: Nucor mini-mill in an Incumbent Market

A classic example of low-end disruption was the electric arc furnace created by Nucor to manufacture rebar out of scrap metal in what is called a mini-mill. The advantage of the mini-mill is it can manufacture a small unit quantity just as well as a large unit quantity with cost-effective just-in-time production. The incumbent steel manufacturers incurred greater costs and time to start up their mill, so they favored premium higher-tier products and larger unit quantities to drive efficiencies. These incumbents were also happy to give up their low-margin rebar production to favor higher-margin, top-tier products.

Nucor cornered the market on rebar as their quality improved by the mid-70s, but their thin margins limited reinvestment to expand their infrastructure to drive growth. This forced Nucor up-market into other bars and rods by improving the electric arc furnace technology through the late 70s. This improved margins as the quality improved in the 80s, but eventually led to diminishing returns. This forced Nucor up-market into structural steel with additional improvements to their core technology through the mid-to-late 80s. This improved margins, but also attracted the attention of the incumbents when the minimill quality for structural steel was on par with the incumbents in the late 80s. These incumbents like US Steel and Bethlehem Steel were not willing to give up market share for higher-margin products.

The steel wars began with growth in the steel industry in the late 80s. This also coincided with Nucor’s push into the highest margin sheet steel with quality matching that of the incumbents in the early-to-mid 90s. Nucor now had the just-in-time production advantage of the minimill with the broad range of products as an incumbent steel mill. Nucor disrupted the incumbents who willing gave up the low-end of the market to focus on the higher margin top-tier products.

New Market Disruption

The Innovator’s Solution: Creating and Sustaining Successful Growth by Professor Clayton Christensen and Michael Raynor was a sequel to the first book and expanded on Disruptive Innovation within a core value network with New Market Disruption outside this core value network. A value network can contain both sustaining and disruptive innovation but users outside that network cannot adopt the solutions because the pricing, feature sets, or distribution are of out of scope. New entrants can drive adoption through a different supply chain, business process or channel to make solutions easier to adopt.

Example for New Market Disruption: Sony Electronics portable transistor radio

Akio Morita, Chairman of Sony, licensed AT&T’s patented transistor radio technology in the early 50s. Sony used this licensed technology to launch its first low-cost pocket transistor radio in 1955. The popularity of these low cost radios with teenagers in the US who could not afford the incumbent’s tabletop radios allowed Sony to scale production of transistors. The competing incumbent consumer electronics companies limited transistor technology to research and development with low-volume production.

Vacuum tubes were the core technology in televisions in the 50s by incumbent companies like RCA and Magnavox. These incumbent companies saw the potential of transistor technology but could not cross the chiasm from research and development to commercial products. Sony however launched its first portable television in 1959 based on transistor technology.

Sony created a New Market around simplicity, portability and affordability. This market started with low-cost pocket radios and then moved up-market with portable black & white TVs and eventually color TVs. Customers began to abandon the Incumbent Market with high fidelity sound and pictures because they favored the advantages of this New Market created by Sony based on solid-state transistor technology it licensed from AT&T.

As solutions in a New Market gain traction with customers and improve over time, it can start to gain adoption among low-end customers in the Incumbent Market. This can eventually lead to convergence in the New Market and growth by disrupting the Incumbent Market. Failure by the incumbent companies is less about their products and more about customers leaving for a New Market for a better positioned product and/or service. The New Market wins and Incumbent Market loses.

Example for New Market Disruption: IBM created New Markets as the Incumbent

IBM is an example of a successful company in its prime that created New Markets to disrupt their own leadership in an established Incumbent Market to grow revenue by an order of magnitude with higher production volumes led by lower unit revenues through new technology. The first time this happened, IBM was primarily a mainframe computer company with operations spread out across globally including Connecticut, New York, Vermont, Germany and Japan. IBM bet the farm in the early 60s on the System/360 mainframe to consolidate 5 existing product lines with just 1 launched April 1964.

IBM established a presence in Rochester, MN with the opening of its first building in 1958. IBM Rochester introduced IBM’s first midrange computer referred to as the IBM 5410, or System/3 Model 10 in 1969. This was followed by a series of update models until the System/32 was introduced in 1975 followed by the System/34 in 1977 and System/36 in 1983. The System/36 was marketed continuously through 2000.

The next big midrange computer out of IBM Rochester known as the AS/400 was launched in 1988 with more than 1,000 software packages written by IBM and IBM Business Partners. The “AS” represented Application System and the 3-digit number followed a new format for midrange computer compared to ES/9000 for Enterprise System with a 4-digit number for mainframe computers.

IBM opened a manufacturing facility in Boca Raton, FL in 1968. IBM eventually launched a personal computer in 1981 and developed in Boca Raton in only one year. The team departed from IBM’s culture developing computers with proprietary technology to opt for an “open architecture”. Microsoft provided the DOS operating system and BASIC programming language; Intel provided the 8088 microprocessor; Tandon the disk drive; SCI Systems the circuit board; and Epson the printer. IBM also established a new sales channel through retailers Sears and Computerland to sell the IBM PC to small businesses and consumers.

IBM sold 500,000 IBM PCs in the first 18 months and won “Machine of the Year” from Time magazine in 1983. This was the first time a machine was chosen over a person for the annual award. The IBM PC allowed small businesses that could not afford a midrange computer to adopt repositioned computing technology just like the midrange computer allowed small enterprises that could not afford mainframes to adopt repositioned computing technology.

With each major wave of innovation, IBM disrupted itself by creating a New Market to drive the next step change for the company from the early 50s through the late 80s and provided a vehicle for Microsoft and Intel to dominate the PC market supply chain for the next few decades. A key feature of IBM’s success was leading disruption through a corporate location outside the primary ecosystems where the prior technologies were developed. Rochester challenged Connecticut/New York/Vermont and then Boca Raton challenged Rochester.

IBM created a New Market for PCs with a unique supply chain the midrange and mainframe computing supply chains could not service. Companies like Dell and Gateway benefited from access to the same supply chain that serviced the IBM PC, but used low-end disruption to drive down cost with a cheaper direct to consumer business model and made to order customization to enhance the customer experience. Dell and Gateway were the Amazon for PCs and eventually disrupted IBM as the slower moving incumbent.

Growth through disruption does not bring all stakeholders in the relevant market along with the primary winners. Low-End Disruption and New Market Disruption often work when for every $1 the disrupter generates, the incumbents lose $5 in lost revenue when lower costs drive adoption. The success of Amazon, Sony, Dell and Gateway also led to business challenges and in some cases bankruptcy for the retailers and businesses in the Incumbent Market who were disrupted by the new business models and technology. The outcome for significant disruption in an industry, market or product category is usually a mix of winners and losers.

E15.1.3 - Playbook to help revolutionize an industry

A major challenge product teams face is the time pressure to find traction around a solution. But creativity, research and ideation before any prototype development starts are not really penalized by the number of failed concepts or scratched features thrown on the floor.

Instead of verifying just one feature in the attempt to move on, how about testing a dozen or more related features to down-select to the one that will win. Do this 5 times and you have landed on 5 key features out of 60 options without much effort compared to running into a dead end by building and abandoning the wrong prototype.

The relentless pursuit of defining both the Problem to solve and the Solution to develop allows you to go from significant uncertainty (-10) to ideation around key concepts (-1) to a well-defined Problem and Solution (0) to building a prototype to test Problem/Solution Fit. This may require multiple iterations, but once you validate Problem/Solution Fit you have reached (1) with 100s of target users.

But this is only the start. The solution must be refined into a Product meeting a target cost to support the business case. A business model must also be developed and tested for a target Market to support profit assumptions in reasonable unit volumes. A limited launch to 1000s of users in a target market can help validate Product/Market Fit for that specific market. This enables scaled production to drive growth.

The following Playbook is not a sequence of steps, but principles to follow in the order that seems appropriate.

1. Start with the Mission: set the bar high

2. Be Bold: don’t settle for a single when you get the fat pitch to swing for the fence

3. Target, Refine & Simplify: how you define the Problem to solve, Solution, Market to focus on, and eventually the Product

4. Break a Pattern: change Perception about a standard across an entire industry

5. Improve Efficiency: (simplify the process, shortcut the number of steps). Enhance User Experience: (create some optionality to personalize the solution, focus on what matters)

6. Ideate and Test 0 → 1: iterate many variations for a specific Problem & Solution (0). Design and Prototype Solution(s) until you find Problem/Solution Fit (1)

7. Create a Movement: don’t just create a Product

8. Create a Brand: build a sustainable identity for the Product and user experience

You can greatly enhance the Ideate & Test process by narrowing the Problem scope to help amplify signal vs. noise around the Solution. In the early stages of Ideation and Testing, it can also really help to be an active listener. Ask why a user has a certain opinion, clarify perceived gaps between what is tested and what the user might want and dive deeper into why they like a certain feature.

One individual told a small marketing team about how it would be nice if their food was packaged not based on the traditional weight or volume but by a target number of calories. This one insight into the gap between what was tested vs. what one customer wanted created a whole new 100 calorie food category.

Some Final Thoughts

I cannot emphasize enough how hard it is to revolutionize any industry, market or product category. The bar is extremely high to do so. However, a company that has revolutionized transportation over the last decade is Uber.

Uber’s success required 3 significant growth horizons on top of the same mobile app platform. Uber’s original black car service 1.) created a marketplace to connect available limousines in San Francisco with riders looking for transportation on demand without hailing a taxicab. An added benefit was a significant discount to scheduling a limo on their own, but at a premium to the cost of a taxicab.

The Uber mobile app enabled this marketplace to develop over time. As Uber expanded outside of San Francisco, it eventually 2.) launched UberX to allow riders to schedule a driver who used their own vehicle to make some extra money on the same Uber mobile app.

Variations were added for more choices, but the basic concept was to disrupt the licensed taxi and limo service infrastructure with peer-to-peer transportation. And then 3.) Uber Eats used the same infrastructure created for UberX to deliver food like DoorDash instead of people.

The original Uber Black service launched only in San Francisco with significant friction around the existing point-to-point transportation options allowed use of existing infrastructure to develop and validate a mobile app to connect available limos with riders looking for on-demand transportation.

But the real magic happened when Uber broke the pattern for transportation when it created a New Market with car owners putting their own personal vehicles into a pool of available cars for hire. The same Uber mobile app was used to ramp up the local capacity for available on-demand transportation at a lower cost than alternatives. Many consumers over-served by the Uber Black service adopted UberX and Uber Eats with shorter wait times and lower prices.

And what is Uber’s Mission? We reimagine the way the world moves for the better. It all starts with the Mission. Uber is swinging for the fence. Are you?

Best,

Stephen

Nothing in this Update is intended to serve as financial advice. Do your own research. The opinions and views expressed in this newsletter are those of the author. They do not purport to reflect the opinions, views or policies of any other organization, company or employer.