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The Growth Newsletter #166

The Innovator's Dilemma that kills companies

Today's newsletter is more strategy focused.

We'll discuss why massive companies fail and why startups are able to take them on.

Let's dive in 👘

– Neal

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Insight from Clay Christensen (Harvard Business Professor) and various sources.

52% of the Fortune 500 companies in 2000 went out of business by 2020. These are the world's largest companies with the biggest budgets.

And most of them died in just two decades.

Companies have two options to stay or become relevant:

• Sustaining Innovation. You make iteratively better products that you can charge more money from your current customers/market.
  
  
• Disruptive Innovation. You make products cheaper and more accessible for people outside your current market, which undercuts current products. Or you completely change the technology or form factor to make it way better.

Examples of this playing out

• Toyota emerged and made gas cars cheaper (which actually helped reliability). Ford had to decide if they tried to compete (#2) or make even bigger trucks and SUVs (#1). Meanwhile, Tesla invested in electric, futuristic cars and became worth more than every other gas car company combined.
  
  
• Kodak made film cameras and focused on improving them each year. Nikon, Canon, Fuji, and Sony invested heavily in creating digital cameras and killed Kodak.
  
  
• Google focused on making more money from Search. Despite having more data to train AI than anybody else, a startup, OpenAI, creates ChatGPT and replaces the need for many Google searches because you can get nuanced responses.
  
  
• Lockheed Martin and Boeing made insanely expensive rockets and satellites. SpaceX emerged and made them way cheaper and reusable. It has already launched more satellites than all other companies combined (which is also acting to disrupt traditional Internet Service Providers with Starlinq).

If a company doesn't do #2, someone else will and kill them over time.

Most companies focus on #1 for a simple reason:

They’re made up of individuals trying to accumulate short-term evidence of achievement to demonstrate an upward life trajectory. This means more money, promotions, and awards.

And avoid evidence of incompetency, such as demotions, less money, firings, or failure.

A company is a collection of individuals

Individuals within the company all focus on accumulating short-term evidence of achievement. And profit this quarter or this year is king.

Employees and executive staff are often compensated with annual bonuses. Companies don't retroactively take that money back if the company fails 10 years later. 

To maximize profit (and bonuses), they focus on improving current products for current customers and charge more money. An example of this is the iPhone. The iPhone 4 cost $199 to $299. The iPhone 15 costs $899 to $1599. Consumers are happy paying that because the iPhone 15 is so much better.

However, many companies neglect to invest in long-term, risky bets that could make their products cheaper and more accessible or completely different.

Here's why startups have the advantage

Startups are initially less profit-focused. For them, short-term achievement is gaining any market share at all. And hungry, young founders are often driven by longer-term big payouts rather than short-term marginal gains. 

Startups are run by ambitious founders. Massive corporations are run by committees.

Startups also typically can’t compete with incumbents on the best. But they can compete on different, so that's what they lean into.

If it ever happens, it’s unlikely Apple will ever choose to disrupt the iPhone. iPhone sales are 52% of Apple’s revenue. Disruption could kill the cash cow.  

It will most likely be a startup that does unless Apple can maintain a culture of pushing disruptive innovation, even if it hurts in the short term. But I think that's unlikely now that a committee runs Apple.

Quick takeaway, you need both:

1. Sustaining Innovation to sustain or increase profit and keep customers happy.
2. Disruptive Innovation to stay or get ahead, and wow new or existing customers.

I recommend three videos and one article to dive deeper into these concepts:

1. Clay Christensen's TEDx talk and Harvard Business Review interview, which inspired this newsletter.
   
   
2. George Hotz's take on Lex Fridman's podcast, where he discusses the difference between companies that are "alive" and can pivot (ex: Facebook pivoting to Meta) and innovate and companies that are "dead" and cannot (ex: Google being so focused on Search that it missed generative AI). Here's the timestamp.
   
   
3. Clay Christensen's theory narrowly focuses on innovative disruption in making things more accessible and undercutting the market. Ben Thompson's 2013 critique of the theory says that's more true in B2B than B2C. Above, I discuss undercutting (Toyota and SpaceX) and drastic technological shifts (Tesla, digital cameras, OpenAI) as the two major forms of innovative disruption.

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Thanks, everyone! We're back Friday with psychology-backed copywriting tips.

Neal O'Grady

Justin Setzer