Startups, as attackers, are in a battle with incumbents to make money by changing the order of things through the Reinvention of mature products that incumbents have been defending. The weapon for winning the battle is the economics of Innovation—a vital thing that startups, VC fund managers, and academics have largely ignored. Unless the battle is won, the attackers have no money-making opportunity. For seemingly not understanding this fact and the incapability of managing innovations, many are after tons of subsidies to push startups’ frail products ahead of incumbents’ racing horses. Hence, startups attacking strategy by leveraging the economics of technology waves deserve attention.
Leonardo da Vinci was the greatest inventive genius in recorded history. Every single page of his notebooks depicted Breakthrough ideas. Unfortunately, none of his ideas, such as the submarine, parachute, or helicopter, were converted into money-making innovations that offered better alternatives for Getting jobs done. The underlying cause was the inadequacy of technology and materials in 1500. On the other hand, after spending tens of billions in subsidies, Tesla or Uber is yet to be a profitable disruptive force. However, surprisingly, with just a few thousand dollars in seed capital, startups like HP, Microsoft, and Apple became mega corporations, taking over incumbents’ markets, creating new markets, and growing investors’ funds exponentially. Such a reality demands clarity about the startups attacking strategy.
What is the underlying reason if great ideas or billions of seed capital are insufficient for startup disruption? It appears that how startups take advantage of the economics of technology waves and carefully craft and unleash attacking strategies is highly important. Hence, this article focuses on startups attack strategy by leveraging the economics of technology waves. Without it, the Lean Startup Strategy by Eric Ries, the Hungry Startup Strategy by Peter S. Cohan, or the HBR article on Strategy for Startups by Joshua Gans and others suffer from a lack of steam.
Over of startups and role of technology waves
Here is a brief overview. Further clarity is available on the linked pages.
- Startups—offering better and cheaper alternatives to matured products and processes, unleashing Creative waves of destruction, taking over incumbents’ markets and expanding them further, and growing investors’ funds exponentially are significant attributes of startups. However, startups’ innovations around emerging technology cores, invariably, show up as inferior and costlier alternatives. Hence, the mainstream market of matured products rejects them. Therefore, how they can unleash all those radical results with an inferior beginning is a great challenge.
However, the inferior emergence of their innovations as an alternative to high-performing matured products is like the foals of racehorses shortly after birth. They are full of hidden potential; once untapped, they become mighty horses taking over the race, consequentially unleashing startup disruption. What is the nature of hidden potential, what will it take to unlock, and what is the chance of taking over the matured products are all determined by the economics of both the matured and emerging technology waves, powering incumbents’ and startups’ innovations, respectively? Startups’ success and failures are determined by the interplay of two technology waves and how they are leveraged in penetrating the market segment by segment.
- Technology waves—how innovations are suitable in getting jobs done, how they progress, and what they cost all depend on the characteristics of the underlying technology cores. The relative technological performance determines whether startups will succeed in unleashing Creative Destruction. For example, over the last 100 years, despite many attempts to unleash startup disruption effects on the automobile industry through the electric vehicle idea, it has not fully happened. The underlying cause has been the Premature Saturation of the battery technology core and the continued incremental progression of internal combustion engines. On the other hand, despite its very primitive beginning, the digital camera rapidly grew and unleashed creative destructions on the film industry because the film camera reached its limits, and the unique potential of digital cameras rapidly grew as better and cheaper alliterative.
Despite growing R&D costs, the marginal cost of replication of technology advancement is often meager. In some cases, like software, it has been zero. Hence, technological advancements in improving quality and reducing costs are essential. Consequentially, startups pursuing emerging technology cores have the possibility of experiencing higher economies of scale, scope, and network effects than incumbents have been enjoying with matured technology cores. Besides, the return on R&D investment in advancing technologies keeps changing with the maturity of the S-curve-like life cycles. Therefore, the startups’ attacking strategy must consider relative economies of competing technology waves.
Phases of startups attacking strategy by leveraging technology waves
As explained, startups are on the mission of unleashing creative destruction on matured products by reinventing through the change of technology core. There have been seven major phases:
- Making technology assessments and selecting the high-potential candidate
- Choosing the right time of attack
- Managing the growth of technology to create relative advantage in economics
- Finding and penetrating the non-consumption market to gain attack momentum
- Attacking the mainstream market and taking over
- Winning the race and monopolizing the market
- Creating a new market in which incumbent products could not serve
Making technology assessments and selecting the high-potential candidate
Before picking up lithium-ion battery technology to raise attacks against gasoline automobiles, Elon Musk assessed many technologies, including fuel cells. On the other hand, many others in the past could not show performance comparable to Tesla’s by trying with electric vehicles. Similarly, to reinvent computing, Steve Jobs looked around many technologies and eventually found the Graphical User Interface as a weapon to take over defenders’ business. However, despite burning billions of dollars in subsidies, EV has yet to take over the mainstream market of gasoline automobiles. The underlying reason is that batteries’ economics is still poorer than gasoline-burning internal combustion engines.
Technologies have an S-curve-like life cycle. Hence, technology assessment must answer questions such as how much advancement is possible, in which time frame it will take place, and how much it will cost. However, standard economic analysis and extrapolation are insufficient to get those answers with the required accuracy. To answer these questions, startups must have insights about underlying science (genetic code). Otherwise, they run the risk of pursuing the wrong targets.
For example, due to the high growth rate of autonomous vehicles’ performance in the early stage, speculations about the imminent autonomous vehicle disruption were circulating. Hence, investment in R&D and startups ramped up. Unfortunately, more than $80 billion in investment has got stuck due to premature saturation. To avoid it, insights about the science of learning through training neural networks could have been helpful. On the other hand, based on the progress of electronic image sensors over five years, Kodak management ruled out the possibility of reaching a 2-million-pixel image sensor within a decade. Hence, they did not pursue digital cameras upon getting the first patent. On the contrary, Sony’s management kept pursuing it, as they had deeper insights into the science of solid-state physics and quantum mechanics.
Choosing the right time of attack—critical for startups attacking strategy
As the relative economics of matured and emerging candidate technologies is a function of the state of their maturity, the timing of launching an attack is critical. Consequentially, early attackers fail, and so do the ones who delay too long. According to Bill Gross, founder of Idealab, timing is the most important factor for startups’ success. One notable example is Netflix, which is disrupting the video distribution industry due to the selection of proper timing for launching the attack on the distribution model of tapes and DVDs.
Managing the growth of technology to create relative advantage in economics
The performance of products, in terms of quality and cost, depends on the state of maturity of the underlying technology core. Besides, the return on the effort or R&D investment depends on the state of the S-curve like life cycle. On the other hand, Economies of Scale, scope, and Network effect rely on the technology core and its maturity. For example, software as a substitute to hardware technology offers far larger scale, scope, and network effects.
Finding and penetrating the non-consumption market to gain attack momentum
Despite the substantial hidden potential, invariably, startups’ reinventions of matured products by the change of the technology core emerge as inferior alternatives—like foals of racehorses shortly after birth. They are not suitable for customers of the mainstream market in getting their jobs done. For example, bulky and expensive mobile phones were not a better alternative to land phones in the 1980s. Similarly, low-resolution digital cameras were not suitable for professional photography. Hence, the mainstream market would invariably reject initial reinventions or startup products. Despite this, through VC-backed subsidy, startups have been pushing initial inferior alternatives to the mainstream market to capture market share and rapidly increase valuation. However, such a subsidy-led push to penetrate the mainstream market appears wrong. For this reason, numerous startups have been suffering from accumulating losses despite growing market share.
Does it mean that before releasing in the market, startups should keep nurturing their inferior alternatives until they become better substitutes to incumbents’ mature products? For sure, No. Well, to whom should they sell the initial inferior products? Should startups be giving subsidies to push their initial offerings to the mainstream market? The answer is no-either.
Peter S. Cohen stated in his Hungry Startup Strategy book that startups must be hungry for market growth. But whom to sell initial inferior offerings is an issue that startups must address. Fortunately, due to the uniqueness of the technology core, there could be paying customers to whom startups can sell their initial primitive offerings at a profit. Prof. Clayton termed it a nonconsumption market. For example, in digital imaging, satellite-based imaging platforms found poor digital cameras in the 1970s as better alternatives to higher-resolution film cameras due to the ease of real-time wireless transmission.
On the other hand, e-commerce companies found customers in remote villages to be nonconsumption for the standardized products. Hence, in addition to finding paying customers for inferior alternatives, they avoided direct competition with the incumbents. By better servicing the nonconsumption market by advancing the technology core, startups establish the platform or a beachhead for launching the attack to penetrate the mainstream market.
Attacking the mainstream market and taking over—the key phase of startups attacking strategy
Before attacking the mainstream market, the relative economics of two competing technology waves should be assessed to determine the winning possibility. First, the startup product should be close to the inflection or intersection of two waves. The next one is about how much room for profitable advancement of matured technology core is left to incumbents to defend the position. More importantly, startups should investigate how fast they can improve their products through the advancement of the underlying technology, at what cost, and how much additional room is left. Once such economic analysis of competing technologies offers favorable insights, startups should prepare to launch an attack to penetrate the mainstream market and take it over from the defenders.
Due to the uniqueness of the technology core and reaching sufficient maturity, startups spread out and suddenly hit it big. They start offering all kinds of variations in taking over all the niches of the mainstream market. Due to winning big orders, startup attacks have come into full view around this time. Upon sagging, defenders’ sales start collapsing. Despite economic indicators showing the full attack of startup invasion, nervous CEOs and CFOs remain helpless due to the non-favorable economics of competing technologies. For example, after struggling with its initial offering for a few years, Sony hit big and took over the mainstream camera market, pushing Kodak toward bankruptcy.
In addition to superior performance and ecosystem build-up, startups should develop patent barriers so incumbents cannot quickly switch to the new wave. Unfortunately, as Tesla did not focus on developing proprietary technology and patent barriers, incumbents and new entrants face very few obstacles in taking a slice of the EV market.
Winning the race and monopolizing the market
After winning the battle with the incumbents, startups face the challenge of winning the war. Upon losing the mainstream market, defenders or incumbents become weaker. But that does not necessarily mean that startups will be making money.
Upon winning the battle, startups cannot make money, as many new entrants have been competing in offering the same reinvention. Hence, winning the race of reinventions is a must. In doing so, the winning startup must create a far greater scale, scope, and network effect than its peers so that bigger is better and cheaper becomes a reality.
Often, the new market could be far more significant than the mainstream market of the incumbent products. However, penetration of these markets, such as i. non-consumption, ii. mainstream, and iii. unserved, should be done in sequence. The underlying reason is the life cycle of the technology core. Along with maturity, products start becoming more suitable and affordable to gain momentum of penetration in successive market segments. It’s worth noting that High-tech innovations gain penetration momentum due to the advancement of technology core and release of consecutive versions, as opposed to gaining traction due to risk reduction through communications (stated by Dr. Rogers).
Fortunately, the growing role of software and connectivity has offered such an opportunity, creating an increasing tendency to monopolize reinvention waves. Hence, startups attacking strategy must include how to win the reinvention race to monopolize the market, creating a blue ocean. For example, although more than twenty word processor makers in the 1980s played a role in taking over the word processing market from typewriter makers, Microsoft made money by winning the reinvention race and becoming a monopoly.
Creating a new market in which incumbent products could not serve
After taking over the mainstream market, startups must focus on advancing the technology further so that they can grow their innovations and make them suitable for customers who are not using the incumbents’ products. Due to lack of fitness, cost and other factors, more or less all existing products cannot reach all the people of the world. For example, people were not using telephones while on the road in the 1980s. Similarly, due to the high cost and large size, farmers and ricksha pullers of Bangladesh and many other less developed countries could not use mobile phones at the dawn of the 21st century. However, through making them suitable for the unserved market, mobile phone innovations have created a new market due to the advancement of the underlying technology core. Hence, startups must focus on the underlying genetic code and tap into it to create more significant economies of scale, scope, and network effects for developing new markets.
Evading incumbents’ radar is a must for startups attacking strategy to cause startup disruption
Most of the incumbents’ firms are managed by business graduates. Their CEOs and CFOs look into financial data to detect any sign of invasion. Before making their alternatives competitive in quality and cost, startups will be caught by the incumbents’ financial radar if they attempt to penetrate the mainstream market through subsidies. Such a premature catch will lead to the incumbent’s response to counter it with their substantial goodwill, logistics, technology, and financial base. For example, Tesla has been suffering due to a premature attack on the mainstream market. On the other hand, existing retailers have opened e-commerce lines to counter the loss of market to e-commerce startups. Hence, startups attacking strategy must consider evading premature caught in incumbents’ radar.
However, instead of taking away incumbents’ market shares by pushing premature products through subsidies, if startups focus on targeting the non-consumption market, defenders or incumbents will not see its reflection in economic performance or financial data. If it takes away some business, the penetration rate will be less than the market’s overall growth. Through such a strategy, attackers will be deceiving defenders as they will not be able to detect the relative technological performance that has been deteriorating. As a result, defenders cannot detect the rise of the capability of the startups or attackers—making them vulnerable to sudden hits at the inflection points of two technology waves.
As explained in this article, startups attacking strategy by leveraging technology waves can be placed into a time frame. Usually, it takes 10 to 15 years for a startup’s reinvention wave to take over the incumbents’ matured products and surface the winner. There are four distinct phases: (i) assessing the relative economics of competing S-Curves and developing products for penetrating the non-consumption market, (ii) penetrating the non-consumption market and developing the technology further for establishing the beachhead, (iii) taking over the mainstream market of matured products and (iv) winning the reinvention race and monopolizing the market.
The first quarter of the total time goes to advancing the technology to make it suitable for penetrating the nonconsumption market. Serving the nonconsumption market and progressing toward the tipping point take away the 2nd quarter. During the 3rd quarter, startups take over the mainstream market, unleashing startup disruption, and during the 4th quarter, winning startup/s show up by attaining price-setting capability to make money in the newly formed blue ocean. By this time, the winning startup/s show up as the defender/s. Until the next reinvention wave shows up, they keep advancing the underlying technology and innovations to create a new market that is beyond the reach of previous products.
We hope startups attacking strategy by leveraging technology waves has presented a sufficiently strong logical approach to unleashing startup disruption. Hopefully, it will trigger a rethinking of the startup mad race to increase valuation by pushing premature products with massive subsidies. This approach is based on reoccurring patterns underlying the successes and failures of startups and incumbents. Although the “great man” school of innovation has largely been ignored, patterns did emerge. Not only patterns but some principles caused the rise of startups and the fall of behemoths. Once principles and patterns align, there is a reason to believe that the theory about startups attacking strategy by leveraging technology waves has merits.
