Why Success Often Breeds Failure

Making a enterprise succeed isn’t easy. You need to come up with a viable product, identify the right market for it and then find a way to get paid. Those 3 elements, creating, delivering and capturing value are at the heart of any successful business model.

Yet developing a model is only half the battle, To make it work, you need to develop an organization — people, processes and practices — that is dedicated to making the model work. Without that, all you have is a concept.

The danger is that once an organization hits on a successful formula, rigidity naturally sets in. We all like to think we’re capable of change, but once profits are rolling in and everybody is happy, staying the same seems a whole lot more profitable. That’s the irony of disruption, it’s something that happens to successes, not failures.

The Invention That Went Nowhere

Chester Carlson was a prototypical inventor. Self taught and brilliant, he worked for years tinkering with his invention even while holding down a day job and going to law school at night. When his wife got tired of the explosions he made mixing chemicals in the kitchen, he moved his work to a second floor room in a house his mother-in-law owned.

After working on it for over a decade, he finally teamed up with the Haloid corporation. They built a superior product, but it cost nearly ten times what competitive machines did. They tried to interest the great companies of the day — Kodak, IBM and GE — but all demurred. There just didn’t seem to be a value proposition that would justify the cost.

Then Joe Wilson, the President of Haloid, had a billion dollar idea. Instead of selling their machines, why don’t they lease them? The idea took off and the company we now know as the Xerox Corporation was born.

An Innovative Business Model

The brilliance of Wilson’s business model was that it couldn’t possibly work for anyone but Xerox. The leases were priced so cheaply that there wouldn’t be a profit from ordinary usage, but only if customers made more than 2000 copies per month, a very large quantity at the time. So usage would have to rise significantly for Xerox to make money.

The bet paid off. The technology made copying so much easier that before long their customers averaged 2000 copies per day, instead of per month. Revenues grew at a 41% compound annual rate for over a decade and the small firm soon became a titan of American business.

Perhaps not surprisingly, Xerox continued to innovate along its business model. New products came out that could print more copies faster, which not only increased customer satisfaction, but made Xerox a lot more money. It plowed those profits back into more innovation, a legendary direct sales operation and better and faster copiers.

A New Crappy Competitor Arises

Trouble came when a host of Japanese competitors entered the market. They could not compete with Xerox on technology, quality or service. In fact, they offered their customers inferior technology that printed out lower quality copies at a slower rate. What’s more, they didn’t offer much in the way of service at all, but sold through 3rd party organizations.

Xerox didn’t pay their new competition much attention. After all, the new Japanese upstarts weren’t going after their customers, but were targeting the lower end of the market which needed cheap copiers to do occasional jobs. Xerox continued to thrive and their engineers continued to build ever more elaborate and impressive products.

It didn’t last. The cheap copiers got better and before long it wasn’t just the small “Mom and Pop” firms that were interested in them. While the quality and features weren’t a match for the high-end Xerox products, they were good enough, the price was attractive and the products were so simple that they didn’t need extensive service.

In a very real sense, disruptive innovation is crappy innovation. It never enters the market at scale, but starts out in a seemingly insignificant niche. A small ecosystem develops, the technology improves and the basis of competition migrates to a completely new feature set. The gods never falter on Olympus, it is always earthly mortals that cause their downfall.

The True Nature of Disruption

Disruption never makes sense to us, because it always starts with them. The film nut who will rent a cult movie through the mail rather than go to Blockbuster; the Silicon Valley mogul who wants to salve his environmental angst by driving an electric car; the forlorn Tunisian street vendor setting himself on fire in a public square.

In the early stages, nothing ever seems like it is afoot. After all, at any given time, there are any number of weird people doing any number of weird things. We can’t possibly take them all seriously. What we need to look for is the unseen connections. It is the networks, not the nodes, that create the long chains of behavior that make disruption happen.

Clearly, we’re in the midst of a management revolution and there has been ample discussion about digital technology and lean startups — minimal viable products, iterations and pivots. What don’t hear about is the language of networks — topologies, path links and cluster coefficients. The way things are connected determines how they will perform.

And that’s why success often leads to failure. It builds its own network of partners, customers and employees who all have a stake in the status quo. But networks are never set in stone, they can spread, build new connections and lose old ones, become more dense or sparse and sometimes even collapse unto themselves and disappear.