11 February 2011

The Innovator's Dilemma

With internet valuations back to the dizzying days of 1997, Huffington Post's sale to AOL this week for $315M actually seems reasonable. In justifying the deal to its audience, Arianna Huffington pointed to the "Innovators Dilemma" theory which states that large companies, no matter how successful, generally fail to adapt to the ever-changing business landscape and market trends. The primary reason stems from the fact that incumbents tend to focus on defensive tactics as they do not want to cannibalize existing sales by investing in areas that threaten their market position. In this case, AOL and HuffPost seek to change the face of news distribution by aggressively growing a free, open network-based media model where established players like WSJ or NYT, who are aggressively charging for access, will not.

In the internet age, its easy to see the Innovators Dilemma in play. Blockbuster filed for bankruptcy given the rise of Netflix and Redbox. Newspapers and magazines faced a quick, violent death. Bookstores and CD shops are no more thanks to e-commerce. Do you think all of these big companies failed to see the rise of the internet ? Its one thing for mom and pops to fail to adapt to the new Walmart in their locale given their limited resources, but how could Blockbuster not become the first streaming movie company? Did the handsomely paid executives miss what everyone else in the world saw ? Not at all. Their myopia handcuffed them from changing their distribution model, pricing, and cost structure. With quarterly pressure to prop up earnings, they failed to react to the bigger picture at hand. Instead of embracing change, they tried and failed to put up artificial borders around their existing business models. As they ultimately tried to cope, they were too little too late.

Long before the internet, this trend existed. American car companies almost went belly up (well 2 of the 3 did) with the Japanese invasion in the 1980s. Rather than focusing on fixing their business model, American Airlines tried to prevent Southwest from entering Dallas (but the Wright Amendment failed to stop Southwest from becoming the largest market-cap airliner). Macy's and other department stores, comfortable with their fat profit margins, failed to adapt to consumer's desire for lower priced apparel. Target was happy to oblige.

Its hard to blame the large companies from doing this. The emerging trend may not pan out. They might not execute as effectively as their competition. They are making good money, so why rock the boat? Thousands of reasons to look the other way and most of them justify it to themselves. This is why most innovation and true breakthroughs come from new players who have nothing to lose. So who's next? Cable television? PC companies like Dell ? Microsoft? Oil companies ? It's definitely an interesting question - one that will be answered by disruptive ideas and successful entrepreneurs.

What's ironic about HuffPost's argument for the deal is that AOL itself failed to adapt to the death of dial-up. It's easy to "reinvent" your business when its already in a downward spiral. I would have loved it if she was just honest and said "would you say no to $315M ?"


  1. AOL is on its downward spiral. For years it is trying to reinvent itself, but to what? Same could be said for Yahoo! - still prominent but dying a slow death. This is repeated with Nokia and its saviour Microsoft. Good bye Nokia, too. But what corporations go through is inherent in human rationality. How do I let go of something I am comfortable with and know versus the unknown? It is a survival instinct.

    However, mother nature let's those who adapt to changes thrive in the long run. I can say that from my own experience, you can only be king once, because competition will come in and one needs to adapt and even abandon methods. If you fail to adapt and not run defensive plays, then you are stuck. Only a good offense scores. Period.

  2. Agreed. This is why most corporations have a shelf life.

  3. One thing that has occurred to me recently with the new subscription-based model from the Dallas Morning News is that the person who builds the Craigslist for local news will be the next billionaire. Old media is dead, and refuses to reincarnate itself by crowd-sourcing content while laying off its existing journalism staff. There is a very nice MLM play in local journalism which could make somebody very wealthy.

  4. I agree with it all but would also add that though the big companies probably see trends coming, many of them also suffer because they do not retain enough talent over time. Turnover is a big problem these days, and it is tough to keep top talent when VC-backed start-ups offer stock options and signing bonuses that the big boys can't do anymore.

  5. Good point on the people. Even next gen companies like Google are losing massive talent to Facebook and other pre-IPO companies with juicy stock options. Sheryl Sandberg, handpicked by FB, was instrumental in launching Adwords at google and has brought FB from no revenue to ~$1B.