David The Disruptor v. Microsoft The Goliath
This is part two of a two-part series. Part One looked at the fall of Steve Ballmer and the decline of Microsoft in mobile. Part Two tries to discover why it all happened.
Steve Ballmer was just fired after 13 uninspiring years at Microsoft. A hotly debated question is whether Ballmer failed because he was a bad manager or whether he was simply a victim of disruptive innovation.
Analogy: David v. Goliath / Disruption v. Microsoft
PATIENT: Doctor doctor,- I keep comparing things with something else.
DOCTOR: Don’t worry, it’s only an-alogy
Disruption is often described as a David v. Goliath story. Let’s take that analogy and run with it.
Saul and the Israelites are facing the Philistines near the Valley of Elah. Twice a day for 40 days, Goliath, the champion of the Philistines, comes out between the lines and challenges the Israelites to send out a champion of their own to decide the outcome in single combat, but Saul and all the Israelites are afraid. David, (a mere shepherd,) accepts the challenge. Saul reluctantly agrees and offers his armor, which David declines, taking only his sling and five stones from a brook.
David and Goliath confront each other, Goliath with his armor and shield, David with his staff and sling. David hurls a stone from his sling with all his might and hits Goliath in the center of his forehead, Goliath falls on his face to the ground, and David cuts off his head. ~ Excerpted from Wikipedia
Obviously, in our story, David represents disruption and Goliath represents the fallen giant, Microsoft.
The Rules Of Disruption
- When a new product or service competes with a successful incumbent product or service.
David challenged Goliath.
The Apple iPhone challenged Microsoft’s Windows Mobile. The iPad challenged low-end notebook and desktop computers running Microsoft Windows. Google Docs challenged Microsoft’s Office Suite.
- When the features of the new product or service are inferior and the features of the incumbent product or service are superior.
David was young, small, weak, had no armor and no weapon to speak of. The incumbent, Goliath, seemingly had all the advantages and no disadvantages. What was there to fear?
The iPhone, iPad and Google Docs were the “David” to Microsoft’s “Goliath.” The iPhone was low capacity, with no stylus or keyboard and with few advanced features. The iPad was underpowered – nothing but a big iPod Touch. Google Docs were immature and terribly limited in functionality. Microsoft seemingly had all the advantages and no disadvantages. What was there to fear?
- When, unbeknownst to the incumbent, the existing product or service is over-serving a large part of their current customer base. The incumbent’s supposed strengths are actually irrelevant to the vast majority of its customers. This means that the challenger need only provide “good enough” service to satisfy the over-served part of the market.
Goliath was the master at one-on-one, hand-to-hand combat. With his size, strength and power, he was simply unbeatable. However, David’s sling shifted the shape and size of the battlefield. David didn’t have to engage Goliath’s strengths. He could attack Goliath from a distance, thereby negating Goliath’s strengths and turning Goliath’s size into a weakness.
Microsoft was a major player in mobile phones1 and dominated PC operating systems and Professional Software Suites. With their size and ongoing monopolies, they were simply unbeatable. However, the iPhone shifted the battlefield from styluses and menus to touch, the iPad shifted the battlefield from power to simplicity and mobility and Google Docs shifted the battlefield from expensive, powerful and compatible on all PCs to free, simple and compatible on all browsers. The iPhone, iPad and Google Docs negated Microsoft’s many strengths and turned those strengths into weaknesses.
- When the challenger, in addition, provides exceptional service where the incumbent is weakest and where the customer’s unmet needs are the greatest.
David was exceptionally strong where Goliath was exceptionally weak. His small size and lack of heavy armor made him quick and mobile. His sling made him agile and deadly from a distance.
The iPhone, iPad and Google Docs gave people the simplicity they craved at the price of complexity and power that they neither desired nor needed. From Microsoft’s vantage point, users were replacing powerful tools with weak “toys” (replacing powerful swords with limited use slings.) From the user’s vantage point, however, they were giving up nothing of practical use (heavy armor that they could not wear and weapons that they could not wield) for the sake of mobility and ease of use.
- The incumbents cannot effectively respond without sacrificing the benefits they are receiving by maintaining the status quo.
The incumbents were no fools and they were no slouches, either. Both Goliath and Microsoft saw the shift in battle strategy and they would have liked to have responded in kind. However, their very nature prohibited them from doing so. Only by giving up his strength, armor and sword could Goliath have competed with David’s sling. And then his size would have slowed him down and hampered him anyway.
Only by giving up their monopoly profits in Windows and Office, could Microsoft have competed with the lower margin2 iPhone, iPad and Google Docs. And then, Microsoft’s size and structure would have made it impossible for them to keep up with the nimble Apple and Google, in any case.
The incumbent is caught in a bind. He can’t cater to the new service without abandoning the old. And he can’t abandon the old service without abandoning the advantages that go along with it. Furthermore, any such change would make his best customers, and his best incentivized employees, and his best shareholders (or, in the case of Goliath, his fellow soldiers, his commander and his King), mad as hell.
20/20 Hindsight And Revisionist History
It’s very easy to criticize both Goliath and Microsoft. The answer, in retrospect, appears perfectly clear. Goliath should have simply reshaped his body into that of a lean, mean, sprinting machine and become skilled with the sling. Microsoft should have abandoned its obsession with Windows and focused on new, innovative products that would cannibalize Windows.
There is always an easy solution to every human problem—neat, plausible, and wrong. ~ H. L. Mencken
The above is all perfectly good advice…assuming one knows absolutely nothing about human beings. Not only does this course of action run counter to human nature, it runs counter to common sense, too.
PATIENT: Doctor doctor, I’ve broken my arm in two places.
DOCTOR: Hmm, I’d advise you not to go back to either of those places then.
Telling someone to do what no sane person in their their position would do is not really good advice, it’s madness.
Too bad that all the people who know how to run the (company) are busy driving taxicabs and cutting hair. ~ George Burns
It’s easy for those of us who have have absolutely nothing to lose, to blithely provide radical advice to those who have everything to lose. But it’s also easy for those who have “skin in the game” to reject such wrong-headed advice. If either Goliath or Microsoft had taken the above-prescribed advice, it would have been a case of curing the disease by killing the patient.3
Microsoft Is Like A Trust Fund Baby
Microsoft does have one major advantage that most disrupted companies do not. Microsoft has — and will continue to have for quite some time to come — a huge stream of income.
This means that Microsoft can, unlike, for example, Palm, Nokia and Blackberry, make the changes necessary to survive. Their resources give them the time that most companies are denied.
But just because they can do something, doesn’t mean that it would be easy to do and just because they can do something doesn’t mean that they will choose to do it either.
When evaluating companies, and in particular their executives, I find it useful to start with the assumption they’re highly intelligent. ~ Ben Thompson
Was Ballmer a bad manager or was he a victim of innovative disruption? I have no doubt that Ballmer made some serious mistakes. But it was not what he did wrong, but what he did “by the book” that got Microsoft into the mess that it’s in today.
A man is known by the company he organizes. ~ Ambrose Bierce
I must be willing to give up what I am in order to become what I will be.” – Albert Einstein
- 42% market share in 2007 [↩]
- Yes, lower margin. The iPhone and the iPad had high margins for Apple because Apple made their profits from the hardware. However, Apple’s integrated model bundled the software and Android’s subsidized model gave away the software for free, thus making it impossible for Microsoft to maintain their software licensing margins. [↩]
- Cure the disease and kill the patient. ~ Francis Bacon, Essays . Of Friendship [↩]
- “But why would anybody want that CEO job as long as Bill stays on the board? (Steve, too, most likely, given that he still owns 333 million Microsoft shares.) Both need to quit to give the newcomer a free rein and air to breath. Otherwise, failure isn’t just an option, but the most likely outcome.” ~ Joachim Kempin [↩]
- “Microsoft’s next CEO will need to be Superman. Here’s the mess Steve Ballmer will leave for his successor: –Windows 8 has failed to produce a turnaround in Microsoft’s gradual decline. –The Surface tablets have more or less died in the market. –The company’s just been through a massive top-level organizational change. Those things typically take a year to trickle down through the organization, as the lower levels of management get resorted and reassigned. That process will be disrupted while everyone waits to see if the new structure will stick with the new CEO (unlikely; new CEOs almost always want to change things). –And now Microsoft needs to mesh the Nokia and Microsoft businesses. There’s a cultural challenge: Nokia’s is a collectivist Finnish hardware company while Microsoft is a dog-eat-dog hypercompetitive software business. There are also operational challenges. As I learned when I worked at Palm, it’s incredibly difficult to manage an operating system to please both your in-house hardware team and your licensees. They always want conflicting things. Microsoft claims it can both license Windows Phone and run Nokia. I hope that’s just bluster, because I don’t think it will work in practice.” ~ Michael Mace [↩]