Review – Zero to One

Zero to One: Notes on Startups, Or How to Build the Future

by Peter Thiel, published 2014

No wonder Peter Thiel is encouraging young people to avoid college and start companies– if the best lecture on startup entrepreneurship is Peter Thiel’s Stanford class-turned-book, it’s clear how vapid the value offering is in the average college course.

Thiel encourages the reader to build companies that make the world a better place on a principled basis, and he strongly advises to avoid competitive markets. And while he says that the book is not and can not be a how-to book for starting a company but rather a set of guidelines for how to think about what it takes to succeed as a startup, the book’s content doesn’t appear revelatory for any but the most amateur business mind. Maybe it would shock some people to learn they have to have a plan for selling their product, not just designing it, but if that’s the level you’re at (or that’s the “truth” you’re wedded to), is Peter Thiel’s book really going to be the bridge between your idea and massive success? Or any success?

It reads much more as a personal journal, reflecting on funny stories and anecdotes about Thiel’s own success with PayPal, than it seems to be a guide to entrepreneurship principles. Most of the “rules” are validated by some quirky thing that happened to Thiel and his mafia, for example, deciding not to invest in green energy companies because their CEOs were too well dressed and everyone knows real tech people wear tshirts and jeans. Huh?

It is also more useful as a descriptive work that explains entrepreneurship phenomena witnessed after the fact, rather than anything with a predictive quality to it. In other words, few entrepreneurship success stories will have failed to check the various boxes Thiel covers, but it’s also likely that many failures will have checked them, too. The book provides more insights into questions such as, “Why did Company X manage to grow so rapidly in Market Y?” rather than answering such questions as “How can Company X grow rapidly in Market Y?”

I was much more impressed by Thiel’s short speech pre-election to the National Press Club, outlining his reasons for supporting Donald Trump:

You can disagree with his reasons and his choice, but there is clearly a set of principles he believes in and an overall framework for understanding social issues that guided him to throw in his lot with Trump. That’s more educational than this book, unfortunately.

Notes – Stanford Graduate School of Business Search Fund Primer

Notes on “A Primer On Search Funds” produced by the Stanford Graduate School of Business

“The Search Fund”

  • Greater than 20% of search funds have not acquired a company
  • Stages of the Search Fund model:
  • Raise initial capital (2-6mos)
  • Search for acquisition (1-30mos)
  • Raise acquisition capital and close transaction (6mos)
  • Operation and value creation (4-7+ years)
  • Exit (6mos)
  • SFs target industries not subject to rapid tech change, easy to understand, fragmented geographic or product markets, growing
  • Highest quality deals are found outside broker network/open market due to lack of auction dynamics
  • Research shows that partnerships are more likely to complete an acquisition and have a successful outcome than solo searchers (71% yielded positive return, 15 of top 20 performing funds were partnerships)
  • Principals budget a salary of $80,000-120,000 per year w/ median amount raised per principal $300,000~
  • Majority of the economic benefit of SF comes through principal’s earned equity; entrepreneur/partners receive 15-30% equity stake in acquired company in three tranches
  • Investors typically receive preference over the SFer, ensuring investment is repaid, with return attached, before SFer receives equity value
  • Individual IRR from 2003-2011 median was not meaningful, heavily skewed toward 75th percentile where median was 26% in 2011; 57% of individual IRRs were not meaningful in 2011; the median fund destroyed capital in 2009 (0.5x) and 2011 (0.8x); 58% in 2011 broke even or lost money
  • Half of the funds that represent a total or partial loss were funds that did not acquire a company; biggest risk is in not acquiring a company at all
  • Median acquisition multiples: 1.1x revenues; 5.1x EBITDA
  • Median deal size, $8.5M

“Raising a Fund”

  • Search fund capital should come from investors with the ability and willingness to participate in the acquisition round of capital raising

“Search Fund Economics”

  • Search fund investors often participate at a stepped up rate of 150% of original investment in acquired company securities

“Setting Criteria and Evaluating Industries”

  • Desirable characteristics for a target industry: fragmented, growing, sizable in terms of revenues and number of companies, straightforward operations, early in industry lifecycle, high number of companies in target size range
  • Desirable characteristics for a target company: healthy and sustainable profit margins (>15% EBIT), competitive advantage, recurring revenue model, history of cash flow generation, motivated seller for non-business reasons, fits financial criteria ($10-30M in revs, >$1.5M EBITDA), multiple avenues for growth, solid middle management, available financing, reasonable valuation, realistic liquidity options in 3-6 years
  • Key challenge is “know when to take the train” lest a SF never leaves the station waiting for the perfect opportunity
  • Ideally, seller is ready to transition out of the business for retirement or personal circumstances or has something else they’d like to do professionally
  • Experience shows it is better to pay full price for a good company than a “bargain” for a bad one
  • Idea generation: SIC and NAICS codes, Yahoo! Finance, Thomson Financial industry listings, Inc. 5000 companies, public stock OTC and NASDAQ lists and even the Yellow Pages; generate a list of 75 potential industries to start
  • Target industries buoyed by a mega-trend
  • Can also target an industry in which the SFer has worked and possesses an established knowledge base and network
  • Some focus on 2-3 “super priority” industry criteria (eg, recurring revenues, ability to scale, min # of potential targets, etc.)
  • Objective is to pare down the industry target list to 5-10 most promising
  • Basic industry analysis (Porter’s five forces, etc.) is then used to narrow from 10 to 3; SFers use public equity research and annual reports for market size, growth, margin benchmarks; also Capital IQ, Hoover’s, Dun & Bradstreet and One Source
  • Industry insiders (business owners, trade association members, sales or business development professionals) and industry trade associations or affiliated ibanks and advisory firms are primary methods of research and often have general industry research or white papers available
  • Next step is to create a thesis to codify accumulated knowledge and compare opportunities across common metric set in order to make go/no-go decision
  • In order to become an industry insider, SFers typically attend tradeshows, meet with business owners, interview customers and suppliers and develop “River Guides”

“The Search”

  • Median # of months spent searching, 19
  • 54% spend less than 20 months searching, 25% spend 21-30 months, 21% spend 30+ months
  • Track acquisition targets with CRM software such as Salesforce, Zoho, Sugar CRM
  • Bring up financial criteria and valuation ranges as early as possible when speaking to potential acquisition targets to save everyone time
  • A company that is too large or too small as an acquisition target may still be worth talking to for information
  • You must immediately sound useful, credible or relevant to the owner; deep industry analysis should already have been performed at this stage
  • Trade shows can be a critical source of deal flow
  • If a particular owner is not willing to sell, ask if he knows others who are
  • “River Guides” are typically compensated with a deal success fee, usually .5-1% of total deal size
  • Boutique investment banks, accounting firms and legal practices specializing in the industry in question are also a good source of deals
  • The business broker community itself is extremely large and fragmented; could be a good rollup target?
  • Often, brokered deals are only shown if a private equity investor with committed capital has already passed on the deal, presenting an adverse selection problem
  • Involve your financing sources (such as lenders and investors) early in the deal process to ensure their commitment and familiarity

“Evaluating Target Businesses”

  • Principles of time management: clarify goals of each stage of evaluation and structure work to meet those goals; recognize that perfect information is an unrealistic goal; keep a list of prioritized items impacting the go/no-go decision
  • Stages: first pass, valuation/LOI, comprehensive due diligence
  • It is in the best interest of the SFer to tackle core business issues personally during due diligence as it is the best way to learn the details of the business being taken over
  • Adding back the expenses of a failed product launch rewards the seller for a bad business decision; adding back growth expenses gives the seller the double benefit of capturing the growth without reflecting its true cost
  • Due diligence may also uncover deductions to EBITDA or unrealized expenses that reduce the “normalized” level of earnings (undermarket rents, inadequate insurance coverage, costs to upgrade existing systems, etc.)

“Transitioning Ownership and Management”

  • Create a detailed “Transition Services Agreement” with the seller, a legal contract where specific roles, responsibilities, defined time commitments and compensation are agreed prior to the transaction close
  • The first 100 days should be dedicated to learning the business
  • Businesses consist of people, and people need communication; great leaders are always great communicators
  • “Don’t listen to complaints about your predecessor, this can lead to a swamp and you don’t want to be mired there.”
  • The goal is to learn, not to make immediate changes
  • Outwork everyone; be the first person in and the last to leave
  • Many SFers insert themselves into the cash management process during the transition period by reviewing daily sales, invoices and receipts and signing every check/payment made by the company
  • The company’s board should be a mix of deep operational experience, specific industry or business model experience and financial expertise
  • The seeds of destruction for new senior leaders are often sown in the first 100 days

Entrepreneurial Opportunity Cost

I am wondering out loud here: when people attempt to do some kind of modeling of the various opportunity costs of having government provide X, versus having “the market” provide X, do they factor in the opportunity cost of lost entrepreneurial progress inherent in bureaucratic provisioning?

For example, if someone was arguing that the government should control automobile production, is there any calculus attempted that examines the present value of foregone future improvements in automobile production and design that will inherently be included in bureaucratic provisioning?

A further example– the roads and highways we drive on, which have been provisioned by government for decades, haven’t changed all that much. But cars have made huge technological leaps in terms of how they’re designed and built. Cars have entrepreneurs behind them, roads and highways have bureaucrats behind them.

I’m not sure I am articulating my inquiry as coherently as I might like to but there it is nonetheless!

Review – Losing My Virginity

Losing My Virginity: How I Survived, Had Fun and Made a Fortune Doing Business My Way

by Richard Branson, published 2011

Spoiler alert– this book is choppy and inconsistent in the pacing and entertainment factor of its narrative. You really need to read between the lines a bit to get the most value out of it. That being said, it’s surprisingly literary for a dyslexic former publisher of a student magazine and I found Branson’s repeated reference to his high-altitude balloon voyage trials to be an outstanding metaphor for his life as a businessman and entrepreneur.

You see, in Branson’s ballon journeys, the key factors of any consistency were that: a.) Branson was knowingly and openly taking what he perceived to be a potentially life-threatening risk b.) Branson was almost always underprepared for it, or decided to go ahead with his attempt despite early warnings that something was amiss and c.) nonetheless, he somehow managed to survive one disaster after another, only to try something bigger and bolder the next time around.

And this is quite similar to the way he comported himself as an entrepreneur on so many occasions. Again and again, he’d make a daring foray into a business, market or industry he didn’t quite understand, the company would stumble after an early success leaving them all on the brink of failure and yet, each time they’d double down and somehow win.

In that sense, Branson is a perfect example of survivorship bias. On the other hand, having so many narrow misses that turn into massive accelerators of a person’s fortune start to make you wonder if isn’t mostly luck but rather mostly skill.

As an entrepreneurial profile, “Losing My Virginity” is full of all kinds of great successes and astounding failures. With regards to the failures, something I found of particular interest was the fact that Branson’s company were victims of some of the most common pitfalls of other businesses throughout its early history: taken for a ride by indomitable Japanese owners/partnerships in the 80s, repeated victim of the LBO-boom and the private/public buyout-cycle in the 80s and 90s. When you read these stories in the financial press it always seems to happen to the rubes of the business world, but Branson’s foibles help one to realize even rather sophisticated types can get taken in now and then.

The volatility in Branson’s fortunes do leave one with a major question though, namely, why did Branson’s company ultimately survive?

This isn’t a Harvard Business School case study so I don’t mean to pass this off as a qualified, intelligent answer to that question, but I will attempt a few observations and, in typical HBS fashion, some or all of them may be contradictory of one another and none will be provided with the precise proportional contribution they made to the end result:

  • the group had a cultural commitment to change and dynamism; they were not so much their businesses, but a culture and group of people who did business a particular way, a true brand-over-merchandise, which allowed them to reinvent themselves numerous times
  • the group strategically focused on being the low-cost provider in their industry, usually while simultaneously attempting to pursue the seemingly mutually exclusive goal as being seen as the highest quality offering as well
  • the group focused on serving customers but equally saw treating its employees with concern as an important value
  • the group consciously created a brand that could be applied to diverse businesses (see point #1)
  • the group pursued businesses that seemed “interesting” or sensually appealing to it, which ensured that everyone involved was motivated to do well because they liked the work they had chosen

Another thing I noticed about Branson and the development of his company was the attention he paid to the composition of management and owners and his dedication to weeding out those who were not good fits in a charitable way. Channeling the “best owner” principle, Branson made a conscious effort to buy out early partners whose vision and tastes did not match the current or future vision of the group. In this way, the company maintained top-level focus and concentration on a shared strategic vision at all times, sparing itself the expense and distraction of infighting and wrangling over where to go next and why.

Another aspect of the company’s resilience had to do with its operational structure. Branson built a decentralized company whose debts and obligations were kept separate. In an environment where new ventures were constantly subject to total failure, this arrangement ensured that no one business failure would bring the entire group down.

The final lessons of the Branson bio were most instructive and had to do with the nature and value of forecasting.

The first lesson in forecasting has to do with the forecasts others make of us, or the world around us. For example, Richard Branson had no formal business training, he grew up with learning disabilities (dyslexia) and he was told very early on in his life by teachers and other adult and authority figures in his life that he’d amount to nothing and his juvenile delinquency would land him in prison. Somehow this worthless person contributed a great deal to society, through business and charity, and by most reasonable measures could be considered a success, making this forecast a failure. If one had taken a snapshot of the great Warren Buffett at a particular time in his adolescence, when the young boy was known to often take a “five-finger discount” from local department stores, it might have been easy to come up with a similar forecast about him.

I’m not sure how to succinctly sum up the concept there other than to say, “Things change.” Most forecasts that involve extrapolating the current trend unendingly out into the future will probably fail for this reason.

The second lesson in forecasting has to do with how we might attempt to forecast and plan our own lives. When we have 50, 60, 70 or more years of a person’s life to reflect on, it is easy to employ the hindsight bias and see how all the facts of a person’s life were connected and led them inexorably to the success (or infamy) they ultimately achieved. And certainly there are some people, again using Buffett as an example, who from an early age were driven to become a certain something or someone and so their ability to “predict their future selves” seemed quite strong.

But the reality is that for the great many of us, the well-known and the common alike, we really don’t have much of a clue of who we are and what we’ll ultimately become. The future is uncertain and, after all, that’s the great puzzle of life that we all spend our lives trying to unravel. Richard Branson was no different. He was not born a billionaire, in a financial, intellectual, personal or other sense. He had to learn how to be a businessman and how to create a billion dollar organization from scratch. Most of the time, he didn’t even know he was doing it. In other words, HE DID NOT KNOW AHEAD OF TIME that he would become fabulously wealthy, and while he was hard-working and driven, it doesn’t even appear he purposefully intended to become so.

Maybe we should all take a page from Branson’s book and spend less time trying to figure out what’s going to happen and more time just… happening. We could sit around all day trying to figure life out, or we could follow the Branson philosophy where he says, “As for me, I just pick up the phone and get on with it.”

Why Do Former Presidents And Politicians Need “Jobs”? And How Do They Manage To Find Them In Silicon Valley?

I got a good chuckle out of this today, “Obama hints at a future in VC“:

“had I not gone into politics, I’d probably be starting some kind of business,” said Obama. “The skill set of starting my presidential campaigns—and building the kinds of teams that we did and marketing ideas—I think would be the same kinds of skills that I would enjoy exercising in the private sector. … The conversations I have with Silicon Valley and with venture capital pull together my interests in science and organization in a way I find really satisfying.”

The rest of the article contains quotes from VCs good-humoredly sniffing Obama’s jock strap and suggesting candidly that he would make an excellent high risk capital allocator. I don’t even need to provide examples of why these disclosures are a bunch of bald-faced lies. You can make up your own punchlines.

Instead, I am pondering the following: does something like this represent a sign of how crony Silicon Valley is and how dependent upon government privilege it is for the profit it generates? Or does it represent how pragmatic this community of businessmen is in co-opting the enemy that is continually placing new obstacles on its road to riches?

I am not sure I am comfortable with either reality but the latter has merit in that one could at least argue one is acting in self-defense, and that’s more noble than getting behind the guns and pointing them at competitors and customers as in the case of the former.

 

Who Is YCombinator Trying To Fool With Their New Cities Research Project?

Two friends independently linked me to YCombinator’s “New Cities” blog post and it interested me enough that I thought to write about it in brief. The idea of a new city started “from scratch” excites me as an advocate of the private property society. I have a hard time imagining how my preferred values and ideas for peaceful, voluntary social arrangements will come to be implemented incrementally within the existing coercive institutions we call “city governments”. Starting with a bare plot of land, wholly-owned by one or more sympathetic parties and going from there seems like the only viable option for realizing this ideal and building a working model.

I was excited, then, to see that some well-known and resourceful people in the Silicon Valley VC community seem to be on to the same idea. But then I started reading their short post and I ended up with a lot of questions, the primary one being “What are they really trying to accomplish with this?”

I’m having trouble trusting their motives as sincere because of this: if they’re trying to build new cities, and they think they need to conduct “research” to figure out things like…

  • How can we make and keep housing affordable? This is critical to us; the cost of housing affects everything else in a city.
  • How can we lay out the public and private spaces (and roads) to make a great place to live? Can we figure out better zoning laws?
  • What is the right role for vehicles in a city?  Should we have human-driven cars at all?
  • How can we have affordable high-speed transit to and from other cities?
  • How can we make rules and regulations that are comprehensive while also being easily understandable? Can we fit all rules for the city in 100 pages of text?
  • What effects will the new city have on the surrounding community?

…they could prop open a free copy of Rothbard’s Man, Economy and State, Scholar’s Edition (with Power and Market) and start reading the basic economic theory underlying these questions, with special emphasis on the sections about “The Economics of Violent Intervention in the Market” which specifically deal with the problems they mention which relate to artificial scarcity of housing, zoning laws, street use permitting, mass transit policies and legislative efficiency. All the brainwork has been done for them, there is no need to reinvent the wheel and “discover” these effects independently if only they will consider what Rothbard has to say on the matter.

In fact, anyone who has read such material would immediately look at the “high-level questions” the YC Research project hopes to think through and notice the flawed premises evident in asking them. For example, asking “What should a city optimize for?” implies a city has some kind of monolithic identity and singular purpose, rather than being an unplanned, spontaneous outcome of the individual plans and values of the multitude of people who compose it. In asking the wrong questions, this project is doomed to arrive at arbitrary answers that are worse than wrong– they will be unknowledge which will set people back in believing it to be true and acting on it.

I don’t expect anyone at YCombinator or the research project to take a concern like this seriously, because I don’t believe their stated motivation is authentic. If it was, I would expect them to study the conclusions of 350+ years of economic pondering on these very unoriginal curiosities before proceeding with their experiment, which will never happen.

So my question remains. What are they really trying to accomplish with this? (And their Basic Income research project, which almost seems like expertly engineered trolling for the same reason I question the motivation of this New Cities project.)

 

Ko School, An Incubator For Middle Schoolers?

A friend in Dallas told me about an alternative educational institution he recently learned about, Ko School, located in Austin, TX. The school bills itself as “focused on ensuring that you have the skills, habits, knowledge, and attitudes to thrive in a rapidly changing world” and appears to provide students with both a standard STEM education as well as an entrepreneurship curriculum centered on “the three pillars of Authentic Leadership, Personal Development, and Autodidacticism”.

One of the founders has given a few TED Talks, here is a recent one:

 

I don’t know much more about it than this at present. I plan to do more research and I am making a note here for future reference.

A Thought On Nintendo

Although Nintendo missed its sales targets for the Nintendo 3DS platform, they still sold enough of the systems and its games to give credence to the argument that Nintendo’s business model (independent hardware manufacturer plus proprietary franchise software development) has not been killed and buried in a ditch by the transition to mobile, freemium, changing lifestyles, etc.

What is missing in most discussions of Nintendo’s fortunes, however, is the following fact: what has appeared to die is the profitability of Nintendo’s business model.

That is to say, Nintendo still has a market for its proprietary business model, but going forward it appears to be a marginally profitable effort. However, a business with marginal profitability could have strategic (ie, competitive, brand) value, which is why Nintendo may have decided to keep their hat in that ring.

But it is clear now that Nintendo is a box of cash, with potentially valuable franchise IP sitting on top of it, pursuing a “blue ocean” market.

In other words, Nintendo is not presently an operating company, but a development company that might transform back into an operating company at a later date.

Therefore, the analysis of the value of Nintendo now and in the future hinges on the answers to several questions:

  1. How much, and at what rate, will Nintendo Development Company (NDC) burn through their cash stockpile before finding a new operating business? And will they burn through all of it?
  2. What potential valuable uses do their existing IP have that they are not yet considering them for?
  3. Will NDC’s existing franchise IP have value in their new, blue ocean market?
  4. How valuable will the new, blue ocean market be relative to the past size and scope of the company, its present market cap, size of present cash hoard, etc.? (That is, how big is the potential future market?)
  5. Will they abandon their previous markets once they’ve secured a new market?

Review – The Innovator’s Dilemma

The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business

by Clayton M. Christensen, published 1997

Technological innovation always means change, but which kind?

In the world of business technology, innovation can be thought of as coming in two distinct flavors:

  • sustaining, which are new technologies that improve a product or service in a way that is valuable to existing customers or markets
  • disruptive, which are new technologies that are uncompetitive along traditional performance metrics, which are unusable or undesirable to existing customers or markets but which nonetheless can eventually come to replace the traditional market over time

Throughout history, it is the best-in-class businesses which have the most difficult time with disruptive technologies to the point that disruptive technologies are usually the death knell for the leading businesses at the time. But this raises a question: if they’re such good businesses and they’re so well-managed, how come they can’t manage their way around disruptive technology in their industry?

The answer lies at the heart of what the author refers to as the “innovator’s dilemma”:

the logical, competent decisions of management that are critical to the success of their companies are also the reasons why they lose their positions of leadership

Why do good management teams and competent decision-making processes miss disruptive technologies? Disruptive technologies:

  1. are normally simpler and cheaper, promising lower margins, not greater profits
  2. typically are first commercialized in emerging or insignificant markets
  3. are usually unwanted and unusable to leading firms’ most profitable customers

But good management teams with excellent decision-making processes are fine-tuned to search out:

  1. higher margin opportunities at best, and opportunities with minimum margin requirements based upon their existing cost structure
  2. opportunities that market research and querying of leading customers show there is a present demand for
  3. markets and growth opportunities which can have a significant impact on their business relative to their current scale

In short, every successful firm has a unique “value network” DNA that allows them to be especially dominant within a certain set of competitive circumstances.

the value network — the context within which a firm identifies and responds to customers’ needs, solves problems, procures inputs, reacts to competitors, and strives for profit

But disruptive technologies present a paradigm shift of a market into a completely different “value network” that the firm has not been evolved to survive in which results in, similar to biology, an extinction event for firms with the wrong type of value network DNA.

Crafting a response to disruptive technology

But the reality of disruptive technology is not entirely depressing for successful firms, and they can develop successful strategies for coping with disruptive technologies if they first make themselves aware of the five principles of disruptive innovation:

  1. Companies depend on customers and investors for resources
  2. Small markets don’t solve the growth needs of large companies
  3. Markets that don’t exist can’t be analyzed
  4. An organizations capabilities define its disabilities
  5. Technology supply may not equal market demand

Each of these principles holds within it a potential misstep for successful firms within their traditional value networks trying to respond to a disruptive technology. Because firms depend on their customers (primarily their leading, most profitable customers) and investors for their resources, they are often incentivized to ignore the low margin disruptive technology because their customers initially don’t want it. And because disruptive technologies start in emerging or insignificant markets, successful firms often ignore them in favor of better growth opportunities. Meanwhile, firms that DO try to take disruptive technologies seriously often commit themselves to particular investment and marketing patterns based off of market research for a market that is dynamic and prone to sudden and rapid change. At the same time, that which makes a company excellent at doing A simultaneously makes the company horrible at doing B (where B is the opposite of A), and often disruptive technologies require B responses when successful firms are honed to operate at A. The final frustration for these successful firms occurs when they attempt to enter a disruptive market with a solution that technologically exceeds the needs of its current users, causing them to withdraw in defeat only to watch the market then take off anyway!

An ironic twist

As hinted at above, it is ironic that the very strengths of leading firms in adapting their business to sustaining technologies (improvements in performance in relevant metrics that their best customers demand) are the exact things that cause them to fail to respond to disruptive technologies in a profitable, dominant way. And to make a bad story worse, it is these strengths-as-weaknesses that allow entrants in disruptive technological markets to capture important first-mover advantages for themselves, constructing barriers to entry which are later often insurmountable for established firms.

To a dominant firm, disruptive technology looks like low-margin, small market business that neither their customers nor anyone else seems to be interested in. But for entrants in the disruptive market, with radically different cost structures than dominant firms and with organizational sizes and resources better matched to the opportunities presented, disruptive markets are a wild playground full of unchallenged opportunity.

And while the dominant firms look down at lower-margin, smaller market business and shake their heads dismissively, entrant firms look up above at higher-margin, huge market opportunity and lick their chops. Every business ultimately looks upstream for higher-margin opportunities than the ones they have at present.

Is it any wonder why dominant firms are continually defeated by surprise attacks from below?

How dominant firms can successfully respond to disruptive technology

The position of the dominant firm in the face of disruptive emerging technology is not hopeless. For every yin, there is a yang. By inverting the five principles of disruptive innovation outlined earlier, dominant firms can find five guidelines for successfully responding to disruptive technology:

  1. Give responsibility for disruptive technologies to organizations whose customers need them
  2. Match the size of the organization to the size of the market
  3. Discover new and emerging markets through a flexible commitment to “plans for learning” rather than plans for implementation
  4. Create organizational capabilities and strengths which are complementary to the unique demands of the disruptive market place
  5. Resist the temptation to approach the disruptive technology with the goal of turning it into something existing customers can use, rather than serving the customers unique to the market and searching out new markets entirely

Conclusion

This book was published 15 years ago. The subtitle is, “The revolutionary book that will change the way you do business.” I don’t know if 15 years is long enough in the business world for the ideas of a book like this to be fully adapted into the mainstream but I would guess it is not. I am no business expert but this material was completely uncharted territory for me.

Frankly, I never thought I’d enjoy reading something written by a Harvard business school professor as much as I did with this book. Whereas case studies, quirky charts and statistical evidence usually bore me to the point that I often skip over them, this book was something of a page-turner for me and I found myself eager to find out “what happens next” in each subsequent chapter.

As faddish as it has become as of late to hype the increasingly rapid change of markets and business practices in general, the reality is that most markets don’t change that quickly and most business practices are timeless themselves. But for those unlucky enough to find themselves, suddenly or otherwise, in a market or business that is changing due to disruptive technology, this book could be a lifesaver at a minimum and a handbook for profiting immensely from that change at best.

You can get the essential points of the book entirely from reading my review, or skim-reading the introduction and final chapters of the book (which present a comprehensive summary of the ideas outlined above). But the case studies are invaluable in driving the point home and there are numerous nuances to Christensen’s argument that are worth savoring and considering on their own. Because of this, I unequivocally recommend that every interested reader purchase their own copy and read it in full, and thereby grant themselves an invaluable competitive advantage in the market place, whichever value network they might happen to be competing within.