Innovation and Destruction: Part II

Innovation and Destruction:

Read part 1 in this series before continuing.

Innovation happens at every level of a business. From broad, disruptive, massive changes to seemingly tiny changes that happen almost transparently. Indeed it is some of these small, incremental changes that technologists most admire. Over the years Oracle and Microsoft and VMware have shown to be masters of incremental innovation. Their products improve with feature benefits that their customers love. But their new features haven't created new businesses. Their innovation is in growing and defending territory in the windows that opened many years ago.

But is it possible for an existing company to follow a strategy into a new market and innovate successfully to dominate it? In enterprise IT, examples are few of large companies with product innovations so radical that they create a billion dollar market. They are so rare that I doubt public companies are even organized to pursue these opportunities. As a friend recently said, a product manager at Oracle won't get out of bed for less $10M of revenue. Since all ideas start small, that robs them of the chance to create a new $1B product.

In short, big companies chase big markets. Small companies seek gaps. And therefore small companies are more likely to find themselves in a new, growing window of opportunity.

This is not to say that large companies don’t innovate. In addition to the micro-innovations previously mentioned, large companies succeed through innovative acquisition. It’s easier to imagine a $1B opportunity by extrapolating growth in a $50m business than creating that business from scratch. And that is why VMware and EMC’s revenues continue to grow when their core businesses languish.

The strategy of acquisition guarantees inorganic growth of businesses that otherwise lack the strategic/innovative combination that would otherwise grow business. And there are so many companies looking to acquire innovation that acquisition strategies are changing.

I was recently listening to the podcast The Hot Aisle. In episode four EMC President Scott Darling explained some of EMC’s acquisition strategy. He said the valuations of start-ups were so high today that EMC was searching for its next successes in a larger number of smaller companies. There are a combination of factors that could drive up those small innovators’ values. But surely one of them is the large concentration of money in the hands of so few aging IT giants. These giants are cash-rich and idea-poor. And in possession of stalling businesses that need the infusion of an exciting market. Darling's team will perform a financial innovation that could ensure EMC’s long-term success.

But on the product side, the real innovation almost universally comes from small companies. By product innovation I mean a company’s ability to create a product from scratch that balloons into a billion dollar industry. When a company’s revenue is near $0 any idea deserves consideration. After-all, mono-product strategy could create another Pebble. Or Uber, Twitter, Facebook, VMware (in the 00s), Nutanix, Data Domain, NetApp, Salesforce.com, and uncountable others. One great idea, backed by venture capital, executed feverishly produced each of these businesses. Could any of those businesses have sprung from the bowels of a multinational corporation?

Large companies may rarely create billion dollar ideas yet their product teams don't want for innovation. Innovation happens in degrees. Consider one of my former employers, EMC. Their old midrange array has been incrementally innovated upon for more than two decades to maintain a relevance in the enterprise. And Microsoft Windows continues to hold the market lead in large enterprise against a solid and potentially free rival by augmenting security, performance, and manageability of their OS. These incremental improvements cannot be ignored.

Yet even with incremental innovation there are differences in velocity. Despite its S1 woes few would argue that Pure Storage is innovating with incremental improvements within the existing framework of IT. They didn’t create the idea of the storage array. But they refined it faster than half a dozen bigger rivals could.

So the world is divided into small companies that create new businesses and large companies that exploit them. Or is it not so simple? I can find few examples of companies that created billion dollar markets while being a multi-billion dollar company. Apple did it with the iPhone and again with the iPad. And Amazon did it with Amazon Web Services. But I’ve searched the internet and the minds of my friends for more examples. I’ve not found many.

This cycle of innovation is what we love about IT. We’re junkies for destruction. And destruction of each other is the best part of our jobs.

Part 3 of 4 to come.