Innovation and Destruction
Read part 2 in this series before continuing.
More than half of what we love about innovation is destruction. The abandonment of old styles and habits. The market drama of corporate failure. What Facebook did to Myspace. Google Maps to Mapquest. And Apple's iPhone to BlackBerry and Nokia. In enterprise IT we saw Intel and its ecosystem destroy the mainframe. With every one of those technological carcasses left by the roadside were habits and processes we previously followed and now laugh at. When was the last time you printed directions before leaving home?
Economists call this creative destruction. Originally defined by Joseph Schumpeter in 1942, creative destruction is the process by which new companies in the free market destroyed their predecessors, leaving the market more efficient. The process is creative because its end result shows objective superiority: faster electronics, simpler cars, clearer communication systems. But it is destructive because businesses crumple and jobs are lost.
And just look at what creative destruction has wrought among the Fortune 500. Looking at the Fortune 500 over the past 60 years, 89% of companies have disappeared from the list. In fact rate of change of this list has increased over this period. The churn is disturbing. Especially if you’re a CEO trying innovate your business’s previous version into bankruptcy.
But back to one of this series’ theses: innovation happens at all levels yet is insufficient for market success. VMware’s Diane Greene couldn’t keep her company with a promise to out-innovate. But in reality she started a fire. A blaze of self-destruction fueled by innovation. What we have is an ironic situation where the good innovation causes burning discomfort. In other words, if you’re comfortable in your job you're doing something wrong.
But back to the rate of change in the fortune 500, consider the acceleration of destruction. The compression of development cycles. We’ve saw more potentially game-changing improvements to enterprise solutions (flash, hyper-converged, containers, cloud) in the last five years than the 10 years that proceeded it. And in those ten years we saw the rise of centralized storage, the dominance of x86, and the addition to the Oracle transactional database. The changes in that decade were arguably more disruptive than the two decades that proceeded them.
Small companies are likely to thrive with small, organic innovation. Because small companies are usually addressing a niche they can potentially grow that niche into its own market by broadening their novel product’s idea with incremental changes. Large companies can only defend their market share with incremental innovation. Any company worth billions of dollars has numerous competitors and no small product change will result in its dominance.
Instead, large companies can acquire brilliantly. And I’d argue that Google and EMC are modern day examples of this. EMC has been on an envious acquisition streak for a decade now. And its hard to imagine a time when YouTube, DoubleClick, and Android weren’t part of Google.
Does this mean that large companies are doomed to inorganic growth or incremental innovation? Obviously not. Apple has twice created new massive markets (smartphones and tablets). But we must admit that Apple and Amazon Web Services' market-creating innovations are rare. How would Oracle or Microsoft ever repeat their success?
First I’ll return to Paul Maritz’s comment about VMware strategy: he knew Microsoft was uncomfortable in new markets. But I suspect nearly every big company is uncomfortable new markets. New markets are uncharted waters and there be dragons there. Stockholders don’t want to lose ships to bold adventures.
Whatever is holding back large scale innovation is probably with us to stay. No blog article or barroom chatter is going to revolutionize corporate structures that have been molded over centuries of practice. But clearly the size of the organization is directly correlated to its risk aversion. And big ideas require risk tolerance.
I’ve heard that Cisco’s bold move into servers with UCS was allowed by creating an distinct organization within the company. It was logically separate and free to build unencumbered by the weight of their previous successes. And that worked. I’m not sure how frequently other companies replicate this “internal spin-off” process.
But instead I think we’re seeing an era where the line between innovation and acquisition is blurred. I’ll again cite The Hot Aisle’s podcast guest Scott Darling in the way EMC’s venture capital plays a part in the long term growth and survival of the company. With targeted investments and a loose connection to the startup through its board, some of the best parts of the investor company can pass to the start-up without weighing down the start-up’s growth and rate of innovation. Innovation is compartmentalized from the suffocating rules of its owners.
As a recent addition to the Nutanix team I think less about how EMC will survive than how we at Nutanix will. We’re years from having the paralyzing weight of EMC bureaucracy around our necks and decades from having its overflowing coffers to aggressively invest and acquire. But because the rate of innovation…the rate of creative destruction…is increasing we don’t have years to wait.
The solution was hinted at months ago by Nutanix SVP of Sales Sudheesh Nair:Nutanix must destroy itself. Rather it must burn its current version to the ground so that a healthier, better version can sprout. Yet it must ensure a controlled burn so the existing business funds and gracefully passes as the new one emerges.
Our executives showed the world at June’s .NEXT that we plan three acts of Nutanix growth. And it was unstated then but should not be ignored today that the later stages commoditize and kill the earlier ones. Act 1, our current business, was making storage invisible. Act 2 making the hypervisor invisible. And Act 3 making the cloud invisible. And surely there will be half a dozen vendors making top-quality hyper converged infrastructure by Act 3. Act 3 destroys Act 1.
But I’m not writing today to sell you on our vision. This meandering series is bringing me to my final thoughts: what does it mean to us? How will my plans this year evolve as the dunes shift beneath my feet? That brings me to my conclusion.
Part 4 of 4 to come.
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