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The Goliath Advantage

2016 February 28
by Greg Satell
Goliath

In David and Goliath, bestselling author Malcolm Gladwell explains how small upstarts often have surprising advantages over larger, more powerful opponents. “Giants are not what we think they are,” he writes, “and that often makes us fail to appreciate less conventional strategies that may be superior.”

That’s certainly true in business. Large enterprises must serve the present. Things are expected of them. They have to keep customers, employees and other stakeholders happy. These obligations often weigh them down and make them vulnerable to disruptive innovation.

Yet that shouldn’t blind us to the fact that startups make for such enticing stories precisely because they are so unlikely. Most fail. And when they succeed, they become Goliaths themselves and face the same challenges as incumbents do. So instead of glorifying startups, perhaps we should take a closer look at what it takes to stay on top once you get there.

A Global Market For 5 Computers?

An oft repeated Internet meme shows Thomas Watson, the icon of IBM, declaring that the total global demand for computers would only amount to five units. It’s become a common theme: the manager of an old-line business so clueless about his own industry that he dismisses an all-important emerging technology out of hand.

What makes the quote even more bewildering is that IBM was, in fact, an early mover in computer technology and dominated the industry for decades. In fact, Kevin Maney points out in his biography of Watson that there’s no evidence that the quote is anything more than an urban myth.

The truth is that IBM’s dominance of the computer industry in the 1950’s began two decades before, in the early 1930’s when in the depths of the depression, Watson invested in a research division. Although nobody was thinking about computers then, Watson knew that technological advancement would be key to his company’s future success.

It was to be a decision with far reaching consequences. IBM Research would go on to achieve a number of breakthroughs, including high temperature superconductivity, the SABRE travel reservation system and, most recently, cognitive computing. IBM’s ability to think in terms of generational change is what has allowed it to innovate and stay relevant for a century.

There’s a substantial difference between hitting on the next big thing and developing it consistently, generation after generation.

Why Blockbuster Really Failed

Blockbuster Video is a cautionary tale. A dominant industry leader, when faced with an agile young upstart, fails to adapt, loses relevance and eventually disappears altogether. When people think of Blockbuster today, they don’t remember the innovative firm that revolutionized its industry, but of the dangers of corporate inertia.

The real story, however, is quite a bit different. Actually, the company was all too aware of the danger Netflix represented. Its CEO, John Antioco, devised a strategy called Total Access that allowed customers to use the Web and retail stores interchangeably. It was an offer Netflix couldn’t match and Blockbuster’s online membership doubled in six weeks.

Yet it was all for naught. Antioco’s plan was met with fierce resistance from franchisees who were suspicious of the changes and from investors who balked at its cost. When Antioco got into a salary dispute with investor Carl Icahn, he was summarily fired. A new CEO was brought in who rolled back the changes and, within a few years, Blockbuster filed for bankruptcy.

So that’s why Blockbuster really failed. Not due to an incompetent corporate bureaucracy, but because of an activist investor and a network of small business owners—the franchisees—who refused to invest in the future.

How Microsoft Stayed On Top

When people think of Microsoft, most think of the once dominant company that lost its luster. After riding the PC wave to become the world’s most valuable company it found itself embroiled in an antitrust suit, its founder Bill Gates retired and it foolishly misjudged the importance of smartphones. Before you knew it, Microsoft went from paragon to punchline.

Yet through it all, Microsoft has remained a very profitable business, with excellent margins, that continues to grow. While it’s true that the company doesn’t doesn’t create the same kind of excitement that Apple does, it has if anything, become even more embedded into enterprises over the years and has used those relationships to create entirely new businesses.

What’s driven Microsoft’s continued success—with a $400 billion market cap, it’s still the third most valuable company in the world—is its commitment to invest in the future . That’s what allows it to develop new products like Azure and the HoloLens that, while making up a small portion of its revenue today, have the potential to make a big impact down the road.

In other words, Microsoft remains a large, relatively slow moving enterprise, but if you’re competing for the long term—the company has been in business for nearly half a century and never had an unprofitable year—it’s better to be consistent than fast.

Leveraging Advantage

Far too often, corporate executives fall prey to the cult of startups. Sure, a smart young company with a new bold new idea is exciting and glamourous, but success takes a lot of luck. Ambition, skill and bravado are never enough. Once you make it, you end up having many of the same problems of those corporate behemoths that you used to condemn.

It’s true that small, agile firms can move fast, but larger enterprises have the luxury of going slow. They have loyal customers and an abundance of resources. They can see past the next hot trend and invest for the long term. The next truly big thing never emerges whole from a flash of insight or a brainstorming meeting. It takes years of painstaking work.

IBM and Microsoft are unusual in that they both invest in basic research. That allows them to explore horizons 5, 10 and 20 years out. It’s also why both are thriving concerns even today, long after their initial markets have declined. Blockbuster’s management found a way to make retail stores, which many assumed to be a liability, into a valuable asset.

Established enterprises don’t get anywhere by wishing they could operate like startups. The key to success in any business is leveraging the assets you do have instead of whining about the ones you don’t.

– Greg

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