Self-disrupt to Avoid Self-destruction

For sustained success in business of software, it is necessary to constantly anticipate next curve. Not only anticipate, but execute to make the jump to the next curve early on. But often, incumbents become victims to innovator's dilemma (book reference: Innovator's Dilemma) and fear to self-disrupt and in the process get self-destructed. They don't want to strangle their current roadmap that is bringing in revenue. And, surely, they don't want to upset Wall Street.

However, Apple is one of the organization that is self-disrupting in the space of consumer electronics. Apple's iPhone is a good example of self-disruption. Apple's iPhone is an early indicator of self-disruption of its very own product - iPod - that won Apple back its lost glory. iPhone will eventually replace iPod. This might not happen this year or next, but in future not far away from today.

For any organization, big or small, self-disruption should be a built in trait to maintain long term leadership in its business. They can do so in following ways:
1. By having next generation of themselves (a different business unit or a spin-off), whose sole responsibility is to attain leadership on the next curve. In doing so, they might and should take away revenues from their parent company who is still a leader on older curve. This way the parent company will lose its market share, but only to the next generation of itself.

2. Other approach to self-disruption is to acquire company(s) who are already on the next curve. Even though this seems to be dull and not-so-challenging approach as compared to #1, it is a practical one. Instead of placing bets and investment on next curve, its definitely better to shop-and-compare for proven companies who are on their way to become leaders on the next curve. Such an acquistion approach also works out well for software business ecosystem. Smaller startups can innovate at a greater velocity than bigger organizations. Bigger organizations, on other hand, get to shop-compare-buy and not risk their investments based on speculation of next curve. Also, after certain stage, smaller startups can flourish better under big banner organization by taking advantage of its branding, sales, marketing, customer support and other infrastructure.

Does Wall Street reward disruption? Not always.

Anshu Sharma's comment on my recent post led me to think whether Wall Street always rewards companies who lead disruption. I can cite two cases, both on either ends of spectrum.

Amazon is an example of how a company can be punished by Wall Street for trying something disruptive such as their webservice offering of S3, EC2, and Fulfillment by Amazon. Quoting article from businessweek.com:

All that has investors restless and many analysts throwing up their hands wondering if Bezos is merely flailing around for an alternative [S3, EC2] to his retail operation. Eleven of 27 analysts who follow the company have underperform or sell ratings on the stock--a stunning vote of no confidence.

Investors want consistent profit growth and a company investing in disruptive offering (like Amazon investing in S3 and EC2) eats away the profits in the short run. This doesn't gel well with investors and punishment to stock price is eminent.

Apple, on other hand, with its iPod and iTunes has been successful in disrupting music industry's business model (selling individual song as against to album), while still keeping investor's confidence in the company resulting in a healthy stock price. It is successfully changing its strategy from a computer company to consumer electronics company.

On Wall St., it seems like simplicity of disruption matters. If disruption is simple enough, it helps investors (and masses in general) understand and appreciate its significance. Even if disruption is not simple enough, its complexity has to be hidden behind a simple concept that masses can relate to. It is easier to appreciate the impact of Apple's iPod+iTunes than Amazon's S3+EC2. Though, in my opinion, both are equally disruptive in their respective segment. However, both seems to be getting different treatment on Wall Street.

Amazon OS: The operating system of e-commerce

Amazon with its webservice offering has morphed itself into the operating system (OS) for e-commerce retailer. A computer's operating system provides core infrastructure such as process and memory management, controlling input/output devices, security, and networking. As an application developer, you can simply assume this OS functionality to be available to you. Similarly, as a e-commerce retail website developer, you can expect Amazon to provide core infrastructure such as remote shopping cart, detailed information about products, warehouse management to store, ship, handle returns of the products (and even though non-tangible, peace of mind of Amazon branding). You only have to concentrate on value addition on top of core functionality supplied by Amazon, and earn affiliation dollars.

Its a gutsy decision on part of Amazon to open its doors to proprietary data (product description, customer feedback) via webservice that took years to collect. Amazon has been exemplary in providing such a webservice offering. This will surely act as a catalyst for others and will lead them to follow the same path as Amazon, in turn, leading us all to interesting times ahead.

Amazon's Simple Storage Service (S3) and Elastic Compute Cloud (EC2) shows yet another aspect of innovation at Amazon lead by Jeff Bezos. These would have been an obvious offering from some data storage company (it makes me wonder as to why none of the data storage company offered this). But this coming from Amazon shows Jeff's multi-faceted vision, and the fact that companies like Amazon do not fear sailing uncharted waters.

With its webservice, S3, and EC2 offerings, Amazon has truly become the operating system of e-commerce.