Startup 123: Another Reason Startups Kick Corporate Butt

As a previous post discussed, some of the reasons startups win are people, freedom and failure.  In addition to these cultural differences, there are some inherent challenges for “entrenched” companies which startups often exploit to ensure their success.  One of the challenges (among others…) is that entrenched companies have a set of assumptions that become out of date and incorrect.  That often leads them to confuse the product they provide with the value customers perceive. And as a result, they become blinded by their existing business model success until it’s too late.

It’s 2am, do you know what business you are in?
What does it mean to confuse your product with customer value?  Basically, companies assume the product or service they currently manufacture or provide is what customers want.  However, customers don’t want products perse, they want a solution to a problem.  And when a better solution in the form of a different product or service becomes available, and I am not talking about a slightly better solution, but an order of magnitude change in benefit of a new solution, they are often ignored or dismissed by the entrenched players because they assume their successful business will continue based on the product they currently offer.  This idea of assumptions about a product and business is similar to many that Peter Drucker refers to as the theory of a business.  (You can buy the HBR article The Theory of the Business at Amazon)

This is not a recent business phenomenon.  In 1900, there were 7,500 companies in the US selling horse drawn carriages.  Those companies sold 1,500,000 carriages for a total of $121 million in sales.  Does not sound like much does it?  Only .6% of US GDP.  Miniscule.  But what if I told you that in 2007 new car sales were in the range of 1-2% of GDP?  Horse carriages were actually a pretty big business.

So why does this happen?
It’s simple – the horse drawn carriage companies assumed they were in the business of selling horse drawn carriages and probably even dismissed the idea of the automobile – until it was too late.  In reality, they were in the transportation business and their assumptions of what that meant and what were their core competencies were no longer valid.  It’s a common problem for any entrenched company.

Of the 7,500 carriage makers, there were only two that made the shift to providing cars – Studebaker, who was making six carriages a minute in 1880, and Flint Wagon Works, who bought a company called Buick – which was a failing startup at the time.

(As an aside, I learned that Studebaker’s first two years of production were actually electric cars and Buick is failing again -  Interesting?  Yes, but I digress and you can read more about my thoughts on the car companies here)

Transportation was already a big business but the assumptions around the technology available to solve the problem changed.  This is a classic reason why entrenched companies fail and startups succeed.

This is the challenge we see today for the newspaper industry. They built their business around, well, newspapers – the printing and distribution of newspaper.  Think about the slogan for the NY Times “All The News That’s Fit To Print.” Printing is in their company mission.  It’s part of their DNA.  Yet, the internet has changed all that.  Their value is providing news.  And in the case of newspapers, not only is the internet an order of magnitude better distribution model than printing (real time, no geographic limitations, etc.), but it also turns out to be an order of magnitude less expensive which which is another assumption that has radically changed their business and that of many others.

Companies need to know their true business and as changes occur, keep checking their assumptions on what they provide to solve a problem or even if the problem continues to exist.  The value is not necessarily the product they sell as was the case for customers of horse drawn carriages or the way in which people consume news today.

Lesson for startups
If you are a startup and you can find a a solution which radically changes the economics (and assumptions!) around an existing problem, then you have a great chance of succeeding because it will take awhile for the entrenched players to realize their assumptions are no longer valid.  Your biggest threat from the entrenched players will most likely be they acquire one of your competitors.  It’s not likely that the entrenched player will act fast enough to compete directly with you.  And that’s the bar to hold yourself to, radical change to the assumptions of a business, because the flip side to this is that if your new assumptions are only a little better, then you’re unlikely to succeed.

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Related posts and references
- Previous posts – Why Startup Innovation Kicks Corporate Booty and What if GM was a Startup?
- The Carriage Trade By Thomas A. Kinney
- Various data sources: http://www.measuringworth.org/datasets/usgdp/result.php# http://www.bea.gov/index.htm BTW, my new car sales as a % of GDP estimate excludes trucks