Should startups be afraid of industry incumbents? Are they dragons or dinosaurs? How defensive should you be?
A quick story: when I started Nanodome, everyone I asked – and I do mean everyone – told me:-
- Security buyers buy on brand, so however funky my technology I’d need to have a brand attached to it to sell any at all.
- Licensing (and specifically to one or more major players) was the only possible business model that would work for a small hardware startup
- I should be terrified of incumbents such as Pelco (who had then only just been acquired by Schneider Electric), Bosch, Siemens, Panasonic, Samsung, etc
However, what quickly became apparent to me was that none of this was particularly true. In Nanodome’s corner of the industry, buyers have long bought high-end branded product in the hope that these would have been (over)engineered for reliability – yet even in 2007 it was clear from talking to customers that this ‘brandness’ was breaking down. Licensing, too, doesn’t work how most people think – basically, ‘good ideas’ only tend to get licensed after they’ve started to eat into potential licensees’ market shares.
Yet the generic supply-side problems incumbents tend to have are (a) that they’ve got top-heavy divisional management mouths to feed based on a cash cow that’s rapidly going dog-like, and (b) that their products have already been incrementally optimized to within a few thou of their production sweet spot. Corporates tend to be reasonably good at optimization – that’s basically why they hire MBAs.
The security industry is perhaps a bit of an extreme example of all this, in that most of its manufacturers grew large and fat on the long security boom – margins were wide, quantities were decent, & there was room for pretty much everyone to make money. But since 2006/2007, competition from multiple fixed camera setups has heightened, market prices have dropped, and everyone can tell that there’s inevitably a commoditization phase for PTZs coming up (even if nobody can quite see how this is going to work).
What you need to think through as a startup manager is how incumbents are able to react when (as has clearly happened over the last few years) all the certainties of their business context change. Imagining the view from their managerial chair, to avoid having to close down an entire division, how do you think they should go about forming a new plan? Honestly, could they really reinvent their business?
This is the stage where academic business theorists like to talk about how you should ignore all your sunk costs when making decisions – basically, how decision-makers should strip any proposition down to the CapEx, overheads, margins and volumes going forward. However, the perhaps surprising thing is that most corporates aren’t nearly as cold-blooded as their detractors like to claim – in fact, many (if not most) have real problems “Reengineering the Corporation” (whatever Hammer and Champy claim), because this often involves awkward and unpopular activities – closing factories, laying people off, offshoring in unexpected and hard-to-manage ways, etc. No matter how bad the situation and how necessary the upheaval, senior managers will also have to invest a lot of political effort and board-level lobbying to put those changes into action – and this will almost always distract attention from the rest of their thousand daily tasks.
So this points to the real reason why startups exist – it is because corporates are often unable to make radical internal changes to their business except through after-the-event M&A. Startups get the opportunity to change the world not because corporations are technically unable to do the same thing, but because they are usually politically unable to follow such a demanding path. It is not the inhumanity of corporates that stops them, but their humanity.
From where I’m sitting, then, industry incumbents seem to be neither dinosaurs nor dragons. Rather, they are like elephants – big and powerful, with huge appetites, but with poor eyesight and all too often crashing around with their trunk tied in a knot. If you’re nimble and alert, they should be little danger to you!