Early on in the competitive life cycle, we have what we might even refer to as the Era of Ferment. This is the idea that early on things are largely exploratory. Innovation focuses on different product features and different underlying technology that might eventually become the dominant form within the industry. It's at this period we often see small entrepreneurial firms entering the industry, in many cases pioneering the industry. And to the extent that profits are made, they're often made more through differentiation and niche placement, than they are through, for example, a low-cost structure within the industry.
Now over time what we typically see, is a dominant design start to emerge. We see, not necessarily one technology, but in many cases of a limited number of technologies emerge, that become the dominant form factor we see within the industry. Now, as we see this occur, innovation begins to shift from innovation and experimentation around different form factors to things like manufacturing, processing, delivery, service. And this is where a shakeout typically occurs, where we might be left with just a few large efficient firms. And interestingly enough, many of the pioneering firms might actually wither away. Think again about digital music players and the Rio but Sony outplayed the whole market with their music players.
So it's not guaranteed that being the first mover or the first entrant into this new technology or new industry is going to guarantee long-term success.
So, when we think about this process, we eventually want to think about the renewal of this process through a new disruption. So once we reach that dominant design and the market matures, this actually creates the seeds for future disruption to occur. That disruption might be exogenous, it might be driven by a technology change, what we sometimes refer to as technology push. It could also be driven by the market itself, as consumer preferences shift, what we often call demand-pull.
And it's often the case that there are some potentially, even physical limits to how well the technology can improve. So let's turn our attention now again to the automobile example. We are in the midst of another disruption in the industry driven by electric vehicles and autonomous vehicles. This after nearly 100 years of stability within the industry. Why is this occurring now? Well, we can speculate. One is underlying advances in the technology, the technology push concept here. Some of it is driven by digital transformation itself, making these technologies more viable. Some of it also is being driven by consumer demand.
For example, consumers demanding low emissions vehicles, leading to the prevalence of electric vehicles in the market. We see, obviously, a lot of incumbent firms competing and offering vehicles along these lines. But we also see new entrants, like Tesla, making significant inroads. In fact, by 2017, Tesla actually had a higher market capitalization than General Motors. Meaning basically, that the market thinks that Tesla will be a larger, more significant player in the future. We see companies like Volvo, an established player in the market, pledged to go all-electric by 2020 but they have partially done that now. So once again, we don't know how this will exactly playoff, but we have a pretty good idea. We'll probably see entry into the industry. We'll probably see competing designs here in terms of what the dominant design technology might look like. And we'll probably eventually see a shakeout and a coalescing around a common form factor for the industry in the somewhat near future. So again, diving into the details of the competitive lifecycle gives us a greater understanding of how the competition unfolds when we have these disruptions taking place.
The Liability of Incumbency
So let's start with the question of why do incumbent firms often fail when faced with these disruptions?
The first argument is very simple, there is no better position when new entrants when a new innovation or new technology comes along. In essence, the innovation renders existing capabilities valueless, either technologically, organizationally, or market-wise.
Second, they could actually be in a worse position than other entrants in the industry. Incumbent firms might actually fail to see the value of the new innovations and have a difficult time adapting. This is what is sometimes referred to as core rigidities. The idea being, what made you successful in the past, what may have been your core capability, actually becomes a core rigidity as the industry shifts, because you are unwilling to make the change.
The third thing we might want to think about is that, in some cases, firms might simply select not to change. Maybe there's a fundamental trade-off between the long-run competencies they need and the short-term advantages that they have. Maybe they're worried about cannibalizing their existing products.
Economics of Innovations
Exploitation refers to investing in research and development to incrementally improve existing products and services.
Exploration on the other hand refers to investments to try to advance the technology significantly, bring about these disruptions that we've been talking about.
And so a critical question for a lot of organizations is how much effort to spend on exploitation versus how much effort to spend on exploration. It's a balancing act for many companies.
You could imagine if you spend too much time just exploiting existing technology you might miss a disruption and therefore find yourself disadvantage as the market evolves. On the other hand, if you spend too much on exploration, you might not be able to be profitable in the existing world and then you'll never survive the new technologies you're trying to advance.
I hope you enjoy reading it!