The Innovate-Dominate Imperative
There are two paths to long-term survival for today's enterprise software companies. The problem is that very few companies are heading in the right direction.
By Ray Lane, Kleiner Perkins Caufield Byers
Jan. 09, 2006
2006 is a year of challenge. Software companies are facing a confluence of trends which are changing the very nature of the industry. New technologies, new business models and industry consolidation are combining to create a new breed of software provider.
To their credit, few software executives are sitting on their hands, hoping things will return to the "good old days." Many are experimenting with business model changes and new offerings. But how many companies have a solid plan to deal with death-wielding market forces such as open source, megavendor offerings and offshoring? In my estimation, very few.
There is a new kind of software Darwinism going on. The harsh reality is that over the next 5 to 10 years, most of today's software providers will not fare very well. The only way for enterprise software suppliers to survive this wave of industry evolution is to innovate and/or dominate.
And 2006 is the year to get started.
This day-late-dollar-short mentality is not new to the software industry. When other technology or market shifts have occurred, the way in which existing players respond has typically determined the new order.
When I was at Oracle in the early-1990s and client-server computing was all the rage, I had the opportunity to meet with several software industry CEOs. I was surprised that so many were still debating their strategy for moving to client-server. It was way too late! At Oracle, we had been challenged by an aggressive startup called Sybase that motivated us to move fast. Most suppliers that didn't move quickly became irrelevant, and didn't have the critical mass to take on the next technology shift - the Internet. Few are around today.
The Innovate/Dominate Matrix
The current challenges in the enterprise software market are daunting relative to the 1990s. Now, a premium must be placed on unwavering focus, and that focus must be on "innovating" and/or "dominating."
Relating the scale of companies to how they innovate (see chart) allows us to understand the bifurcation beginning in the industry. Winners will be the few that can dominate a category or execute on fundamental, paradigm-changing innovation.
The top right corner of the matrix will be held by those who dominate their sectors, or the industry overall - the Microsofts, Oracles, SAPs, Symantecs. Their vast installed base and seemingly infinite resources to "continuously" innovate - or buy innovation - will allow them to continue in business for a long time.
At the other end of the spectrum are the startups. There are as few of these as there are category leaders. Most startups are really doing "continuous" innovation but, interestingly, a well-designed startup doing fundamental innovation in this evolving market can have the same chance of survival as your average "megavendor." Why? Think of building an airplane. If you're starting out with a steam train and you need to reengineer that product into an airplane, it will take far longer than if you just set out to build an airplane from scratch. Startups can leverage the latest technologies and business models without concern for an installed base or Wall Street expectations.
The other corners of the matrix are less attractive. In the bottom right corner sits the classic, "Innovator's Dilemma." Popularized by the Clayton M. Christensen book in the late 1990s, this notion encompasses successful companies who innovated at one time and then slowed down. They now have something to protect. No one could expect this model to work in the software industry today - but it is surprising how many companies still try to make this work.
In the top left corner, there are many startups flailing about. Their innovation is essentially incremental to what leaders offer, taking advantage of time; but they rarely grow to scale because customers prefer incremental innovation from category leaders and they are willing to wait for it.
Of course the 500-pound gorilla sits smack in the center of this matrix. This "No Man's Land" will be the primary challenge for many software companies who cannot gain a dominant position in their market, or cannot innovate enough for customers to want to take a risk on them. Unfortunately, this is where many of the small and mid-sized enterprise software companies live today.
To their credit, few software executives are sitting on their hands, hoping things will return to the "good old days." Many are experimenting with business model changes and new offerings. But how many companies have a solid plan to deal with death-wielding market forces such as open source, megavendor offerings and offshoring? In my estimation, very few.
There is a new kind of software Darwinism going on. The harsh reality is that over the next 5 to 10 years, most of today's software providers will not fare very well. The only way for enterprise software suppliers to survive this wave of industry evolution is to innovate and/or dominate.
And 2006 is the year to get started.
This day-late-dollar-short mentality is not new to the software industry. When other technology or market shifts have occurred, the way in which existing players respond has typically determined the new order.
When I was at Oracle in the early-1990s and client-server computing was all the rage, I had the opportunity to meet with several software industry CEOs. I was surprised that so many were still debating their strategy for moving to client-server. It was way too late! At Oracle, we had been challenged by an aggressive startup called Sybase that motivated us to move fast. Most suppliers that didn't move quickly became irrelevant, and didn't have the critical mass to take on the next technology shift - the Internet. Few are around today.
The Innovate/Dominate Matrix
The current challenges in the enterprise software market are daunting relative to the 1990s. Now, a premium must be placed on unwavering focus, and that focus must be on "innovating" and/or "dominating."
Relating the scale of companies to how they innovate (see chart) allows us to understand the bifurcation beginning in the industry. Winners will be the few that can dominate a category or execute on fundamental, paradigm-changing innovation.
The top right corner of the matrix will be held by those who dominate their sectors, or the industry overall - the Microsofts, Oracles, SAPs, Symantecs. Their vast installed base and seemingly infinite resources to "continuously" innovate - or buy innovation - will allow them to continue in business for a long time.
At the other end of the spectrum are the startups. There are as few of these as there are category leaders. Most startups are really doing "continuous" innovation but, interestingly, a well-designed startup doing fundamental innovation in this evolving market can have the same chance of survival as your average "megavendor." Why? Think of building an airplane. If you're starting out with a steam train and you need to reengineer that product into an airplane, it will take far longer than if you just set out to build an airplane from scratch. Startups can leverage the latest technologies and business models without concern for an installed base or Wall Street expectations.
The other corners of the matrix are less attractive. In the bottom right corner sits the classic, "Innovator's Dilemma." Popularized by the Clayton M. Christensen book in the late 1990s, this notion encompasses successful companies who innovated at one time and then slowed down. They now have something to protect. No one could expect this model to work in the software industry today - but it is surprising how many companies still try to make this work.
In the top left corner, there are many startups flailing about. Their innovation is essentially incremental to what leaders offer, taking advantage of time; but they rarely grow to scale because customers prefer incremental innovation from category leaders and they are willing to wait for it.
Of course the 500-pound gorilla sits smack in the center of this matrix. This "No Man's Land" will be the primary challenge for many software companies who cannot gain a dominant position in their market, or cannot innovate enough for customers to want to take a risk on them. Unfortunately, this is where many of the small and mid-sized enterprise software companies live today.
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