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The 3rd Foothold

 

 

Embracing & Extending

Christensen's Theory of Disruption

in the

XaaS Economy

The term “disruptive innovation” is misleading when it is used to refer to a product or service at one fixed point, rather than to the evolution of that product or service over time. The first minicomputers were disruptive not merely because they were low-end upstarts when they appeared on the scene, nor because they were later heralded as superior to mainframes in many markets; they were disruptive by virtue of the path they followed from the fringe to the mainstream (JB emphasis).  Clayton M. Christensen, Michael E. Raynor, Rory McDonald from December 2015 Harvard Business Review

Christensen's "Two Footholds"

In the December 2015 HBR, Clayton Christensen (and co-authors above) published an update and clarification of his theory of disruptive innovation.

One of the critical elements of disruption theory that Christensen and associates elaborate on in detail is what they see as the 2 points of origin--or strategic footholds--through which an innovator initiates the process of disruption.

Here's how the authors describe the two footholds.

There is no doubt that numerous instances of disruption do occur in both low end and greenfield new markets.

But in the spirit of embracing and extending Christensen's core thinking, I would argue that the history of the tech industry illustrates the existence of a 3rd foothold that provides a "path...followed from the fringe to the mainstream"--when an innovator's product or service is embedded inside the app, cloud, network, system, solution, or digital experience of another player.

I would further argue that this 3rd foothold--let's call it an "ingredient" foothold--can provide a starting point--and path--for disruption across its whole process of evolution, whether or not that ingredient is embedded inside the "sustaining innovations" of incumbents and/or their responses to disruptive challengers--or inside the products and services of new innovators seeking to disrupt incumbents.

Microsoft as 3rd Foothold Disrupter

The young Microsoft is an example of a 3rd foothold disrupter.

At the time it selected Microsoft DOS as the operating system for its original PC, IBM bestowed upon Microsoft an ingredient foothold inside its product--and ultimately--inside its enterprise customer and partner ecosystem.

I see the original IBM PC as a tactical response by IBM to a disruptive challenger, in this case Apple--who at the time was an originator of a new market (2nd foothold) for PCs. From the standpoint of IBM, the original PC was what Christensen would characterize as a "sustaining innovation". Why do I say this?

The PC itself came out of a group called IBM Entry Systems (as in data entry terminals). IBM's original five year forecast for the PC was an anemic 250,000 units over 5 years. The PC was essentially a defensive move by IBM to provide 'smart' terminals to its enterprise customers while blocking Apple adoption inside its customer base, and simultaneously enabling  IBM to enter computer retail channels. In a company that at the time made everything itself, the IBM PC was packed with non-IBM technology. The only IBM-made 'ingredient' was the keyboard.

What was most innovative about Microsoft's strategic approach to providing the OS for the IBM PC was its business model. Microsoft retained the rights to license the OS to other "PC compatible" suppliers. So what happened?

The IBM PC--this defense-driven sustaining innovation seen as a response to Apple's disruption--gave rise to a new wave of disruption against IBM from what came to be known as IBM PC clones.

From Compaq to Dell (aka PCs Limited) to hundreds of 'No Name' system builders in what IDC called 'the all others category'---IBM lost the market it created to the powerful PC clone ingredient suppliers. Relatively quickly, the IBM PC architecture became the WinTel architecture.

To summarize, Microsoft's path to disruption began in the 3rd foothold--the ingredient foothold. The Microsoft "path...from the fringe to the mainstream" went through incumbent IBM's defensive response to a disruptive challenger, Apple. It then propagated through a new wave of price/value disruptors represented by the WinTel cloners who went on to eat IBM's lunch, leading ultimately to its exit from the PC market it created.

So why is Microsoft's "path" relevant today?

The XaaS Economy as 3rd Foothold Landscape

Fueled by distributed "new stack" architectures, APIs, plug & play web services and microservices, white label platforms, open source communities, and cloud IaaS and PaaS marketplace add-ons, an "anything as a service" or XaaS economy has emerged in tech.

Within this XaaS economy, both startup innovators and enterprises undergoing digital transformation are presented with multiple partnering modalities to engage in market disruption via the 3rd or ingredient foothold taken by Microsoft and others.

Let's look at the path from the fringe to the mainstream taken by the leading player in the cloud infrastructure market, Amazon Web Services (AWS).

When Amazon initiated its AWS journey, it was not even in the neighborhood of being a disruptive startup. The company was a large e-commerce incumbent that created AWS initially as a sustaining innovation inside Amazon-- exposing disparate e-commerce web services as APIs its internal IT groups could consume in a more agile fashion inside Amazon.

As it productized (under Jeff Bezos mandate) and then "externalized" this sustaining innovation, its growth path as a foundation ingredient inside other companies apps and web services came into focus.

The AWS cloud became a core IT ingredient inside startups like Zynga, Pinterest, AirBnB, Spotify, and Slack. And as important as the AWS platform was to these startups, the benefits of its "platformula" (below) have become even more important--enabling them to run lean and focus on their own code and growth programs--knowing a multi-billion dollar ecommerce superpower lived at the foundation of their stack.

One could reasonably argue that AWS is really just an example of the compounding effect of disruption footholds 1 and 2, i.e. that "cloud" was a new market, and that the AWS pay for use pricing model allowed these startups to massively reduce their IT infrastructure spend, thereby freeing up capital for other uses. In other words it's just about Foothold 1 + Foothold 2 interoperating. This is definitely the case relative to AWS as a disrupter of the "IT old guard" as Andy Jassy refers to his competitors.

But the fact that AWS is consumed as an ingredient inside other apps--apps from startups that consistently think of it as a 'no brainer' to use the same infrastructure Amazon uses for its commerce business--goes to the issue raised at the top of this post by Christensen and colleagues. What is the "path...from the fringe to the mainstream". Or to invoke Brian Arthur's early work, what specific "path dependence" led to the rise of AWS "increasing returns" as the breakout cloud leader.

The AWS "path ...from the fringe to the mainstream" is highly relevant to other XaaS ingredient suppliers. Today's XaaS ingredient landscape is big and getting bigger. White label point cloud categories have emerged not simply in what we would call digital infrastructure, but in business process functionality including marketplace as a service, subscription billing as a service, and more.

And increasingly, new XaaS services and microservices are creating a composable enterprise IT model in which Chief Information Officers are morphing into Chief Integration Officers, snapping together plug/play cloud and on-premise services into new digital experiences.

In the December HBR piece, Christensen and colleagues take Silicon Valley to task for the misapplication of disruption theory, citing Uber as an example that falls outside the boundaries of the 2 footholds framework. On one level I'm in violent agreement with them--that in fact many Silicon Valley players use the term disruption, and/or the tagline "disrupt or be disrupted" to describe any innovation, or accelerator-born startup claiming innovation, or competing with an incumbent.

But on another level, Uber could be classified as a 3rd foothold disrupter. If not via its ride service then most certainly in its role as a digital ingredient inside other company's apps via the Uber API.

Final Thoughts: How 3rd Foothold Startups Initiate the Process of Disruption

Let's sum up. In Christensen's theory, disruption is initiated in low end markets and new, aka greenfield markets.

But in the tech industry, we have seen and continue to see disruption carried out by "ingredient" players from inside products--i.e. products from both incumbents pursuing sustaining innovation at the high end of markets, as well as new entrants at the low end of markets or in entirely new markets.

I describe this inside-out trajectory or "path...from the fringe to the mainstream" as "3rd foothold" disruption and refer to both the young Microsoft and the mature Amazon.com as instances of this form of disruption. This kind of ingredient disruption is also different than what Christensen in a recent interview referred to as "efficiency disruption".

Fast forward to now. Today's XaaS (anything as a service) economy is fast becoming an ideal landscape for 3rd foothold disruption. Marc Andreessen's much quoted observation that "Software is eating the world" encapsulates in 5 words the idea that intelligent "ingredients" inside both incumbents offerings and new startups have power, tremendous power.

For XaaS economy startups or established incumbent seeking to pursue 3rd foothold disruption, three things are important to consider at the start.

1. Partner Viable Products: While the venture capital abundance of the recent past has driven XaaS startups in the direction of direct-to-user minimum viable products, 3rd foothold disrupters begin the path from the fringe to the mainstream elsewhere. They think "Partner First" and build offerings that are capable of being plugged into established incumbent roadmaps--incumbents with a base of customers, or plugged into new, well-funded startups. This is a higher bar but the results from this course of action are compelling. Developer focused innovator New Relic is a good role model for the power of PVP thinking in the "as a service" economy.

2. XaaS Distribution Strategy: While it is currently fashionable for SaaS and app startups to focus on downstream user growth hacking, in the recombinant XaaS economy there are multiple modalities available to symbiotically engage partners "@ the core" of their offerings--and at a much lower sales and marketing burn rate. Here's a few "Partner @ the Core" modalities to get started. And don't forget to build account based marketing (ABM) programs to amplify the partner "DNA inheritance" you receive from your earliest partners.

3. Platformula: Platforms are great but platformulas are even better. Here's what I mean. Sometimes your product is literally the 'ticket to the game' as Microsoft's OS was for PC OEMs, or as AWS has become for tens of thousands of XaaS startups. And sometimes your product is a natural value-add for multiple vertical markets, as we have seen with the pivot by Box from its beginnings as a downstream user-focused offering to its evolving emphasis on industry solutions and the partner/developer focused Box platform. In any case, your success is predicated on both the role and relevance your product has as a must-have ingredient, and the economic incentives (think Apple's 70/30 revenue share on iPhone apps) you build around it to accelerate that must-have status. Each platformula is unique, as is the "path...from the fringe to the mainstream" for 3rd foothold players.

Christensen's (and colleagues) piece in the December HBR is a must read for strategic product marketers in both XaaS economy startups and established enterprises undergoing digital transformation.

Think of it as an open source strategy platform in its own right and contribute to its development--while building on its framework. And for those of us working in Silicon Valley, Christensen's message is clear. "Disruption" is not a branding tagline.

It's a living process.

Joseph Bentzel is the senior consultant at Platformula1. Contact him at Joe@platformulagroup.com

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