How To Lose Your Company

From an article on "net-top" computers in today's New York Times:

"'We're sitting on the sidelines not because we're lazy. We're sitting on the sidelines because even if this category takes off, and we get our piece of the pie, it doesn't add up,' said Paul Moore, senior director of mobile product management for Fujitsu. 'It's a product that essentially has no margin.'"

No one can blame Fujitsu for wanting to stick with higher-margined traditional laptops. But you don't always get what you want. If this category of thin, light, cheap, energy-light computers built primarily to surf the Internet and use online applications takes off and begins to cut into sales of today's full-featured laptops, Fujitsu will lose its current laptop business and have nothing to replace it with.

You can't make displacement products disappear by sticking your head in the sand. You can't always maintain the margins you were used to. In fact, if you're in a line of business where you have "comfortably" high margins, you're in a line of business which is particularly susceptible to disruptive attack.

It Fujitsu really believes there is no market for this product, it is good business to avoid making it. But, if Fujitsu believes there is a market, then they need to figure out how to make their existing product more competitive or how to compete in this market and add enough value to earn a margin or how to disrupt the disruptors with innovation of their own (or get a law passed against their competitors but that's unlikely in this case).

Further down in the story the Times says:

"Intel is projecting that by 2011, the market for the netbooks will be 40 million units a year, which is why Intel is jumping in with low-powered chips that would be used in the netbooks and the net-tops… Intel executives think the market for low-cost PCs is too big to pass up, though it does raise a potential threat to more powerful and more profitable computing lines."

Microsoft, according to the story, is also a participant in this market:

"Microsoft has been a reluctant participant too. Even though it is no longer selling its Windows XP operating system software, it made an exception for makers of these low-cost laptops and desktops. Microsoft said it was responding to a groundswell of consumer interest in the low-cost machines, but some makers of those machines say Microsoft did so reluctantly because it did not want to lose market share to Linux."

Reluctance is OK ; sitting on the sideline sulking is not.

Years ago I tried to interest my then-employer AT&T in VoIP. To their credit, some people in the company believed AT&T should be a leader in this new category of voice service. But the argument that kept AT&T out of VoIP was "why should we participate in cratering the margins of a profitable business." It was somewhat a holdover from the monopoly days when AT&T's lack of participation in a technology might have slowed the spread of that technology. When my counter-argument "because it's going to happen anyway and we'll be better off leading rather than following" wasn't persuasive, I left to cofound a VoIP company secure in the belief that I wouldn't have to worry about competition from AT&T.

I have no idea whether net-top computers will succeed. But I do know that companies have to face disruptive competition squarely in order to survive.

Comments

[Damon Cali]

I was just thinking the same thing as mikepk - this looks like textbook innovator's dilemma. It will be fun to watch.

[mikepk]

Great example of the "Innovators Dilemma" at work, my single favorite business book. It is the natural path that companies take, moving their products up-market to higher margins, because it is the right thing to do from a business fundamentals standpoint. They're doing the right thing with regards to the bottom-line, ignoring the disruptive technologies, but will likely end up positioning themselves right out of business.