If you watch HBO’s Silicon Valley, then you’re already familiar with the concept of “reverse-leveling”—which is what happens when large, well-established companies scramble to create new products to compete against “disruptive” newcomers.
For those not familiar, the show chronicles Richard Hendricks’ uphill battle to become CEO of his own startup. Hendricks’ music app, Pied Piper, receives funding that allows him to leave his job as a programmer at a giant tech corporation named Hooli (made to resemble Google). Once Hooli’s CEO gets wind of Hendricks’ data compression algorithm, he sets up a new division of the company to reverse engineer Pied Piper’s algorithm and develop a similar product, called Nucleus.
While the TV show is in every way a hyperbole of actual tech startup life, much of the drama rings true. The companies are unevenly matched as they race to be first to bring their products to market, but certainly, Pied Piper’s technology is made more valuable as a direct result of Hooli’s interest in it.
Warning to the big guys: don’t slack off
In real life, the Pied Piper’s are shocking the Hooli’s of the world out of their “business apathy” and back into business. Familiar to us all, Uber has challenged large, long-standing yellow cab companies to clean up their cars and automate their processes. Dozens of online subscription services are giving big box stores a run for their money. And in B2B, companies like Salesforce, whose sales CRM is deeply embedded into the business landscape, are buying and developing products to compete in other spaces, like customer service, against companies like Zendesk. Even the big boys—the really big boys—have come out to play. In November 2016, Microsoft introduced Microsoft Teams to compete with people-and-project collaboration tool, Slack. Until then, Microsoft was not necessarily on Slack’s radar as a competitor. Yet the inverse must have been true.
In real life, the Pied Piper’s are shocking the Hooli’s of the world out of their “business apathy” and back into business.
A real-time, collaborative chat tool, aimed at boosting team productivity, was a gap in the Office 365 suite—one that is otherwise well-addressed in the overall market by Slack, whose product is used by 28 of Fortune 100 companies. Feature-by-feature, the products are comparable, leading the media to call Teams Microsoft’s “answer” to Slack. At best, Teams seemed less a knock-off, and more a similar product for a different market. That is, until Slack released Slack for Enterprise this January.
Surely Microsoft’s goal is to ensure that their vast customer base of Office users remain in-suite, but the cadence of development between the two companies suggests that Slack has pushed Microsoft into more innovative territory and that Microsoft has challenged Slack, in turn, to up-level their offerings.
Google the demise of Google+
But does it always work? If we look to Google+, history suggests that it’s tough for a big company, with many lines of business, to take on a smaller, laser-focused startup—especially one that already has traction in the market. By 2010, Google had tried out several different social networking sites (I confess, I am old enough to remember Orkut), but nothing caught on. Still relatively new, Facebook was blowing its competition out of the water. Google’s answer was to jump back on the bandwagon and invest heavily in Google+.
According to Google insiders, Google+ was both late to the market and too similar to Facebook to compete. They had attempted to fill a gap in their own product offerings instead of a gap in the market, and there was little to entice Facebook users to move.
Today Google+ is just barely alive and kicking. As Seth Fiegerman wrote in Mashable, “The slow demise of Google+ sheds light on how a large technology company tries and often fails to innovate when it feels threatened.” Google’s failure might also be the result of “stack fallacy”, which causes big companies to be overconfident when they take on a product outside of their wheelhouse. Google is many great things, but is not a social media company.
Is “business apathy” to blame?
Evidence suggests that Google executives did feel personally threatened, as Facebook was actively poaching many Google employees. But oftentimes, it seems the incumbents merely want a slice of the pie. They see the value in the new technology—and the massive potential for financial gain—and they’re solvent enough to gamble on a competitive product.
In a move that seems to yield better results, many incumbent companies will buy the competition instead of building a new product. For example, in 2006, Google bought YouTube “to seize a starring role in the online video revolution.” The year prior, Yahoo purchased Flickr, during the early days of photo-sharing.
In both cases, the two search giants were lagging behind in specific technology trends. Were they just too big to innovate, handicapped by the complexity of structural and procedural change? Or is it that they suffered from apathy and lack of vision?
Today’s marketplace, crowded by “unicorns” and “disruptors”, seems to favor the agility of a small company. And most “disruptive” businesses emerge precisely because they recognize a specific need in the marketplace and work to eliminate existing customer pain points. There is a clear and palpable commitment to delivering exactly what customers want—and they are agile enough to quickly adapt and respond to customer feedback.
There is a sense of empathy inherent in this process—both in recognizing the initial need for a product, and then in the execution—everything from designing the customer journey to choosing the backend tools. “Through 2020, businesses that deploy CRM technology in such a way that it reflects empathy toward the customer are three times more likely to fend off a digital disrupter,” says a recent report by Gartner.
Without empathy and a close connection to your customer, it’s hard for any company to know what to build and why they should build it. Steve Faktor, former innovation and strategy executive at American Express, Citi, and MasterCard, cites “R&D-linquency” as a reason that big companies put themselves at risk for disruption. Faktor claims that research and development has “flatlined” in many industries, and the incumbent’s punishment is “paying top-shelf prices—retroactively—to buy what they should have made.”
Without empathy and a close connection to your customer, it’s hard for any company to know what to build and why they should build it.
Basically, at the point you can’t interrupt a well-oiled machine for a good fine-tuning, or to produce something new, it becomes a liability.
Trending in 2017: adoption of the startup mindset
It’s hard to say whether 2017 will be the year we see more reverse-leveling, or whether it’s even possible for an incumbent like Microsoft to successfully derail a disrupter like Slack—which it claims it’s not trying to do. To remain competitive, however, big companies may need to begin looking to companies like Slack, Facebook, Uber, and Airbnb for inspiration.
Agile startups are using modern toolsets and building corporate cultures based around transparency and bold thinking (and even crazy ideas like running as a holacracy). They dare, in other words, to be different.
The heads of big businesses have noticed. According to The Kauffman Foundation’s Public Dialogue on Entrepreneurship, large corporations are looking to startups for “dynamic thinking”, from a desire to cultivate more open, collaborative environments.
“Corporations used to be attracted to tech startup communities by the opportunity to scout tech talent,” writes Jonathan Ortmans. “However, while relatively new to ecosystem building, corporations today are not only seeking to acquire innovative, high-potential startups, but also trying to mimic the thought process of such entrepreneurs and the agile culture of young companies. Their wider goal is to boost in-house innovation and problem-solving.”
Who’s to say? If incumbents can embrace the spirit and practices of the companies that are outpacing them, they perhaps stand a chance to actually level the playing field—contributing to a marketplace that pushes for the continual overhaul and up-leveling of products and services.