benbarry-000335Sometimes a post appears that just annoys you so much that you need to comment on it. That happened to me yesterday with this post from Arjun Sethi on at all places, BackChannel (a blog I ordinarily like). Sethi is a product manager at Yahoo but was actually motivated by this passage from Facebook’s Little Red Book (yes, there is such a thing):

If we don’t create the thing that kills Facebook, someone else will.

“Embracing change” isn’t enough. It has to be so hardwired into who we are that even talking about it seems redundant. The internet is not a friendly place. Things that don’t stay relevant don’t even get the luxury of leaving ruins. They disappear.

Now that statement (actually there are two) is true. In fact the first statement cannot be false. If something kills Facebook then it will either be Facebook or someone else (i.e., the complement of Facebook in set theory) that will as Facebook plus someone else = everybody! The second paragraph of the statement just says it is good to innovate but, actually, is almost a truism itself.

This statement is used to motivate the idea that companies, such as Facebook and presumably Yahoo as well, should spend their time disrupting themselves. Sethi argues they can do this in two ways: (i) by having a family of brands and (ii) by not being able to eat your own products.

The family of brands strategy is similar to something Christensen always recommended: setting up autonomous units to competing against yourselves before someone else does. Sethi translates into competing brands using P&G and Facebook as examples. Facebook has actually been doing that. It has been acquiring start-ups — Instagram, WhatsApp and Occulus — and setting them up as autonomous units in Facebook. Apparently this keeps edgy innovation alive in Facebook. Actually, it just seems to re-allocate the ownership of edgy innovation from some venture capitalists to Facebook. That doesn’t seem to mean much in terms of disruption unless you think it is better for Facebook shareholders to see their own divisions reduce their value by providing competition than someone else’s.

The second strategy is a familiar one: canniblization. The chief example used of this is Apple where Steve Jobs said “If you don’t cannibalize yourself, someone else will.” But it is very important to note, and often confused by many, that cannibalization is not self-disruption. Cannibalization occurs when you launch a new product that has a negative impact on the sales of existing products. For instance, the iPhone impacts on the iPod business and the iPad may have impacted on the MacBook business.

To be sure, it is a maxim of economics that the returns to innovation are often higher for new entrants than incumbents precisely because new entrant’s don’t care about the sales of existing products. But it is equally important to note that that maxim only arises if the incumbent expects entrants not to win with those new products. As soon as they expect that, because the incumbent has other assets — namely its core brand — the incumbent has a more powerful incentive to develop those new products than entrants. This is one way of looking at Facebook’s acquisitions. They are not so much about becoming a family of brands but instead, after uncertainty is resolved, continuing to fund innovation on products where the incentives to fund entrant’s doing them has fallen, not risen.

The counter-example to this is supposedly Blockbuster who failed to match Netflix. But it has to be remembered that Blockbuster was the first company to offer on-demand streaming which was the thing that finally killed it. Sethi calls streaming “not really an advance” but I think that is a not commonly held opinion.

Self-disruption means more than launching a product that diminishes existing product sales. After all, cannibalization does not necessarily lower profits over the entire company even if it may wrankle the noses of a few divisional managers. Self-disruption involves finding a way to displace an idea company with a product that would devalue most assets of the company. That’s not Instagram or WhatsApp necessarily when it comes to Facebook. Indeed, no one knows what that is and the chances are that, if such a thing exists, it is so different to Facebook that no one inside could possibly identify it. Suffice it to say, if that thing exists, it is in Facebook’s current interest to slow it down from ever happening rather than speed it up by doing it themselves. After all, as many proponents of disruption note, disruption means great value to consumers and less to companies. Surely Facebook aren’t interested in disrupting themselves with a product that lowers their future profits? Beware of people who use cannibalization examples to promote self-disruption. They don’t mean what they thing they mean.

One Response to Killing yourself to survive is not the same as innovating

  1. econ man says:

    nice post

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