By Kevin Maney
Disruption is so last decade. Creation is the thing now.
That may seem like semantics, yet in all kinds of business these days, creating and then dominating a new category is the winning strategy. Geoffrey Moore’s Crossing the Chasm revolutionized how we think about new products in an existing market. Clayton Christensen’s The Innovator’s Dilemma taught us about disrupting an aging market. But now, as my co-authors and I describe in our book Play Bigger, great enduring businesses are about creating a market and changing how customers think.
The most exciting companies give us new ways of living, thinking or doing business, many times solving a problem we didn’t know we had—or a problem we didn’t pay attention to because we never imagined there was another way. Before Uber, we hailed a cab by standing perilously close to traffic with an arm in the air. After Uber, that seemed dumb.
These companies don’t only invent something to sell us. They are not making products or services that just incrementally improve on whatever came before. They don’t sell us better. The most exciting companies sell us different. They introduce the world to a new category of product or service—like Clarence Birdseye creating the very idea of frozen food a century ago or Uber defining on-demand transportation in recent years. Such companies replace our current point of view on the world with a new point of view. They make what came before seem outdated, clunky, inefficient, costly or painful.
Disruption has been a holy word in the tech industry, like maybe you should genuflect when someone says it. But disruption is a byproduct, not a goal. Legendary companies create new categories that generate a gravitational pull on the market. Customers rush to a new category because it makes sense to them. In some cases, people leave an old category behind, and their departure sucks the life out of it.
In that way, sure, new categories disrupt old categories. But for the smartest innovators on the planet, disruption is never the goal. Elvis Presley didn’t set out to disrupt jazz. He set out to create rock ’n’ roll—a sound that came from his soul. Rock was different from jazz, not better. But over time, as young audiences embraced rock, they left big band jazz and crooners behind. The byproduct of Elvis’s creation was disruption.
Sometimes, booming new categories don’t disrupt anything. Airbnb created a new category of on-demand places to stay, but no one—including and especially its co-founder and CEO, Brian Chesky—is predicting the new category will lead to the collapse of the hotel industry.
A term for the companies that create, develop and dominate new categories is category kings. From time to time—you know, like in all of 2015—the technology industry gets caught up in hype about soaring valuations of startups. But like disruption, valuations are an outcome, not a strategy. A billion-dollar valuation of a company that is not a category king is likely to be fleeting. A billion-dollar valuation of a category king is often a bargain, in good economies or bad. Think of Amazon.com, Salesforce.com, Facebook, Google.
While working on our book, we analyzed data on U.S. venture capital–backed tech startups founded from 2000 to 2015 and found that category kings earned 76 percent of the market capitalization of their entire market categories. Tech analyst Michael Walkley of Canaccord Genuity looked at the earnings of smartphone companies in late 2014 and found that Apple took in 93 percent of the industry’s total profits that quarter. Eddie Yoon, a principal at the Cambridge Group, analyzed the top 20 of Fortune’s 2010 list of fastest-growing companies. Those companies received an average of $3.40 in incremental market capitalization for every dollar of revenue growth. But half of those 20 were category creators, Yoon determined, and those 10 companies got $5.60 in incremental market cap for every dollar of revenue growth. “Wall Street exponentially rewards the category creation companies,” Yoon wrote.
Why is this happening? The ubiquity of networks, cheap cloud-based distribution and lightning-fast word-of-mouth through social media is intensifying a winner-take-all economy—especially when we’re talking about digital products and services.
Since networks give everyone from anyplace access to the perceived best in any category, the vast majority choose the leader and leave the second- or third-best behind.
Once a company wins a position as category king, a gap widens between the leader and the rest. The leader, for example, increasingly has the best data. In today’s world, data is power. Also, the best employees want to work for the category king. The best partners want to sign deals with the category king. Outside developers want to develop for the category king. The best investors want to put in their money, and the best investment bankers want to work on the initial public offering. As a category king pulls far ahead economically, it has the wherewithal to make acquisitions that vault it even further into the lead. The economic power of a category king builds and builds.
A category king strategy is important and effective when the economy is roaring, and perhaps even more powerful when downturns cripple runner-up competitors. Some of the great category kings have been built during some of the “worst” times—Google in the early 2000s, right after the dot-com crash; Airbnb in 2008, as financial markets melted; Birds Eye amid the Great Depression.
Airbnb, Tesla Motors, Snapchat and Twitter are recent category kings in consumer-facing markets. The enterprise technology space is full of category kings too. Salesforce.com developed the cloud-based sales automation category. VMware defined and dominated a category of computer virtualization. Workday, NetSuite, and Slack are among the new category kings of business services.
Most category kings are once-in-a-founder’s-lifetime achievements. A rare few individuals have proved to be master creators of category kings. One of the best of all time, as you might imagine, was Steve Jobs, especially during his second go-round at Apple. He led the creation of three important new categories: digital music (with the iPod and iTunes), smartphones (iPhone) and tablets (iPad).
Elon Musk made Tesla into the category king of electric cars and SpaceX into the category king of private spaceflight, incredibly doing that for both companies at the same time. Jeff Bezos started out making Amazon.com the category king of online retail, and he repeated that success with e-book readers (Kindle) and cloud-based computing services (Amazon Web Services). A lesser-known but no less prolific creator of category kings is Seattle entrepreneur Rich Barton. He had a hand in founding Expedia, Zillow and Glassdoor.
While our connected age has revved up category king economics, category kings aren’t just a connected-age phenomenon. When Chrysler introduced the minivan in 1983, it created—and then dominated for three decades—a new category of personal vehicle. Bob Pittman’s MTV and Ted Turner’s CNN were once category kings. Boeing created the category of the jet airliner with its 707 in 1958.
So forget about that whole unicorn thing. Roll your eyes at self-defined disruptors. To find the next great companies, look for creators. Find yourself an Elvis.
Adapted from Kevin Maney's new book, Play Bigger: How Pirates, Dreamers, and Innovators Create and Dominate Markets, co-authored with Al Ramadan, Dave Peterson and Christopher Lochhead. Available June 14.