How market leaders can drive disruption that new entrants can’t
In last week's post "When your tech roadmap gets too far ahead of your business" I discussed how the best path to rapid growth often begins with intense focus on your core business until you can solidify yourself as the market leader. Once that beachhead has been formed, the door to new growth opportunities begins to open up but it's not just in terms of new features or related product lines. Those can be justifiable paths to growth but the real value tends to be created when companies can leverage their position as the market leader to drive additional disruption.
Let's take a very salient example Amazon who has in many ways perfected this art. In 2016 Amazon Web Services (AWS) accounted for 150% of Amazon's operating income. In other words, AWS effectively subsidized losses from Amazon's enormous ecommerce business. AWS however was basically made possible because in the early 2000's Amazon needed better hosting infrastructure to keep up with their incredible growth. They then decided to leverage the infrastructure as a side business and today it's the world's largest cloud infrastructure company. Amazon did they same thing with their fulfillment centers allowing other ecommerce businesses to leverage the infrastructure and deliver 2 day shipping with Amazon Fulfillment Services.
In the cases above Amazon leveraged their position not just as the ecommerce market leader but in many ways as a leader of all Internet based businesses to drive new disruption. But it doesn't take Amazon levels of success for this concept to hold true so let's look at this from a more down to earth perspective. As I've discussed in previous posts such as "What makes a tech company valuable?" there are two common ways in which companies can leverage their position as market leader to drive additional disruption.
- Aggregating and analyzing data across your customer base
- Establishing yourself as a new sales channel
Aggregating data is something that can come natural to marketplace or SaaS businesses. Once you have enough activity or customers that they now represent a statistically significant portion of the overall potential market, you can now collect and analyze meaningful data about how that market works. Let's take a theoretical example: a marketplace for commercial real estate. With enough transaction activity flowing through, you know have potential for predictive power that could be very valuable to the people listing on your marketplace such as: who is likely to rent, what time of year, what is a competitive rent for your space, what's the most unique selling point, who are the best realtors for this type of space, etc.
Establishing yourself as a new sales channel can be equally valuable. Let's imagine you built a business to Uberize cleaning services and nannies. If you become the go-to place to bring them new work and if you become a trusted software to help them run their business, you have now established yourself as an incredibly strong sales channel to that customer base. That could be something very valuable to an acquirer but it can also be leveraged to sell additional products into that market which you would not have been able to otherwise such as subscription cleaning supplies.
The point is, growth opportunities in disruptive Internet businesses are not the same as they are in most corporate environments. Simply adding features and complimentary products can help continue growth but smart founders find a way to continue disrupting the market by leveraging their position as market leaders to do so. An added benefit to that strategy is that it creates further moats to protect against competition who cannot offer those same new services because they lack the market position to do so.
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