Andy Grove did the unthinkable at Intel. They had a category-dominating, high-profit margin product in the Pentium processor. All they had to do was not screw it up and the profits were theirs for the taking. But, that wasn’t good enough for Grove. A pesky little academic theory about “disruption” had him thinking. It took him some time, but he convinced the company it was the right move. They were going to cannibalize their most valued product line.
It’s a story for the ages, especially for the business journals. With the lower margin Celeron processor, Grove not only took out Intel’s own Pentium market share, but went on to take 35% of the total processor market – more than offsetting Intel’s lost Pentium profits on the way. In hindsight, it’s one of those historically brilliant business maneuvers. In real-time, it was a serious gamble. For most of us, outside of high-tech product sales, it also offers a valuable lesson.
The incumbent product or service is never invincible. Never. There is always a next iteration or next delivery method or next something to be aware of. If you want the tech case, see James Allworth’s brilliant piece, “Intel’s Disruption Is Now Complete.” He details the rise and fall of Intel along these lines. If you want the every-industry takeaway just know this: it all boils down to profit margin and turnover. Every product or service can be competed against from above or below.
Profit margin is the difference between the revenue earned and the costs incurred along the way. A $2 widget with a $0.50 cost has a $1.50 profit margin. Turnover is how many times an item can be sold over a given period. If our same widget is turned over 100x per day, it’s daily profit margin is $150. This widget could be viably competed against by a lower margin, higher turnover product, or a higher margin, lower turnover product.
Put simply, you can beat them with a lower price and make up the profits on volume, or you can charge a much higher price for a superior product and make up the profits on margin. Every dominant company is exposed to these risks and will have to compete and defend on these fronts. Few will be willing to sew the seeds of their demise. This is the opportunity.
If we know who the competition is, we can begin to plot out our attack from either angle. Sometimes, cheaper with higher turnover is the correct path. Other times it’s the opposite. Market demand and preference, actual or potential, should be the guide. What Grove’s experience teaches us is that it can be done. All it takes is proper planning and a willingness to be disruptive.
A general footnote: we usually start by thinking of the market (aka the Total Addressable Market or TAM), to estimate the total potential buyers/users of whatever is being offered.
A product footnote: A department store has three purses – the cheapo, the regular, and the posh. If we know the costs for each, we can think in terms of how many of each need to be sold to equal the same profit margin. If we’re competing against any one purse, we have to ask if there’s a demand case to be made for how a business can drive volume or margin competitively? Posh may exist without impacting cheap but a high quality regular might take market share from posh if positioned correctly.
A services footnote: A town has three lawn services – the teenager with his parents’ lawnmower, the local guy who’s been doing it forever but is getting old, and the professional company with four-season services. Each have costs and we can do a similar break even analysis. Depending on the neighborhood, we can think in terms of demand and what people really want to plot a strategy (a beautifully manicured lawn to make the neighbors jealous? or just to get out of yard work?).
A final footnote: each level includes a story, sends a signal, and triggers an emotion. There’s the math, but there’s also a tremendous lever in the marketing of each. Put it all together and this is how markets work, pushing and pulling, expanding and contracting over time.