Home » Disruptive Innovation, PG's Thoughts (such as they are) » Why the Leaders of Established Companies Dismiss the Threat That Destroys Them

Why the Leaders of Established Companies Dismiss the Threat That Destroys Them

12 November 2011

Passive Guy talks a lot about disruptive change as it impacts the publishing business.

The following excerpt from a short article summarizes some of the reasons large established businesses are often unable to respond to a newer, cheaper disruptive technology that enters their world.

From Bloomberg:

In 1995, [Harvard Business School Professor Clayton Christensen and a co-author] proposed a new causal mechanism that explained the surprising failure of highly-regarded companies. The most punishing innovations, they argued, were the ones that were easy to dismiss at first blush — simple, affordable solutions that took root outside the mainstream market. The authors called these “disruptive” solutions and provided a straightforward prescription for leaders looking to turn disruption into an opportunity. They suggested that companies should find a customer who loved the disruptive solution despite its limitations and create a separate organization to commercialize it.

. . . .

Yet, the innovator’s dilemma persists. Just ask executives at Blockbuster Video, Sony, Nokia, Microsoft, Hertz, Kodak, Delta, and nearly all newspaper companies. That’s not to say that there haven’t been success stories. But they’re notable because they are exceptions.

So, why has this dilemma persisted?

Capital markets is one explanation. As this argument holds, the short-term pressure of the capital markets, coupled with management incentives tied tightly to stock prices, make it hard for companies to invest in new growth businesses. Even if companies know what they need to do, their investors won’t let them.

. . . .

Perhaps the root problem is leadership limitations.

. . . .

Every once in a while a Steve Jobs, a Jeff Bezos, or an A.G. Lafley appears, but perhaps their rarity leads to the dilemma’s persistence.

Maybe the real challenge lies within. Over the past few decades there has been a fascinating set of research into cognitive biases that lead smart people to make bad decisions. These biases are particularly acute for companies trying to drive disruptive innovation. Consider the “halo effect,” which holds that people who are demonstrably good at one thing are perceived to be good at non-related tasks. The halo effect leads companies to assume their best operators can seamlessly shift into innovation work. Some can, but many cannot. Confirmation bias, disaster neglect [is the worst-case scenario imagined really the worst?], the fundamental attribution error and many others make it easy to simultaneously discount the need to respond to disruptive threats and overestimate the organization’s ability to step into new markets.

Link to the rest at Bloomberg

Disruptive changes are similar in some ways, yet each has its own quirks.

Big Publishing demonstrates a lot of characteristics of large companies being disrupted in other industries. Big Publishing and those who depend upon it for their livelihood demean authors who self-publish. Even as indie-published books continue to grow their sales, Big Publishing denigrates their quality and denies their signficance.

One of the most interesting critiques of indie authors relates to the way many price their books. Big Publishing points to the low price and claims that’s the reason the books sell. They are partially correct, but low prices are one of the competitive advantages of self-publishing. Low prices are one of the fundamental characteristics of disruptive change almost everywhere it is found.

If you’re a big established company and see a smaller competitor with a business model that’s different than yours who is happy to sell a competing product at a lower price than you do, you should be afraid. If some of your customers begin to buy the low-priced alternative, you should be very afraid.

Self-publishing is different from a typical low-priced disruptive technology which begins in small companies who are able to scrape by on low profits for the first few years. In the case of indie publishing, the profits are much higher for many successful authors then they were when those authors were published traditionally. Joe Konrath, Kris Rusch, Dean Wesley Smith and Barry Eisler come immediately to mind.

One of the interesting aspects of this disruptive change for Passive Guy is that publishers are almost completely oblivious to the idea that authors are their suppliers and miss important implications of this relationship.

Well-managed companies treat their suppliers very nicely. Well-managed companies understand their suppliers need to earn a reasonable profit in order to be successful. They understand that the success of the supplier and the success of the company that uses what the supplier produces are intertwined. Well-managed companies know that if they developed a reputation for mistreating suppliers, they will have a difficult time maintaining an adequate supply chain.

PG thinks Amazon was necessary for the disruptive change in publishing to take place. If it hadn’t been Amazon, it probably would have had to be someone like Amazon.

However, by itself, Amazon would not have been able to make the disruptive change as far-reaching as it has become. There is no doubt that Amazon as a bookseller would have brought major changes in pricing, but Amazon as a publisher (PG is not talking about the Amazon imprints.) required indie authors who could produce books that Amazon customers wanted to buy.

Amazon set the stage because it championed e-books and because it was willing to pay authors a much larger percentage of the sales price than they would receive from Big Publishing. Big Publishing has evolved into a pricing cartel with respect to its suppliers, offering virtually the same royalty percentages to authors, regardless of which publisher is making the offer. Price competition is essentially limited to the amount of the advance.

By offering authors a 70% royalty (or a 35% royalty, but 70% worked better), Amazon attacked Big Publishing through its supplier network. While the traditional publishing business model thrived on a certain degree of scarcity (Which publisher could release 10,000 books each year?), Amazon was not thus constrained. If 100 new books were self-published in a day, that was fine with Amazon. If 1000 new books were published in a day, that was fine with Amazon. Scaling this supplier network was mostly a matter of throwing more computers online.

If every single author currently published by Big Publishing decided to self-pub his/her next book on Amazon, the computers in Seattle would never break a sweat.

Amazon treated its suppliers well by paying high royalties and making it very simple for anyone to become a supplier (no query letters or agents required). Since Amazon was already the biggest bookstore in the world, it was ideally suited for hosting thousands and thousands of indie e-books and allowing readers to decide which ones they like the best.

However, even in this market competition, many of the “losers” don’t feel very bad. Their income from Big Publishing was probably zero. Their income from Amazon is probably greater than zero. They may not be able to quit their day jobs, but they earn enough money from their writing to go out to dinner once in a while. Even if it’s only McDonald’s it feels kind of cool.

As is typical with disruptive change, the publishers are reacting in exactly the wrong ways. Instead of treating their suppliers better, they are treating them worse.

In response to the drip, drip, drip of authors defecting to indie publishing, publishers are trying to tie up authors for longer and longer periods of time. In response to authors earning serious money from self-publishing their backlists, publishers are inserting out-of-print clauses into publishing contracts that mean books will never go out of print and revert to the author.

This self-destructive behavior is making it more likely that a promising new author who is beginning to make some noise on Amazon will decline a big publishing offer when it arrives.

Clayton Christensen’s research says it’s almost impossible for the incumbent powers to survive disruptive change in any form remotely resembling their former selves.

While PG never rejoices when people lose their jobs and is not enthusiastic about Schadenfreude, it will be interesting to see how we regard names like Simon & Schuster and HarperCollins five or ten years from now. If we remember them at all.


Disruptive Innovation, PG's Thoughts (such as they are)

23 Comments to “Why the Leaders of Established Companies Dismiss the Threat That Destroys Them”

  1. One minor point: The bit about low price is a canard. Ebook prices are higher — from the point of view of the seller.

    My ebook sells on Amazon for $2.99, of which I get slightly less than 70%, because not all sales are made at that royalty level.

    An equivalent ebook from a major publisher would be $9 or so, of which the author could expect to see around 15%, best case.

    So I’m selling my book for more — $2 (more or less) compared to $1.35, roughly a 50% premium. If the customer pays less while I charge more, we’re both pleased, no?


    • Sounds like a win-win to me, Ric.

      • To me, too, obviously. But my point was intended to be that people who sneer that the only reason indie books sell is that they’re cheap are laboring under a misconception.

        I haven’t lowered my price, I’ve raised it! I’m charging the final customer (the reader) more for my contribution than I would be able to get through classic/legacy publishing. The only one who is engaged in price cutting is the publisher-equivalent. I’m charging what the traffic will bear, and loving the result.


  2. I’ve worked for a very large company and have seen most of these phenomina at work. The halo effect alone was responsible for millions in mistakes.
    It’s sobering to think how many publishing jobs are teetering on the brink simply because we have failed to invent a business model with enough checks and balances to protect us from human nature.

    • To be fair, Andrew, human nature makes some great companies and human nature also breaks some companies.

      I don’t know that you would have a very healthy economy if it didn’t include some churn.

      • True enough. Apple seems to have more than enough good qualities to outweigh some of their less popular choices.
        Though I no longer have any interest in a traditional publishing contract, I do hope that the traditional houses will find a way to survive and thrive.
        They will have to treat their stable of authors a little better when it comes to eRoyalties if they want to remain attractive. Once the majority of sales has switched to eBooks (perhaps in 2012?) will the Kings and Martins of the publishing world continue to ignore all the money that they currently leave on the table?

  3. PG – I’ve gone from being a self-pubbing maven to having mixed feelings. You know I’ve been almost 100% behind self-pubbing.

    I will continue to publish my works, but I still make good money from small, reputable Indie e-pubs. I’m not about to look a gift horse in the mouth and cut my ties with those publishers. Many have models the NY pubs would be wise to emulate and embrace.

    But here’s the deal, the NY pubs are big and cumbersome and change comes slowly. Nobody wants to give up his/her corner office. Think the Will Smith movie – Enemy of the State – (paraphrasing) “They’re big and slow, we’re small and mobile.”

    Having loitered at the margins of NY pubs and literary agents, and seen some of the worst offenses, I’m not shedding too many tears. I won’t miss gatekeepers because gatekeepers were guilty of an abuse of power and they have been humbled, whether they realize it or not. I will, however, miss a sense of organization, for lack of a better word.

    I’m increasingly concerned about the wild, wild west attitude in self-pubbing. Everyone is trying to grab a piece of the pie and believe me, the pie is shrinking fast. It’s like one of those sales where women trample each other to get a handkerchief or something!

    Why? Lots of reasons. Because the Amanda Hocking phenomenon is already old news. Hundreds of thousands of self-pubbers are trying to strike it rich emulating her marketing methods – heads bobbing in a raging river – it’s hard to differentiate one head from the next.

    Authors who already have familiar names, big followings and big back lists are crowding out the little guy. And they are signing contracts with Amazon, which may become the next Big Six all on its own. To be honest, it almost seems like business as usual. The difference is that the people who were making money with NY are now making money from self-pubbed books, while telling the rest of us we can do the same thing. No, we can’t, not on that scale. Sorry, PG, we can’t. We don’t have their resources. So once again, very few of us small fry will become big fry. I’d like to claim the playing field is equal, but it ain’t. Maybe it was as recently as a year ago, not now.

    I’m taking a step back to look at all my options. Yes, I am in this for the long haul, but remember, I’m a one-woman band. I’m working my a** off and to be honest, I wouldn’t turn my nose up at a little help.

    • Excellent points, Julia. Thanks for sharing.

    • The nice thing about the e-presses is that most contracts return your rights in 2-3 years. I’d say maybe throw them a title or two, but don’t give up on the indie stuff, either! I really do think things will change up this holiday season, with a big ripple effect extending into early 2012.

      Plus, you NEVER know what title will catch on. Just keep putting stuff out there. My first short story had some nice reviews, but didn’t sell all that well. My second is climbing the rankings, quite unexpectedly. So keep on. There are readers out there who really want to find your work. 🙂

    • Julia: what makes you think the pie is shrinking? I don’t see any sign of it. I only see it growing.

      Part of the illusion of the “wild west” atmosphere is just because the pool has opened up into a vast sea. Things which were not a part of publishing before are now part of it. Yes, indies have flooded the best seller lists… but that’s not because the former best sellers are selling less. It’s just that a whole segment of the audience is now being measured that wasn’t before.

      The used book market, discount book market, regional press, fan fiction, church recipe collections, class projects — all of that stuff has always been there, and yes, there always was a going commercial concern in all of them.

      The thing that has changed is that the wall has come down between Big Publishing, and all of the above, AND the self-publishing industry, AND blogging and YouTube, SEO content writing, AND social networking, and a whole lot more. None of this is crowding Big Publishing out — it just dwarfs the industry and makes it look smaller in comparison.

      • Camille, depends upon what you consider the pie, I suppose, and what your ultimate goals are.
        I’ll disagree without being disagreeable. I don’t think the wild west is an illusion. For one thing, as fast as authors figure out how to use current technology and marketing methods, the technology and marketing changes.
        Self publishing is not as black and white as I thought it was as recently as six months ago. As a matter of fact, I’ve come to view the many issues associated with publishing and rapidly evolving technology as quite complex. On our own, we individual authors are in danger of being left behind. J.W. Manus is right, new models of cooperation and association may become the norm out of necessity.
        Yes, one hopes the quality of the book, or story, will win out. But one can never assume.

        • Perhaps I should have phrased that differently: The _effect_ of the wild west is an illusion.

          I guess if you thought self-publishing (or any aspect of publishing) was black and white, then I can see why you said what you did. But it never was black and white, except within the publishing industry itself.

          To go back to the wild west metaphor: In the actual wild west (and all over U.S. and Europe at the same time) publishing was in a boom something like now. It wasn’t like the gold rush, though. There weren’t people rushing to get into the business to get rich. (Not any more than any other business in the Victorian Era.)

          It’s just that publishing was a part of everyone’s every day life. Every tiny town had multiple newspapers. Anybody who felt like writing would write for them — because they needed to fill up the pages. And people made a living writing poetry and short fiction.

          It was a lot like blogging is today — and that is a much better model to show what’s happening to publishing. Publishing is just behind the curve on the whole Web 2.0 thing.

          The thing about writing, that has been true from day one, is you have to take responsibility for yourself and your career. That’s not a change. It was always that way.

          And sure you need colleagues and mentors… but you always needed them before, too.

          • Good points, Camille, and a lot of authors made good money writing stories about the wild west. Mark Twain was one of them.

  4. Publishers aren’t only making their contracts more draconian, they’re also trying to keep hold of rights from existing contracts, even when they no longer have those rights. It took almost a year before my publisher reverted my rights. Other authors are facing similar waits, if the publisher will entertain their request at all.

    I was thinking of disruption when I read this yesterday, and wonder if this will be game changing. I know I’d like to use it. http://www.businessinsider.com/this-28-year-old-is-making-sure-credit-cards-wont-exist-in-the-next-few-years-2011-11

  5. I don’t think publishers are missing anything in the nature of their relationship with authors. I think the way they treat authors is a perfectly logical result of the concept of supply and demand. The issue is that for a long time there has been a much larger amount of supply (authors with books they want to publish) than demand from publishers in need of books to publish. Companies treat suppliers well when they need them. But in this case it was the suppliers that needed the publishers, publishers have had a constantly renewing stream of thousands of desperate authors begging to supply them. It may be an unfortunate outcome, but it’s perfectly logical. They aren’t oblivious to anything. They had the power.

    And despite the number of authors getting into Indie publishing, there will probably always be a larger number of authors clamoring for traditional publication than the amount of books the publishers can actually put out. At least for a very long time. Indie publishing isn’t really hurting the publishers, and e-publishing is benefiting them. I’ve seen good arguments for the fact that publishers are not in a bad position right now, they are moving and adjusting at the pace they should, and that almost all of them will certainly survive the transition.

    I think the world that will come out of this disruptive innovation will have plenty of room for traditional and indie.

    • I respectfully disagree, Sarah. Sure, there are lots and lots of authors clamoring for publication. Just because they are writing, doesn’t mean they are any good. Go sample-read on Smashwords. Out of a hundred you might find one that is worth buying. Maybe. More like one in a thousand.

      Publishers have long been in a position to cherry-pick the best of the best, and they still put out tons of dreck. They have no choice except to work with what they have. They know better than anyone that good authors are not interchangeable. There is ONE Nora Roberts, not thousands. One Neil Gaiman. One Stuart MacBride. One Barry Eisler. When publishers find a gold mine, they do all within their power–legally and psychologically–to hold onto it. That worked when publishers had a lock on distribution. When the only way to find a decent sized audience was through a legacy publisher, then it’s easy for publishers to convince writers they’re a fungible commodity. Indie publishing is proving that lie. Readers ARE finding the good writers. Self-publishing is the new slush pile and stars are rising out of it, with no help from the big publishers. The fact that there are so few rising stars proves that good writers are rare and exceptional writers are exceptionally rare.

      As more and more good and exceptional writers realize they have OPTIONS, publishers will find it even more difficult to control them and make a profit off them– as long as they continue using the old model. Publishers will still be slammed by a tidal wave of wannabes with manuscripts to sell, but will they be salable? Will they be the best?

      It is not a matter of supply and demand. Publishers want gold and they are fighting every day to meet the demand out of a huge supply that’s 99% dross.

      The rules have changed. If publishers want to stay in the game, they better wise up.

  6. I tried to break into traditional publishing for 5 years. My books are set in medieval Wales, which quite frankly, was always a non-starter for the editors who read them, even if they said nice things as they rejected them. I’m grateful to the couple of agents I had who tried to convince NY otherwise.

    That said, for someone with no history of success in the traditional world, to have made $30,000 this year on my indie published books feels pretty great. Will it continue? I don’t know. Is it insanely competitive? Absolutely. It’s getting more competitive every day and the ups and downs are worse than the stock market. But is it a more tenuous existence than the traditional publishing process? Not from what my traditionally published friends say. For better or for worse, I don’t see ever going back.

  7. Found myself reading bits of this out to my husband this morning, and cheering as I did so. Particularly ‘Well-managed companies …understand that the success of the supplier and the success of the company that uses what the supplier produces are intertwined.’ I’ve been saying for years that writers need to stop casting themselves as ‘humble supplicants’ and become more businesslike in their relationship with publishers. Both sides need to treat each other with professional respect – but for a long time, I’ve felt like a lone voice, crying in the wilderness! Now suddenly we seem to have become a chorus. I’m an experienced writer with a good track record as a novelist and professionally produced playwright, but my dealings with agents and publishers over the years seldom seem to have reflected that fact, and the hard work I’ve put in, (and the excellent reviews I’ve had!) as they would in almost any other profession. I think it has been the squeezing of the mid-list, here in the UK, at any rate, that has finally tipped the balance for myself and many equally experienced writer friends. So many of us feel that we have been abandoned by Big Publishing – so we have absolutely nothing to lose, but quite a lot to gain, not least, in the sense of empowerment that Indie Publishing gives us.

  8. You have managed to say everything I’ve been trying to articulate to my Big 6 published friends for the last year in one concise blog post. Thank you!

    I originally pubbed with a big 6 and found it to be a soul and joy destroying business arrangement. In the past 12 months since I Indie published my backlist I have found more readers and more financial success than I did in the previous 9 years of my “professionally” published life.

    Why would I go back to a business model where writers are treated as easily replaced cogs in the publishing machine?

    Thanks for an always informative and thought provoking blog!

Sorry, the comment form is closed at this time.