Category Entropy Kills

Written by Jonathan Simnett

Tech Category design exists because the company that designs the tech Category is best placed to dominate it – 75 per cent of the market eventually goes to the Category leader. Fact.

Take this example: Tesla’s mission is to accelerate the world’s transition to sustainable energy, and, by pioneering the entirely new category of fully-electric vehicle and battery production, they were able to demonstrate category leadership in the new era of automotive electric traction. And this had had a dramatic effect on valuation.

By September 2020, even as the pandemic disrupted markets around the world, its market capitalisation was over twice that of its largest automotive rival, Toyota, which was producing around twenty times as many vehicles. In 2021 with Tesla still producing less than a million vehicles this year (albeit with production growing at 65 per cent year-on-year) to Toyota’s over 9 million Tesla’s market capitalisation currently approaches three times that of Toyota’s.

And, by September 2021, according to JATO figures, Tesla’s Model 3 becomes the first EV to top Europe’s general model sales rankings. Tesla outsold established brands including Fiat, Nissan and Seat and Tesla’s Model 3 and Y dominated EV sales across the region with combined sales being more than those holding positions 3-8.


alt text is here


Category Cling

But, even in the fast-moving world of tech, some companies have clung on to category leadership for more than a couple of decades.

Apple, initially failed to dominate the personal computer category, an underachievement that left it standing as just a niche player supporting creative services, a potential novel footnote in the history of computing. But, with Steve Jobs’ second coming, it quickly dominated the smartphone category and created that of the tablet..

Its latest trick was to launch the AirPod and quickly dominate the wireless headphone market, even cannibalising the Beats offerings which it had bought just two years earlier for $3bn. Even in doing this it was able to quickly command a combined share of around half the market at what can only be assumed, given AirPods’ price point, to be extraordinary margins. You don’t become the world’s first Trillion dollar market capitalised company by accident.


Category Entropy

But there is a reality in Category leadership – Category Entropy – where from the first moment you create your category you start risking losing your advantage.

Even as you appear to be gaining market share. Even as your competitors, in turn, condemn you then damn you with faint praise. Even as they reluctantly line up to take their place in the new world, your nemesis waits in the wings.

And, just as much as you might fear a Black Swan competitor, appearing out of nowhere to re-write the rules, that nemesis is just as likely to be your own complacency.


From Order to Disorder

From order to disorder and back again, the cycle of tech innovation and reinvention is relentless. So, don’t think because you have created a successful Category it means you are going to live forever in a category-dominating utopia.

Those familiar with product innovation cycle bell curves should be seeing a theme here. Categories, like products, go through familiar life stages of growth and decay. From the slow haul of convincing innovators about the virtues of a novel new offering and watching early adopters catch on, to crossing what Geoff Moore termed the ‘Chasm’ to heady growth in market share and turnover as the early majority rush to the paradigmatic shift that the new product has initiated. Right up to an inevitable zenith before profit maximisation sets in, the late majority come on board and even the laggards acquiesce.


Curving and Shifting

It’s at the moment of maximum comfort, the approach to that zenith, of an `S` shaped  Category Curve  that Category Kings should be feeling their crown wobbling. It’s where clear signs of a potential Category Shift are likely to emerge. And, according to product innovation theory, that’s where brave and decisive reinvention moves from ultimately successful incumbents start to be implemented in earnest. And where Category leaders have to ferment revolution and climb a new category curve to avoid a slow and painful decline.

It used to be that Category decline could be managed over many years. Twentieth century tech behemoths such as Computer Associates prospered by acquiring the remaining user bases of former declined Category leaders, generating healthy cash flows whilst attempting to move them on to newer technologies. But, now, in a global digital market, death comes quickly. Late-stage aggregators can only supply short-term life support before having to turn off the financial ventilator.


Vaulting the Category Canal

The lessons from history are clear. Companies in the past have seldom made the jump from domination of one category to another – at best they try to stay in the game, but end up getting out-marketed by others and suffer death by late-stage acquisition, having failed to make category leader and already doomed to obscurity or irrelevance.

I give you Microsoft versus Wordperfect (acquired by Novell, which was, in turn acquired by The Attachmate Group and MicroFocus) Google versus Alta Vista. (acquired by Yahoo! and subsequently shut down as Yahoo! pursued various failed attempts to catch up with a rampant Google, including endless discussions about combining with Microsoft) .

IBM too is a past master at flunking the category pole vault, failing to redefine markets, sliding into the Category Canal and slowly drifting away into the river of irrelevance. And so a new Category Curve has to be created and climbed with enough velocity to propel its progenitor into a new tech world leadership

From Hero to Zero

But most companies now don’t have the luxury of decades to build up enough momentum in one category – in IBM’s case, the System/360 series commercial mainframes – to survive failure to dominate future categories – minicomputers, PCs, rack servers and a host of opportunities missed in software and services during recent decades.

Ironically, without IBM’s supertanker-like momentum, most of the firms with the exception of HP and Dell that competed directly with IBM – the likes of Digital Equipment, Pyramid, Sequent, and Compaq to name but a few – failed to cross the category canal and became user-base for their acquirers as they developed service-based models.

But that was then and this is now. Not the world of slow analogue corporate decline, a world of abrupt digital business failure. Companies go from hero to zero in a few, short, years. And, unlike the cosy 1990s pre-Internet world of ‘Cheers’, no one now knows their name.


Delivering the Masterplan

But just because something hasn’t been achieved before, it doesn’t mean it can’t be in future.

It’s all about having a Category Masterplan delivered as a product of visionary organic development and audacious, early, acquisition, enabling the Strikes that drive disruptive transition. Not a strategy that aims to fill out a current product portfolio to maximise the take from existing customers that consume products and services according to current fashions.

No, not that. Definitely, not that. Instead, something imaginative. Something that changes the world. Something that breaks the rules. Something you can get behind. Even something that sounds terrible. Because the best ideas have to, right up the moment they don’t, to have the greatest effect. And, crucial to success, something led from the CXO suite. Otherwise, your employees will create it. Somewhere else.


Unleashing the Gales of Creative Category Destruction

To paraphrase the great Austrian economist, Joseph Schumpeter, if the Category leaders of today want to be the Category leaders of tomorrow they will already be unleashing the gales of creative category destruction – of their own category. Imagining a world where they are increasingly irrelevant. Creating a new point of view.

Because they know Category Entropy kills. And if you know that, you can avoid it.

Contact Us