Market Size-Organization Size Alignment
Match small organizations to small markets before they become big ones
One of the cruelest dilemmas facing large, successful companies is that the emerging markets created by disruptive technologies are too small to solve their growth needs. A $4 billion company needing 20 percent growth must find $800 million in new revenue. No emerging market is that large. Yet the evidence shows that companies entering disruptive markets within the first two years are six times more likely to succeed than later entrants, and the cumulative revenues of early entrants dwarf those of followers by a factor of twenty.
This creates a vicious cycle: the larger and more successful a company becomes, the less attractive emerging markets appear, even though entering those markets early is precisely what creates the next wave of enormous growth. Companies that wait until markets are large enough to be interesting find that they are also large enough to be fiercely competitive, and the window of profitable entry has closed.
The solution is to place responsibility for disruptive technologies in organizations small enough to get excited about small opportunities. A $10 million order that would be noise for a billion-dollar division could be transformative for a $20 million subsidiary. By creating organizations whose size matches the size of the emerging market, managers ensure that the natural motivations of growth-seeking employees align with the requirements of the opportunity.
- Leadership in disruptive technology is crucial: early entrants into emerging markets are six times more likely to succeed than followers
- Leadership in sustaining technology is rarely essential: followers do about as well as leaders because there are many ways to improve complex products
- Large companies exchange market risk for competitive risk: they avoid uncertain emerging markets only to face entrenched competitors when they finally enter
- Organizations must be small enough that the disruptive market's revenues represent meaningful growth
- Calculate your growth gapDetermine exactly how much new revenue your company needs to maintain its target growth rate. Compare this number to the realistic size of the emerging disruptive market in its first few years. If the emerging market cannot meaningfully contribute to your growth needs, you have a size-market misalignment.WarningDo not attempt to accelerate the growth of the emerging market to match your company's needs. Apple invested heavily in the Newton to create a market large enough to matter, and the mismatch between market readiness and corporate expectations led to the product being declared a failure despite outselling the Apple II three-to-one.
- Create or acquire a small organizationEstablish an autonomous business unit or acquire a small company whose revenue base is small enough that the emerging market's early revenues represent meaningful growth. A $10 million subsidiary can get genuinely excited about a $2 million order.Pro tipThe organization should have its own growth targets calibrated to the emerging market's realistic trajectory, not the parent company's
- Enter the disruptive market earlyMove aggressively into the emerging market within its first two years. Do not wait for the market to prove itself or become large enough to interest the mainstream organization. First-mover advantages in disruptive markets are powerful and durable.Pro tipRemember: early entrants logged twenty times the cumulative revenues of late entrants in the disk drive industry. The apparent risk of early entry is vastly less dangerous than the competitive risk of late entry.
- Allow the organization to grow with the marketAs the disruptive market grows, let the small organization grow with it. Its cost structure, processes, and culture will evolve in alignment with the market's requirements, giving it capabilities that the mainstream organization cannot replicate.WarningResist the temptation to fold the successful small organization back into the mainstream company. Its value lies precisely in its different cost structure, processes, and values.
Conner Peripherals was a startup that entered the 3.5-inch drive market by co-designing its product with Compaq for portable computers. Because Conner was small, the initial orders from the emerging laptop market were transformative for the company. Conner set a record for the highest first-year revenues in U.S. manufacturing history at $113 million.
Apple sold 43,000 Apple II computers in its first two years, which was celebrated as an IPO-qualifying triumph for the small company. Fifteen years later, Apple sold 140,000 Newtons in its first two years, a figure three times larger, but this was viewed as a catastrophic failure because Apple was now a $5 billion company that needed much larger chunks of revenue to matter.
Christensen documented this principle through a comprehensive census of all 83 companies that entered the U.S. disk drive industry between 1976 and 1993. He tracked which entry strategies led to success, defined as reaching $100 million in annual revenues. The data showed that 37 percent of firms entering emerging markets less than two years old reached the $100 million threshold, compared to only 6 percent of those entering established markets. The cumulative revenues of early entrants totaled $62 billion versus just $3.3 billion for followers. Apple's Newton PDA illustrated the opposite problem: a product that outsold the Apple II three-to-one in its first two years was viewed as a failure because it represented only 1 percent of Apple's $5 billion revenue.