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Where is Your Firephone?
Billion Dollar Failure - Sustaining vs Disruptive Innovation - Power Law - Culture
Hello, I am Nicolas Bustamante. I’m an entrepreneur and I write about long-term company building.
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Have you ever heard about the Firephone? Amazon spent hundreds of millions building a revolutionary smartphone but discontinued commercialization in 2015, one year after its introduction. For most, the Firephone was a massive disappointment; for Amazon's CEO, it was a healthy failure contributing to Amazon's success. I agree, and one of my favorite questions to scale up is now: where is your Firephone?
After reaching their product-market fit, early-stage startups focus on improving one product. The ambition is to add new features quickly to satisfy early customers. The constant iterations lead to fast revenue growth, high net promoter score, low churn, and high upsell. After a while, the main product isn't sufficient to drive additional growth, and it's required to develop new product lines.
These new product initiatives leverage the existing technology and the current competitive advantages. These sustaining innovations are adjacent to the initial developments and sold to existing customers generating new sales and often higher margins for the company. It's relatively straightforward to develop adjacent product lines because customers often ask for the developments, and it's easy to make financial projections before investing. As time goes by, it's harder to grow through these types of sustaining innovations, and companies have to embrace radical innovations.
Developing radically new products is challenging but crucial in highly competitive markets. Failure to innovate leads to irrelevance, and thus bankruptcy. Such an innovative process is challenging because there is so much uncertainty about future success. The investment required is more significant than sustaining innovations, while the margins seem inferior to the core product. Additionally, radical innovations might not target current profitable customers but niches in a new fast-growing market. All of this leads to a substantial career risk in most companies because the team might be held accountable for the lengthy and costly failures that happen along the way.
The paradox is that managers who successfully launched incremental innovations failed to commercialize radical new product lines. Using the same processes of analyzing risk-adjusted returns and talking to customers, they weed out disruptive product initiatives that are key to tomorrow's growth. Overcoming these challenges requires leaders who understand the power-law distribution of returns. Few product successes will cover the cost for many failed ones. In the words of Jeff Bezos: "a small number of winners pay for dozens, hundreds of failures. And so every single important thing that we have done has taken a lot of risk-taking, perseverance, guts, and some of them have worked out, most of them have not."
There is a world between understanding the power-law distribution and creating a company culture that rewards big, bold bets. It requires adopting a long-term perspective, accepting to lose tons of money, and waiting patiently for that outlier to generate a significant outcome. Additionally, the best organizations fail early, fail often, and don't gamble the company's future on one product launch. They seek positive optionality over time with a low downside and a big upside!
From my perspective, the innovative culture is one of the most impressive things about Amazon. They started as an e-commerce company but now dominate the cloud industry with AWS and push the frontiers of hardware with Kindle, Alexa, or AmazonGO. All that while losing billions of dollars due to failed product innovations!
And you, where is your Firephone?
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