The Leader’s Trap

If you’ve ever had to hail a taxi in a city, these pain points are probably familiar to you. For decades, most of us figured that taxi services were pretty much the same all over the world, so we resigned ourselves to putting up with the way things were.

But in 2009, Travis Kalanick and Garrett Camp, the founders of Uber Technologies Inc., took time to think differently. They developed a business model for a transportation service that enables people to travel more easily on their own time. You can order an Uber while sitting at your table in a restaurant. Your smart phone will tell you how soon your taxi will arrive, the name of the driver, the exact car, how much you will need to pay, and the rating of your driver—all before the cab comes into view.

This concept seems very simple, but if it’s so simple, why didn’t any of the 6,300 existing taxicab companies disrupt the industry with it? One answer is that they were preoccupied with the urgent issues of maintaining the status quo in the existing industry. They didn’t spend time identifying gaps in the market and developing new insights about customer needs that would dramatically drive business results to a different level and potentially accelerate the growth of the industry.

Why do companies with the biggest share of a market so often fail to exercise true market leadership? At one time, they must have been consciously seeking to advance the market by aggressively taking advantage of unusual, growth-oriented opportunities. Otherwise, they wouldn’t have become so large. So, what caused them to alter their mindset and actions?

Numerous business books and articles have addressed this question, and there seems to be general agreement about the answer. In fact, the syndrome that causes companies with majority market share to lose their moxie is so common that it even has a name. It’s called “the leader’s trap.”

Companies fall into the leader’s trap when they become so afraid of losing their dominant position within an industry that they prioritize market stability over market leadership. Out of fear of making a mistake that will cause them to lose market share or price, they become excessively cautious.

At a fundamental level, the cause of the leader’s trap is fear of change. Change can sometimes result in disruption, and disruption is inconvenient and uncomfortable. In fact, it can feel (and sometimes can actually be) life-threatening to an organization. But change and disruption are prerequisites for advancement. They’re the standard currency for creating innovative products and bold new ideas. Very little meaningful innovation takes place without some level of disruption and discomfort within an industry, a category, or a company.

Disruption is most threatening to companies with the largest market share because these companies have the most invested in their current products, pricing structures, distribution channels, technologies, plant assets, inventory and processes. Disruptive decisions can necessitate uncomfortable personnel changes, product alterations, write-offs of inventory and assets, adjustments in marketing and distribution approaches, and shifts in business and production processes across multiple regions and distribution channels.

Because companies with large market share usually have the most to lose from disruptions, they are more likely to try to “play it safe.” Consciously or unconsciously, they fall into the leader’s trap by choosing to be maintainers rather than leaders. That’s why some of the strongest advancements come not from market share leaders, but from smaller companies within or even outside of a category. These companies are like the “Cinderella teams” in the NCAA “March Madness” basketball tournament. They figure they have less to lose than the high-profile teams, so they are more willing to stretch boundaries and shake things up.

In the building materials industry, for example, some of the major product disruptions have included vinyl siding (versus aluminum), composite doors (versus wood), composite decks (versus wood), engineered wood (versus plywood), spray foam insulation (versus fiberglass), and tankless water heaters (versus tank water heaters). Interestingly, none of these disruptions come from the market share leaders. Why? Because the share leaders were busy protecting their space, their products, their profits and their investments in their manufacturing assets.

Over the long term, the ultimate costs you must pay to merely maintain can far exceed the costs of leading. Eastman Kodak Company is a case in point. At one time, Kodak was the undisputed leader in the photographic film category. As the market-share leaders, it also had the biggest investment in existing technologies.

When digital processing began to replace film in the late 1990s, Kodak was very slow to react. Although it had invested in innovation and had actually developed the very first digital camera in 1975, it had quickly eliminated the product out of fear it would lead to cannibalization of the company’s photographic film business. Kodak fell into the leader’s trap by attempting to protect its existing share. Eventually, its competitors disrupted the industry with digital technology and cannibalized dramatic amounts of share from Kodak’s once dominant market-share position.

Fear of losing market share becomes a self-fulfilling prophecy. I am a true believer that if you are going to be cannibalized, cannibalize yourself rather than let someone else take both your business and the credit for advancing the industry.

Several large companies like Netflix and Amazon have a history of disrupting themselves. This can be—and has been—successfully accomplished in many industries. Owens Corning, a Fortune 1000 company in the building products industry, has historically looked for opportunities to be a disruptor, innovator, and advancer in several categories. In its industry, for example, the company has done an exemplary job of identifying market needs and filling them with innovations connected to its core competency of producing glass fibers in several forms and fashions.

Apple is another disruptive company that would certainly come to most people’s minds. Apple didn’t invent the iPhone in response to what people specifically wanted, and it didn’t set out to develop the “next cool product.” Rather, Steve Jobs envisioned how people would be engaging with each other in the future, and then he led his company to leverage technology to forward-design the connectivity and functionality to match those evolving needs and interactions. Apple continues to innovate and introduce new offerings based on this approach, but as of late, have allowed other companies to drive innovation more quickly.

Companies whose employees sit around the conference room table and try to create products that will optimize what people want today will never be highly successful. The same is true of companies that try to develop products based on what has worked in the past. The most successful companies look at the gaps and how needs and tastes are trending, and they identify (or create) the unique .1% that fills these gaps and exploits the opportunities they observe. Then they leverage that uniqueness with all their organizational energy.

If you want to be a market leader, you must become comfortable with being uncomfortable. You need to embrace disruption, not only with your products, but also with how you approach the market. You have to do more than tolerate disruption; you must deliberately seek it out and cultivate it. Encourage some of your more creative and outspoken employees to be catalysts for change in meetings. Consider having outside “disruption consultants” facilitate meetings. Make sure disruption is welcomed throughout your organization. Encourage it at every opportunity. If your company doesn’t learn to harness the power of disruption, sooner or later somebody outside of your company will. And then they will use it to disrupt you!

Adapted from “Diverge: Stand Out in a Sea of Sameness.”