plus/minus epsilon

Surprisingly often, well-managed companies fail to compete against startups that pursue their customer base. By not competing, these large companies lose market share and often go out of business, even though they have substantially more resources than their startup competition.

The concept in business theory that explains this pattern of David beating Goliath is called disruptive innovation and it comes from the creation and commercialization of a new, disruptive technology. Disruptive technology is characterized by the following:

1. It starts out by serving a niche or low-end market. Startups are able to gain initial traction here because their market is infertile enough that they have no competition from more powerful, established companies.
2. As initially formulated, the new technology doesn’t offer any value to a mainstream customer. But as it becomes more refined, it’s able to satisfy the needs of more and more of the established companies’ least desirable customers, better than the established company can.

It’s unintuitive, but this often creates a lot of growth and value in the established companies because shedding their least valuable customers decreases cost and improves margin, which allows the company to better pursue and develop their high-value customers.