What Goes Up, Can’t Go Down

The Northeastern Pull and Upmarket Migration

  • Established firms tend to move upmarket into higher-performance, higher-margin products.
  • This upward mobility is driven by rational resource allocation processes focused on improving financial performance.
  • The chapter explores the history of Seagate Technology and the battle between minimill and integrated steelmakers to illustrate this phenomenon.

Upmarket Migration of Seagate Technology

  • Seagate’s strategy represents a typical pattern for disk drive manufacturers.
  • Initially dominated the desktop computing value network with 5.25-inch drives.
  • When 3.5-inch drives disrupted the market, Seagate shifted its focus to mid-range computers such as file servers and engineering workstations.
  • Upmarket migration made disruptive technologies dangerous to established firms and attractive to entrants.

Value Networks and Cost Structures

  • Each value network has distinct cost structures which shape corporate behavior and profitability strategies.
  • Disk drive manufacturers developed specific economic characteristics tuned to their value network.
  • Moving upmarket offered higher margins and was seen as a straightforward path to improved profitability.
  • Moving downmarket was less attractive due to the lower margins and cost structures of established competitors.

Resource Allocation and Upward Migration

  • Bower’s model of resource allocation characterizes it as a bottom-up process with middle managers playing a critical role.
  • Rational decision-making leads to supporting projects with assured market demand.
  • Proposals for developing higher-performance products targeting higher-margin markets typically get funded over proposals for lower-margin, less-defined markets.

Case of the 1.8-inch Disk Drive

  • Despite repeated developments of 1.8-inch drives, large companies found no viable market due to their focus on higher-margin products.
  • This disruptive technology was recognized but not integrated effectively due to the conflicting priorities of employees and company profit goals.
  • Even attempts to catch disruptive waves early were often stifled by the organizational culture and structure of established firms.

Value Networks and Market Visibility

  • The simultaneous upmarket movement of customers and suppliers can obscure the downmarket threat.
  • Disk drive manufacturers missed emerging disruptive technologies as their primary customers were also moving upmarket.
  • Upmarket movement creates a vacuum in lower-end markets, allowing new entrants to establish themselves.

Minimill vs. Integrated Steelmakers

  • Minimill technology, where steel is made from scrap using electric arc furnaces, emerged in the mid-1960s.
  • Minimills operated at a fraction of the cost of integrated mills and focused on low-margin markets like rebars.
  • Over time, minimills moved upmarket by improving the quality and expanding product offerings.
  • Integrated steelmakers focused on profitable high-end markets, ceding lower-margin product lines to minimills.
  • Managers at integrated mills made rational decisions to avoid low-margin markets but ultimately faced disruptive challenges from minimills.

Minimill Thin-Slab Casting and Market Impact

  • Thin-slab casting technology, disruptive by nature, allowed Nucor Steel to enter the sheet steel market at a lower cost.
  • Despite being evaluated by integrated mills, it was not adopted due to its initial position in low-margin segments.
  • Nucor’s investment in thin-slab casting enabled it to capture market share in less-profitable but growing segments.
  • Integrated mills’ focus on high-end markets prevented them from addressing disruptive threats effectively.

These points outline the challenges and strategic decisions that lead established firms to prioritize sustaining innovations in high-margin markets over disruptive technologies in emerging markets, ultimately leading to their potential decline.