The Unbearable Heaviness of Being Positioned

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0:34Happy Monday and welcome to Not Boring. It was a good weekend here at Not Boring HQ. I got to take Dev to his first Sixers game. He made it through the whole thing, which I was very proud of. We got the win and the Sixers are advancing to the next round. Even more excitingly, there are now over 200 ,000 smart, curious people who read Not Boring. We crossed over that milestone over the weekend. If anything, it's made me want to up my game more. Back to recording these audio versions is a little thank you for the people who have stuck with us and also don't necessarily want to read six to 15 ,000 words every week.

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1:49Let's give the sponsor slot today to Create. Create is the first modern creatine brand with a first of its kind, creatine monohydrate gummy. I know what you're probably thinking, creatine? Me too. I had the same reaction when my brother Dan first texted me about starting the business. I always associated creatine with bodybuilders and high school football players and bucketed in with steroids. But that's the opportunity. Dan did his homework and showed me the research and it turns out that creatine is one of the safest and most effective general performance supplements on the market. Andrew Huberman is on the record as taking five grams per day, and Peter Atiyah called it the supplement he feels most confident recommending to patients.

2:32The guys who know the most about this stuff view creatine as table stakes supplement. Here's why. It's safe. The FDA marked creatine monohydrate is generally recognized as safe in 2020. And note, before starting any supplement, people should consult with your personal doctor or healthcare provider, but it's effective. If you've ever taken creatine before, this one is obvious and it's what differentiates it most from other supplements. It works and it's beneficial. It increases strength, builds muscle, improves recovery. I now take five gummies or five grams per day to boost my recovery and overall performance.

3:06It's part of my morning routine. I actually just took it before recording this now that I'm running more and that I'm old. But I'm biased. My brother started the company and I'm an investor. You should try it out for yourself. You can go to trycreate.co, that's trycreate.co, and enter the code NOTBORING20 at checkout to get 20 % off your first order. Now, without further ado, let's get to it. The unbearable heaviness of being positioned. Not every new technology is a disruptive innovation, and not every challenge to an incumbent presents an innovator's dilemma. As AI, specifically large language models or LLMs, threatens to eat away at Google's dominant search business, the people who talk about this kind of thing have reached for Professor Clayton Christensen's familiar framework to explain what's going on.

3:58This is classic Innovator's Dilemma, they tweet. Classic. Just check out the Twitter search for Google Innovator's Dilemma. Narrator, it is not. What people are missing in the analysis is that LLMs and the products like ChatGPT built on top of them aren't a disruptive innovation. They don't underperform on things that matter to mainstream customers and make it up by serving a small, new, or low-end niche well, but a superior product across nearly all dimensions. So Google isn't facing the innovator's dilemma. It's just so deeply positioned in search that it's been a sitting duck for the first superior technology or business model strong enough to take it on.

4:36Positioning is the flip side of one of Hamilton Helmer's seven powers, counterpositioning, in which a newcomer adopts a new superior business model which the incumbent does not mimic due to anticipated damage to their existing business. As Helmer points out in the book, counterpositioning is distinct from disruptive innovation. Similarly, positioning is distinct from the innovator's dilemma. We can define positioning as, quote, an incumbent is susceptible to a new superior business model due to anticipated damage to their existing business. I think that this is what people are going for when they reach for the innovator's dilemma.

5:11If a company adopts a new technology or business model, it will put their very good existing business model at risk. That new technology might be a disruptive innovation, and the company might be facing the innovator's dilemma. Those can fit within the counter positioning positioning framework, but that's not necessarily the case. Now, it's hard to blame people for their confusion. This happens every time there's an exciting new technology that threatens an established business or industry. It happens with such frequency that Christensen, the co-author of the original post on disruptive technologies and the book, The Innovator's Dilemma, took to the pages of HBR to clarify some things in 2015.

5:48Along with two co-authors, he penned what is disruptive innovation because, quote, despite broad dissemination, the theory's core concepts have been widely misunderstood and its basic tenets frequently misapplied. My goal today is to provide a framework, positioning, that we can all lazily reach for anytime a new impressive technology or business model threatens an established incumbent, and many more situations from the personal to the national besides, without tripping any technical definitions. To do that, we first need to go back to see what people get wrong about Clayton Christensen's theories.

6:23Disruptive Technologies and the Innovator's Dilemma by the book. What people often get wrong about Christensen's theories is that they mistake sustaining technologies and paradigm-shifting technologies for disruptive ones. Christensen was very precise with his definitions. In The Innovator's Dilemma, he made a clear distinction between two types of new technologies. Quote, What all sustaining technologies have in common is that they improve the performance of established products along the dimensions of performance that mainstream customers and major markets have historically valued. Disruptive technologies bring to market a very different value proposition than it had been available previously.

7:00Generally, disruptive technologies underperform established products in mainstream markets, but they have other features that a few fringe and generally new customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently more convenient to use. Well-managed incumbents are great at using sustaining technologies to make their products better in all the ways the customers are willing to pay for. The innovator's dilemma occurs specifically when incumbents are faced with a disruptive technology and do two things that they're supposed to do. One, listen and respond to the needs of their best customers.

7:36And two, focus investments on innovations that promise the highest returns. Turns out, existing customers rarely want the new, underperformant technology, and then investing in that new, underperformant technology rarely offers higher returns than investing in a sustaining technology that makes a core product better. So the incumbent eschews the new technology, even though they're often the ones who developed it, focuses on serving the high end of the market, and ignores the low end of the market, or a potential market that doesn't currently exist, leaving a foothold for new entrants who serve that low end or new market with the disruptive technology, and then ride its improving performance up to the mainstream.

8:13Imagine that you sat down at the blackjack table and promised yourself that you would do what the book says every hand. Every time the dealer shows a six or below, you stay. And hand after hand, you keep losing. Turns out the deck was loaded with extra shitty, ugly low cards, a bunch of twos and threes. You played by the book and you lost it all anyway. That's the innovator's dilemma. That's why we call it the innovator's dilemma, Christensen wrote. Doing the right thing is the wrong thing. Like I said, a lot of smart people have observed that what's happening to Google with LLMs is a classic case of the innovator's dilemma.

8:49So I don't mean to pick on any one person in particular, but I think this tweet, which I linked in the post at notboring.co from Brett Winton at ARK is instructive. He tweeted, the innovator's dilemma, Google's dominance in search is its vulnerability. The fact that Google's dominance in search is its vulnerability is not the innovator's dilemma. To be fair, it's a dilemma faced by an innovator, but I think it's not the innovator's dilemma trademark. I have a footnote in the post with more of my thoughts on why, and I have pages and pages and pages in my notes on why, but I think that it can boil down to one idea.

9:29LLMs are widely recognized to be the bleeding edge of humanity's technological capabilities. They're not bad enough to fit Christensen's definition of a disruptive technology. Sometimes a technology emerges that is simply better than the previous ones that pushes out the Pareto frontier. These technologies might be closer to sustaining technologies, but they don't fit that definition perfectly either. They're better, but they don't improve products, quote, along the dimensions of performance that mainstream customers in major markets have historically valued, because in these cases, mainstream customers didn't even know that these dimensions of performance were available to them.

10:04If I had asked people what they wanted, they would have said a faster horse and all that. Often, the next big thing will start out looking like a toy. but occasionally the next big thing will start out looking like the next big thing. When that happens, it's not a disruptive technology, even if it disrupts existing businesses. This is the challenge Google is facing with respect to LLMs. Everyone recognizes that AI is the next big thing, but to fully embrace AI, Google might have to sacrifice the position it's built up over decades. That's not the innovator's dilemma. It's something else. I think the word that we're all looking for is positioned.

10:40Positioned. Counterpositioning is my favorite concept in business strategy. Hamilton Helmer, who included counterpositioning as one of his seven powers, defines it as, quote, a newcomer adopts a new superior business model, which the incumbent does not mimic due to anticipated damage to their existing business. In counterpositioning, the new entrant adopts a business model that the incumbent can't copy without inflicting collateral damage on itself. It's like the business strategy version of the five-point palm exploding heart technique. Like Bill and Kill Bill after the bride touches his chest, if the incumbent takes five steps in the new entrance direction, they're dead.

11:20Jiu-Jitsu is another helpful analogy. Successful counter-positioning involves leveraging an opponent's strengths and movements against them, using technique and strategy over brute force. Startups can't win a boxing match against an incumbent, but they have a shot in Jiu-Jitsu. In the book, Helmer spends as much time detailing the reasons that an incumbent fails to mimic a counterpositioned upstart as he does describing how an upstart can use counterpositioning. But he never gives the incumbent's position a name. That unnamed state is exactly what I think most people are trying to say when they say that a company is facing the innovator's dilemma.

11:53So let's give it a name. To be counterpositioned against, a company needs to be positioned. Based on the definition of counterpositioning, we can come up with a definition of positioning. Quote, an incumbent is susceptible to a new superior business model due to anticipated damage to their existing business. This encapsulates some of the challenges an incumbent faces in the innovator's dilemma. Adopting a disruptive technology can hurt existing customer relationships and divert resources from higher ROI projects, but it's broader. It covers situations in which an incumbent faces a new business model but not a new technology, situations in which an incumbent faces new technologies that are just better on all the important dimensions, like Uber was for incumbent taxi companies, and situations in which incumbents somehow fail to adopt even sustaining technologies.

12:40The more deeply positioned a company becomes, the more susceptible it becomes to being counter-positioned against when a superior new technology or business model emerges. A company doesn't have to be actively counter-positioned against to be positioned. Becoming more positioned just increases the potential for counter-positioning. I want you to imagine the word positioned as something that can take on both weight and direction. Companies can be positioned on two axes. One, depth, from shallow, a new startup experimenting with products and models, to deep, an incumbent with a very profitable business and an organization that has grown up around it to protect it at all costs.

13:16And two, diversity, from platform, many products are a true platform on top of which others can build. Often platform companies are positioned on skills versus any one product. To product, the company is positioned on one core product, even if it offers others, which are often funded by the core product. Companies that are deeply positioned on one product are the most susceptible to counter-positioning. I like the way that Gordon Brander describes the issue. In a tweet, he wrote, moats are useless in maneuver warfare. Good in a war of position, bad in a war of maneuver. Moats keep you stuck in one place.

13:50Reading that, I picture a medieval army holding the ground with comfortable tents and lavish meals dug in impervious to its enemy's attacks when out of nowhere bombers fly in and demolish the concentrated target. Being positioned is neither inherently good or inherently bad. It's both and either depending on the circumstances. In a war position, when no sufficiently superior new business model exists with which newcomers might mount a credible counter positioning attack, being deeply positioned on a product is the best place to be. But with that comfort comes risk. When a new business model enters the fray, the contest switches to a war of maneuver.

14:27And the more deeply positioned a company is when the shift occurs, the less prepared it will be to fight the new war. Let's look at the good and the bad through the lens of Google and LLMs. The situation in a nutshell, OpenAI versus Google. For those who are unfamiliar with the threat that OpenAI and other LLM-based chat products post to Google, I'll give you the nutshell version. Google makes the vast majority of its vast amounts of money from selling ads against the searches you make. When you search, it shows you a bunch of links, some of which show up because an advertiser paid, some of which show up because they're the most relevant, and some of which show up because the company behind them is good at search engine optimization.

15:03When you click on ad links, Google makes money. AI-based chat, like OpenAI's ChatGPT, doesn't give you links. It gives you answers. I tweeted a comparison of Google's search results versus a chat GPT answer for a question that I asked recently. And from my perspective as a user, the chat GPT answer is more useful, although it's not 100 % reliable, so it depends on how much precision I need. From Google's perspective as a search ads business, the chat GPT answer is terrible. There are no links. Regardless of my preferences or Google's, products are shifting from links to answers. Competitors are experimenting with new capabilities and new business models.

15:41A company's willingness to take risks seems to track how positioned a company is in search. Microsoft, whose Bing is a distant second most popular search engine, beat Google to market with an AI product built on OpenAI's models, and it uses a mix of traditional search and chat, leaving room for ads. Last week, the New York Times reported that Samsung is considering switching to Bing for default search on its devices, likely because of Bing's inclusion of AI chat. OpenAI, which had no business model until a few weeks ago, offers access to ChatGPT Plus for$20 a month and recently announced ChatGPT plugins, which I wrote about in Attention is All You Need.

16:18I think plugins have the potential to challenge Google even more than ChatGPT itself because they both connect to the internet for real-time results and get into the valuable commerce searches, travel, shopping, food, and more that ChatGPT hadn't previously touched. Users may prefer a chat that takes actions on their behalf to a page full of links they need to search for themselves. It's still very early in the race, but it puts Google's search business in an uncomfortable position for the first time in 25 years, a period of near monopoly during which the company has built tremendous advantages in search.

16:50During that period, being positioned has been all upside. The upside of being positioned. Google is deeply positioned on one product, search. search. Being deeply positioned can be excellent, as Gordon points out. If you're in a word position, like Google has been in search for over two decades, being positioned lets you accumulate advantages and dig deeper most over time. For example, Google has arguably the greatest business model in the history of the world, search ads. In 2022, it generated$282.8 billion in revenue, $224.7 billion of which came from ads,$162.5 billion of which came from search ads specifically.

17:29It threw off over$60 billion in free cash flow last year alone. Its worldwide search market share has been practically impenetrable, ranging between 90 % and 93 % for the past decade, with an all-time high of 93.1 % last quarter while everyone called for its demise. That market share, the fact that it sees 20 to 30 times more searches than its closest competitors, compounds this advantage. Results get better the more people search. When people search for new things, which happens at a surprising rate, Google is best positioned to get good at serving those edge cases faster than anyone else. By having the best product, it can build a better product.

18:07And with a better search product, it can generate more search ads revenue. All of that sweet, sweet cash that ads throw off allow Google to spread its tentacles throughout the internet, even into its competitors' fortresses. It pays Apple somewhere between$15 to$20 billion per year to be the default search in Apple's products. Using its cash, the company has made some of the best acquisitions of all time to both strengthen and leverage its ad capabilities. Android puts its search front and center on 3 billion phones. YouTube generated$30 billion last year from ads, in part by being able to tap into Google's ad infrastructure and relationships.

18:44DoubleClick, the second greatest acquisition of all time according to Acquired, and first in the chart that I included in the post using updated 2022 data, allowed Google to bring its ads to the entire internet. Plus, it employs the people who are best in the world at search, many of whom have worked there for over a decade and are well-versed in the way that Google does things. It can use its cash and world-class employee perks, massages, chefs, disregard for whether you actually work at all, to hire nearly unlimited geniuses, crown them with colorful spinny hats, and train them at the knee of the world's greatest search experts.

19:16It can take cutting-edge advances in distributed systems, quantum computing, and of course AI, and apply them to the challenge of serving ever more relevant search results and ever more tempting search ads. Google even spun up the Google Brain research team, which came up with the Transformers architecture that powers LLMs, and acquired DeepMind, which solved the protein folding problem. Last week, the company merged the rival teams in an effort to get super serious about its AI efforts. There are many more benefits besides the ones I've listed, many captured in the other six of the seven powers.

19:48Scale economies, network economies, process power, switching costs, cornered resource, and branding. That last one is easy to see in the context of Google. People don't search for something, they Google it. All these moats have made Google an impenetrable fortress for a quarter century. One of my core beliefs, though, is that everything in life is a double-edged sword. Your greatest strength is often your greatest weakness. Being deeply positioned can be terrible when things start to change quickly, when you enter a war of maneuver. The downside of being positioned. When OpenAI launched ChatGPT late last year, Google was caught predictably flat-footed.

20:23Less than a month after ChatGPT's launch, Google CEO Sundar Pichai declared code red. Its search engine was, for the first time in two decades, in peril. How it got here is a case study in the downsides of being deeply positioned on one product. Google engineers invented the transformer architecture. The company built its own AI chatbot, Lambda, that was good enough to convince at least one Google engineer, Blake Lemoine, that it was sentient. But the company held Lambda back, concerned about the risk of releasing a product that was known to hallucinate, a risk to Google's brand around accurate information, and undoubtedly worried about how a bot that gives answers instead of links would monetize, a risk to Google's golden goose.

21:03Instead, OpenAI stole the spotlight with ChatGPT, and then again with plugins, a combination that threatens to bring down Google search monopoly. Even Microsoft, another incumbent and also ran in search with inferior AI capabilities, save its savvy partnership with OpenAI, was willing to risk its own chatbot, Sydney, saying unhinged things. How was Google so slow to react? The downsides of being positioned come in many flavors and from many directions. All the benefits we discussed above have evil or at least lazy or risk-averse twins. As Ben Thompson wrote in 2016 in The Curse of Culture, As with most such things, culture is one of a company's most powerful assets right until it isn't.

21:42The same underlying assumptions that permit an organization to scale massively constrain the ability of that same organization to change direction. More distressingly, culture prevents organizations from even knowing they need to do so. The biggest and most obvious downside is that Google search ad business is just too good to risk. Counterpositioning works precisely because incumbents aren't willing to risk damaging their existing business. It stands to reason that the better that existing business is, the less willing an incumbent would be to risk it. The better your position, the better target you are for counter-positioning.

22:16And at$225 billion, Google's search business is as good as it gets. In humans, and companies are made up of humans, the idea is known as loss aversion. Introduced by Daniel Kahneman and Amos Trusky, loss aversion is a cognitive bias where people feel the pain of losing something more intensely than the pleasure of gaining something of equal value. This leads to risk-averse behavior and a preference for maintaining the status quo. Google's position as a near monopolist in search means it has too much to lose to risk cannibalizing itself until and unless it becomes clear someone else might need it.

22:49Relatedly, Arrow's replacement effect also kind of fits here, as Ashman Varma pointed out on Twitter. He tweeted, If you want to argue that Google avoided launching because it was afraid of profit cannibalization, that's fine. But that's Arrow's replacement effect, not Christensen's disruption. Christensen goes to great lengths to distinguish between the two. In 1962, economist Kenneth Arrow wrote Economic Welfare and the Allocation of Resources for Invention, in which he showed that monopolists may underinvest in R &D because they're more concerned with maintaining their current market position and profits than risking the introduction of innovations that could render their existing products obsolete.