GenAI: the future belongs to those who pause and reflectÂ
As GenAI captures the world’s imagination, executives should remember that it takes time to create a future-proof company....
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by Howard H. Yu Published 12 May 2023 in Innovation • 7 min read
After three torrid quarters that it would probably rather forget, Meta is back on form, having reported a return to sales growth in the first three months of 2023, enabling it to forge ahead with its expensive bet on the metaverse. Even as the company invests in artificial intelligence, CEO Mark Zuckerberg has reaffirmed his commitment to building an avatar-filled virtual world.
With its earnings guidance coming in above expectations, Meta can plough ahead with that ambition. The company previously announced redundancies of about 20,000 staff in what Zuckerberg called “the year of efficiency” amid inflationary pressures and macroeconomic woes.
But the more recent turnaround in its performance masks an underlying problem for Meta: it could be putting all its eggs in the wrong basket.
When it comes to gaining traction through innovative disruption, businesses are often better advised to focus on the lower end of the market, rather than chasing high-value customers, as Meta is doing with its sophisticated technology.
To understand Meta’s problem, it is useful to contrast its situation with that of online game platform Roblox. Of course, on one level, Meta remains highly successful, and it ranks #6 on our Future Readiness Indicator analysis of the tech industry. Yet very few people have, to date, downloaded Meta’s social VR platform, Horizon Worlds. However, if you have school-age children in North America or the UK, you’re likely to be familiar with Roblox, at least to some extent.
Roblox offers a blend of user-developed games, fun experiences developed by street-savvy brands, and a rapidly increasing range of opportunities for monetization (including those based on NFTs). It now boasts over 200m active monthly users – dwarfing the 300,000 monthly users of Horizon Worlds. This is despite Meta’s colossal R&D investment in the metaverse of more than $12bn in 2021.
How has Roblox managed to capture such a large user base while Horizon Worlds has struggled? After all, at the technological level, Roblox is not particularly advanced, with relatively basic graphics and unsophisticated gameplay. Zuckerberg’s vision, by contrast, is of an immersive online universe, almost indistinguishable from the real world.
But this is the point. Roblox’s popularity has not been achieved despite its low-end technology but because of it. Yes, it works with VR headsets, but it can also be played on PC, Mac, Xbox One, and even iOS and Android smartphones, which means the bar to entry is set low. Setting up an account is intuitive and straightforward, and those with free accounts can enjoy unrestricted play. This is a formula for success: targeting lower-value market segments who may have less money to spend, but who will be more tolerant of technical shortcomings or slip-ups as the technology evolves.
The innovation strategy pursued by Meta and its peers, including Microsoft and Apple, is in stark contrast. These US tech giants have focused on products designed to appeal to their most lucrative (on a per-head basis) customer segment, only to find that demand for this unproven technology remains stubbornly low. In the meantime, Roblox has brilliantly filleted out what matters to a teenage (and pre-teen) audience. It is less concerned with the level of realism of its digital experiences as it is with making them accessible and fun. This approach is paying off.
Roblox’s strategy is a classic example of low-end disruption. Businesses can thrive when they capture market share through creative new products that grab consumers’ attention – even if those products have their flaws and limitations. Ironically, this is the same approach that Facebook used to launch its first social network, targeting students at Harvard and MIT.
Yet, time and again, companies make the error of targeting their highest-spending customers with innovations, leaving the door open to challengers who position themselves as serving the lower end of the market, focusing on customers who appear less appealing, but enable the company to seize market share with a product that can, over time, evolve to become a real threat to incumbents.
This is also seen in how Sony gained its foothold in consumer electronics when it launched transistor radios in the 1950s. At that time, the US market was dominated by companies like RCA, whose valve-based radios delivered good sound quality and healthy profits, but were also large, heavy, and relatively expensive.
As the late Clayton Christensen and colleagues pointed out, RCA commercialized transistors in their existing vacuum tube markets, but failed to exploit the potential for smaller, cheaper designs, overlooking their disruptive potential. Yet in the hands of companies like Sony, the new technology opened the door for an entirely new category of radio, including pocket-sized devices that simultaneously offered teenagers privacy and access to the latest hits.
RCA’s error was to focus on satisfying the expectations of its highest-spending customers, meaning the only way to go in innovation was up, spending more on design and raising prices accordingly. By contrast, the teenage audience that Sony tapped into was happy to accept tinny sound, if it meant they could afford the product.
The RCA executives were not stupid, any more than those who are leading today’s tech giants. Yet businesses in all sectors keep making this mistake, because of the pressure that traditional financial logic puts on them to pursue the innovations that look best on paper. That is, the ones that promise high returns in the near term by pandering to the highest-spending customers.
All too often, the result is that today’s value models are overtaken by innovators who target those lower-value parts of the market, often creating new product categories in the process.
To avoid the trap that snared first RCA and now Meta, leaders should consider four key areas:
Even the ultra-smart Silicon Valley firms who have successfully marketed so many innovations over the years ignore changing market dynamics at their peril. Following Roblox down the low-end route can ultimately allow organizations to enjoy whole-market access, instead of the dead end in which Meta, with its high-end strategy, finds itself.
LEGO® Chair Professor of Management and Innovation at IMD
Howard Yu, hailing from Hong Kong, holds the title of LEGO® Professor of Management and Innovation at IMD. He leads the Center for Future Readiness, founded in 2020 with support from the LEGO Brand Group, to guide companies through strategic transformation. Recognized globally for his expertise, he was honored in 2023 with the Thinkers50 Strategy Award, recognizing his substantial contributions to management strategy and future readiness. At IMD, Howard directs the Strategy for Future Readiness and Business Growth Strategies programs.
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