“Play to your strengths.”

“I haven’t got any,” said Harry, before he could stop himself.

“Excuse me,” growled Moody, “you’ve got strengths if I say you’ve got them. Think now. What are you best at?”

—J. K. Rowling, Harry Potter and the Goblet of Fire

Spend any time at an industry conference in Silicon Valley and you will be startled by the palpable, sometimes offensive, hubris of the startup culture. You’ll hear a lot of “Big companies just don’t get it” and “The fast eat the slow for breakfast,” backed up with “When one of our people left to go to a big company, the average IQ of both companies went up.” Experienced sages will actively be counselling startup CEOs in the hallways to be careful about partnering with big, established industry leaders lest their companies be dumbed down, slowed down, or both.

On the face of it, this can be written off as part fake-it-until-you-make-it bravado and part irrational youthful exuberance. Dig deeper, though, and you can sense the remarkable fragility that is the venture-funded startup. Startups survive one funding round to the next based on what are often subjective assessments made by their investors using metrics such as “eyeballs”—or the even more vague “market traction.” Early-stage startup CEOs often spend one-third to one-half of their time raising capital for the next funding round instead of running their businesses.

Your Crown Jewels

As the wizard Alastor Moody implores Harry Potter, it is time to pause and think hard about what you are uniquely good at. Specifically, what are your crown jewels? These are not just any random advantages that are available to you. Crown jewels are assets or capabilities that form the starting point for your company achieving Goliath’s Revenge. They are the source of your incumbent’s advantage and the foundation for how you and your company are going to shift from defense to offense as the first step in disrupting your industry’s digital disruptors. To qualify as a crown jewel, each of these assets or capabilities must pass three tests:

1. Essential to customer value. If you asked 10 of your customers whether a given asset or capability is an important part of the reason that they spend their money on your products or services, would eight or more of them say yes?
2. Uniquely controlled by you. Are the given assets or capabilities ones that your industry’s digital disruptors also possess, or do they differentiate your company from those emerging competitors?
3. Hard to replicate by others. Would it take your industry’s digital disruptors at least a year to copy those assets or capabilities, thereby providing you with enough runway to put them to work?

Defining your specific crown jewels is going to require an honest self-assessment. You need to go beyond “What are we good at?” and get to “Why those things matter” to your customers as digital competition reshapes your industry. While any asset or capability is a candidate for your crown jewel inventory, we thought it helpful to give you a starting point.

The established companies that are effectively turning the tables on digital disruptors tend to have crown jewels across multiple areas of their businesses. There are seven areas that we would encourage you to explore as you follow Moody’s advice: self-funding innovation, brand reach, existing customer relationships, installed base, data sets, blocking patents, and standards influence.

Now before we jump into a discussion of each of these seven areas, let us highlight one asset that established companies talk a lot about, but which is not inherently valuable on its own: domain knowledge. The problem with domain knowledge is that it hardly ever passes the second test above. If a startup wants some, they can hire a representative set of people from that domain who will gladly bring them an understanding of an industry’s value chain, core processes, profit levers, and so forth. Or even cheaper, startups can hire retired experts as consultants to bring this level of understanding. As you will see below, it is the manifestation of domain knowledge as actionable assets or capabilities that creates the incumbent’s advantage.

Self-Funding Innovation

Established companies almost always enter the fray of digital disruption with an existing core business that is capable of self-funding at least some of their required innovation investments. The most fortunate companies have multiple core businesses that may be experiencing decelerating growth but are still healthy enough to deliver prodigious free cash flow. This capability of self-funding innovation can be a powerful crown jewel in dealing with digital disruption.

Some examples might help. Microsoft has the massive Office and Windows businesses that have provided the multibillion-dollar cash flow needed to compete in the high-growth IaaS (infrastructure-as-a-service) market globally. In fact, Microsoft has made big enough bets early enough to establish itself as a clear market leader alongside Amazon Web Services. Over the past several years, Azure has actually been growing faster than AWS, which is a remarkable feat. Microsoft’s self-funding innovation capability has been particularly effective against pure-play attackers such as Rackspace, Equinix, and others that have to rely on the good graces of the capital markets to raise the substantial funding needed to compete in IaaS.

This self-funding innovation crown jewel is demonstrating its power across many other industries. In financial services, Schwab’s massive-scale mutual fund business provides the discretionary investment dollars needed to build its own robo-advisor, which is competing effectively against digital disruptors Betterment and Wealthfront. Many customers already view Schwab’s automated wealth management offering as comparable to those of the pure-play attackers, even though those disruptors had a multiyear head start.

Internationally, Japan-based Hitachi benefits from a broad portfolio of global businesses across diverse sectors of the economy. Hitachi’s market leadership across elevators, escalators, water treatment, trains, power generation, grid management solutions, and heavy construction machinery produces over 700 billion yen ($6.3 billion US dollars) in operating income and over 250 billion yen ($2.3 billion US dollars) in free cash flow. This financial strength is enabling Hitachi to accelerate development of its horizontal Internet of Things applications to turn the tables on the dozens of vertical IoT software companies attacking the various industries that Hitachi competes in.

The list goes on. This ability to decouple long-payoff investments that position a company for digital success from a startup’s reliance on the next funding round is an underappreciated asset that almost every established company has at its disposal.

Brand Reach

After having the financial strength to self-fund innovation, brand reach comes second in terms of its potency. Brand value is remarkably effective and unexpectedly flexible as a tool for established companies seeking to defend against, and eventually outflank, their industries’ digital disruptors.

The key principle is that brand value is much more than just name recognition. The intrinsic value of a company’s brand is rooted in that organization’s cumulative history of customer promises kept. In an analysis by consultancy Brand Finance, brand value was estimated to be worth $61 billion at Walmart and $82 billion at AT&T. International brand-value leaders include oil and gas company Pemex (valued at $8 billion in Latin America), telecom company Etisalat (worth $8 billion in the Middle East), and consumer electronics player Samsung (valued at $92 billion in Asia).

While startups might garner effusive media mentions as well as high volumes of clicks, follows, and likes related to their latest press releases, few enjoy the persistent brand value that forms part of the incumbent’s advantage. Startup brands often suffer from their relatively short operating histories and inconsistent delivery on their customer promises. Some even accumulate negative brand value over time through a growing track record of overpromising and underdelivering.

You may be asking yourself what the difference is between “brand value” and the “brand reach” that we have highlighted as a potential crown jewel for your company. The answer lies in how elastic your brand value is. Do you believe that your cumulative history of customer promises kept will translate into customers giving you the benefit of the doubt as you compete in adjacent markets or launch digital offerings alongside your core business?

Only you can answer that question. If your answer is yes, then you can convert your existing brand value into the incumbent’s advantage of brand reach. Your brand value will become a means to that end. Your brand reach will effectively underwrite a new customer promise—an innovation insurance policy, if you will. You will enable your industry’s mass market, pragmatist customers to adopt new and innovative solutions without risking the potentially career-limiting mistake of relying on a startup that overpromises and underdelivers.

GE has made great strides in translating its global brand value into brand reach for its digital offerings. GE’s services business, in particular, which keeps the world’s aircraft engines, MRI machines, power plants, and oil and gas rigs running in some of the harshest environments on the planet, has a multidecade history of delivering on customer promises. As GE sought to grow beyond its traditional remote monitoring and diagnostics offering, its GE Digital branding provided the opportunity to extend its digital footprint within its customer base to new areas like asset performance management and field service automation. It is important to note that this translation of GE brand value into the GE Digital brand reach did not come for free. Starting in 2012, GE made substantial investments across traditional and digital media, in parallel with the launch of its annual Mind + Machines customer conference, to stretch its reputation for promises met to the digital realm.

Existing Customer Relationships

Existing customer relationships are the third potential crown jewel in the incumbent’s arsenal. These customer relationships have market-shaping power beyond the brand reach that we have discussed above. In nearly every industry, the cost of acquiring a new customer is three to five times the cost of selling a new offering to an existing customer. This simple math can gradually but irreversibly tip the scales in favor of established companies.

For most digital disruptors, nearly every dollar of revenue growth is coming from selling to new customers, while in established companies of all sizes, new deals within long-established customer relationships account for the majority of revenue growth. From a return-on-sales perspective, the impact of this is profound. The race for long-term industry leadership is more of a marathon than a sprint.

It is relatively easy to sell to the first three-to-five visionary customers in any market. Every industry has a set of known early adopters that implement disruptive innovations before their peers in search of a lasting competitive advantage. Think Goldman Sachs in financial services, Tesco in retail, Disney in entertainment, and Virgin Atlantic in aviation. They may be demanding, but they are also an easy sale for innovative solutions.

The hard part comes when an innovation needs to get past time to market and on to the tougher challenge of time to scale. The first-mover status enjoyed by digital disruptors often fades during the market transition from pre-chasm visionary customers to post-chasm pragmatist ones. The buying criteria and process of these mass-market customers heavily favor established companies.

Mass-market customers simply do not like starting from scratch with companies they do not know. People buy from people. The multiyear, sometimes multidecade, professional relationships between your company’s sales representatives and your customers’ buyers are much stronger than you give them credit for. You are probably on customers’ approved supplier lists with preset payment terms and conditions already in place. Your people that are on-site with customers have likely already cleared whatever background checks and security audits that those customers have in place. They may even have badges that afford them access to customer premises alongside the customer’s own employees.

Beyond those more administrative aspects of your existing customer relationships, your people almost certainly have insider knowledge about the unique needs and expectations of your customers. This will be invaluable as your company, organically and through acquisitions, broadens the range of innovative solutions that you can sell back to these long-term customers.

Consumer companies, such as GM, and industrial companies, such as GE, have demonstrated how successful this innovation cross-selling approach can be. GM fully leverages the footprint of its dealer network and the long-standing sales and service relationships it represents to compete with digital disruptors, such as Tesla. GE overlays its industry-specific sales professionals with digital sellers recruited from the technology industry to execute four-legged sales calls as the most effective way to cross-sell digital solutions to existing customers. Even if you are more fast follower than first mover in terms of innovation, don’t underestimate the incumbent’s advantage of your existing customer relationships.

Installed Base

A powerful derivative of your existing customer relationships is your company’s installed base: that is, the total number of assets or services that are in use by your customers. Think of this as the cumulative impact of multiple generations of past product and service innovations. The best candidates for Goliath’s Revenge have sophisticated systems to track this installed base and a strong orientation in their innovation programs to bringing more value to it, for both themselves and their customers.

To assess how well you’ve activated your installed base as a crown jewel, you need to calculate what we call your “digital yield”—that is, your annual digital revenues divided by the cumulative installed base value of your products operating within your customer base. A back-of-the-envelope approximation of your company’s installed base value is to multiply your average annual product revenue over the past 5–10 years by your estimate of how long an average customer operates your products before they dispose of them.

So if you are an HVAC contractor with an average annual product revenue of, say, $1 million, and your customers refresh the types of products you sell every 10 years on average, then your estimated installed base value would be $10 million. If you are Apple selling an average of, say, $100 billion worth of iPhones a year and your customers swap out their phones every third year on average, then your estimated installed base value would be $300 billion. You get the point.

Your digital yield is the annual revenue of your digital innovations this year divided by that estimated installed base value. If you are the HVAC contractor offering a remote monitoring and predictive maintenance service to your customers with an annual subscription revenue of $500,000, then your digital yield is 5%. If you are Apple, you could think of your digital yield for the iPhone business as the $12 billion you keep from customers’ App Store purchases plus the $30 billion from annual services revenues (including iTunes and iCloud) divided by your $300 billion estimated installed base value, or 14%.

Cisco has long appreciated the incumbent’s advantage of its installed base and does an excellent job activating this crown jewel to both defend against digital disruption in its core switching and routing markets and to grow into higher-growth market adjacencies. A decade ago Cisco made substantial investments in developing sophisticated customer installed base management tools, such as Smart Net Total Care. In parallel, Cisco digitized both its customer support and network optimization service offerings. In its core business, Cisco has driven up its digital yield by shifting customer support from break-fix reactive services to fix-before-break proactive ones. To drive customer adoption in adjacent markets, such as TelePresence remote collaboration and Internet of Everything applications, Cisco has innovated new optimization solutions that ready customers’ networks for these new workloads based on increasingly granular configuration parameters that are adjusted by Cisco algorithms instead of customers’ IT teams.

Whatever your starting point, viewing your installed base as a crown jewel will focus your energy on driving up your digital yield over time. That incumbent’s advantage protects your core business today and serves as a springboard for growth into new markets tomorrow.

Data Sets

Data sets might be the least understood but most valuable source of the incumbent’s advantage over the long term. Digital disruptors would kill for the chance to gain access to years of granular data about business processes, operations metrics, customer buying patterns, industry return on investment (ROI) models, and the like. In fact, some established companies are unknowingly squandering their potential advantage by openly sharing their data sets with startups for what will prove to be pennies on the dollar.

As AI, machine learning, and bigger data analytics continue to expand their pivotal roles in the operation of entire industries, we will start to think in terms of algorithmic advantage: that is, which company in any given industry has most effectively translated domain knowledge of their markets into computer-based insights that go beyond what a human expert can deliver. Nearly every core business process is fair game for this better-than-expert optimization based on sophisticated algorithms.

In the first wave of digital disruption, a company’s algorithmic advantage tended to rely on the efforts of a small, expensive team of data scientists. These water walkers would gather fragmented data from various operational and IT systems, cleanse and normalize that data to make it useful for analytics, and apply statistical, visualization, and analytic approaches to glean insight needles from the data haystack. Early pilots and proofs of concept were promising but, as we will touch on in Chapter 6, scaling this human-driven data science approach has proven challenging.

Future algorithmic advantage will increasingly be developed by machine learning. Computers can aggregate, normalize, and identify patterns in data sets at rates that human data scientists will never match. Preparing for this second wave of algorithmic advantage requires established companies to do a much better job of understanding the inventory of data that they control, putting in place data governance policies and tools to safeguard it, and investing in or partnering for the machine learning capability needed to translate that data from a potential incumbent’s advantage into a powerful crown jewel.

The dirty secret of data science is that most established companies have a minimal understanding of the data sets that their businesses produce on a daily basis. Data is likely fragmented across your legacy “systems of record” applications from the likes of SAP, Oracle, or Intuit; your proprietary customer service systems that might be running inside third-party service firms; various spreadsheets that your finance team uses to understand trends in your operations; and emerging “systems of engagement” applications, such as the social media platforms millennial customers favor when engaging with your company.

Companies such as Splunk have grown from relatively small businesses to billion-dollar service providers helping established companies of all sizes aggregate and index their data assets. If you believe that digital solutions will be critical to your future revenue growth and profitability, then you are probably not spending enough today to inventory, harness, and activate the data sets you already control.

Blocking Patents

Another potential area of incumbent’s advantage you should consider is intellectual property (IP): specifically, whether your years of past innovation, research, and development have produced what are called “blocking patents,” which can buy you the time needed to achieve Goliath’s Revenge. Blocking patents provide a time-limited exclusive opportunity for your company to market a given product or execute a specialized business process. The most powerful blocking patents, in terms of their potential for incumbent’s advantage, have both few viable workarounds and a significant time period remaining until the protections they afford expire.

We have put this later in the list for a reason—IP protection is often the hardest source of incumbent’s advantage to activate. Patents first need to be filed in all of the countries and regions that you compete in. Those patent filings then need to be adjudicated by the respective patent-granting authorities and issued. Finally, the issued patents must be asserted against those who might be infringing on your IP.

This final step almost always requires the threat, and often the reality, of legal action to enforce your blocking patent rights on aggressive competitors seeking to disrupt your core business. Digital attackers, in particular, have tended to take an ask-for-forgiveness-not-permission approach when it comes to IP. Uber’s $245 million settlement of Google’s lawsuit claiming that Uber infringed on its Waymo self-driving car IP comes to mind.

Blocking patents are not for the faint of heart. They can be highly effective, though. One of this book’s authors ran the products businesses for enterprise mobility leader Symbol Technologies (now part of Zebra Technologies) earlier in his career. Symbol’s years of R&D on moving laser beams to read barcodes and making rugged mobile computers work in challenging industrial environments resulted in a powerful portfolio of blocking patents. The digital disruption Symbol faced at the time was the transition from printed barcodes to the talking barcodes called RFID tags. Symbol’s blocking patents in barcode scanning and enterprise Wi-Fi power management provided the competitive protections, high-margin licensing revenues, and extended time period required for the company to acquire RFID leader Matrics, integrate that team into Symbol’s operations, and come to market with next-generation rugged mobile computers that could read both printed barcodes and RFID tags. At least in Symbol’s case, blocking patents proved to be the most important source of incumbent’s advantage.

Standards Influence

This seventh and final potential source of incumbent’s advantage is related to the blocking patent protection we just discussed. Society as a whole is ill prepared for the transition to a digital future. Some skills are being devalued while others are in short supply. Some companies are capturing massive industry power, revenues, and market capitalization, while others are being torn apart after century-long periods of success. With gyrations like these, governments are flexing their muscles to ensure that country-level imperatives are realized, worker safety and financial security are prioritized alongside corporate profits, and consumer privacy is protected in a world where data really is king.

Digital disruptors are rookies at the standards game. At least when they are small, their venture capitalist backers want to spend money only on engineers (people who make things) and sales staff (people who sell things). All other expenses are good candidates for elimination from proposed budgets. This can work to the advantage of the established companies that aspire to Goliath’s Revenge. In almost every country, there are both government and industry standards bodies that define and enforce the rules of competition for a given industry.

At a minimum, these rules directly impact the pace at which digital disruption is likely to unfold. Established companies can therefore buy time for their own innovation program to succeed through their direct influence on both emerging government regulations and the self-enforcing rules defined within industry associations. Taken further, these regulations and rules can tip the scales in favor of one innovation or business model over another. That impacts the eventual winners and losers in the race for industry leadership as digital disruption unfolds.

Companies such as Broadcom and Qualcomm are particularly effective at influencing standards for the wireless industry in ways that favor their chips and innovations. In every transition—from 3G to 4G, and now, from 4G to 5G—industry trade groups, such as the Cellular Telecommunications and Internet Association (CTIA), exert a direct influence on which technical capabilities are embedded in the standard and which are left out. CTIA actively lobbies government regulatory bodies, such as the Federal Communications Commission (FCC) in the United States and the Body of European Regulators for Electronic Communications (BEREC) in the European Union. Both the FCC and BEREC govern critical aspects of success in the wireless industry, including access to spectrum, rules on net neutrality, and various universal service obligations.

Beyond the wireless industry, examples abound of established companies buying time for their innovations to bear fruit through standards influence. Monsanto and DuPont have been adept at securing positive government regulation and fending off negative rules regarding their innovations in genetically modified seeds and foods. Amgen and Genentech have invested vast sums to influence how genetic therapies are approved by the US Food and Drug Administration as well as by other national health regulatory bodies. American cable companies went so far as to create a shared, not-for-profit innovation organization called CableLabs that helped them get DOCSIS—Data Over Cable Service Interface Specification, if you are really interested—accepted as the carrier network standard that gave them a competitive advantage over traditional telecommunications companies.

Regardless of the industry you compete in, don’t underestimate the powerful potential of your existing standards influence to sway regulations, rules, conventions, and technical standards in your favor as you turn the tables on digital disruptors.

What Are Your Crown Jewels?

In Chapter 1 we covered the remarkable comeback story of GM. GM is activating multiple crown jewels to utilize its most important sources of incumbent’s advantage. First, GM sells over 10 million gas-powered cars annually, providing the financial fuel to self-fund much of the multiyear innovation investment required across electrification, autonomy, and car/ride sharing. In comparison, Tesla sold just 100,000 cars in 2017. That is a 100-to-1 advantage for GM. Second, GM has invested for decades in a global portfolio of brands that are widely recognized in each country where GM competes. Just one of those brands—Chevrolet—is estimated to be worth $12 billion. GM has activated that brand value into brand reach through the Chevy Volt and Chevy Bolt.

Third, GM enjoys significant cost-of-sales leverage due to its extensive dealer network and the ability to cross-sell new electric cars to existing loyal customers. Fourth, GM has a history of investing for digital yield: OnStar dates back to 1996. That is two years before Google even existed. Fifth, in recent years GM has focused more heavily on integrating its data across brands, regions, and operating companies as the basis for both internal productivity and launching new high-growth businesses.

Sixth, in 2016 GM joined with Ford, Honda, Hyundai, and other automotive leaders to pool IP in a way that prevents companies called patent trolls from inhibiting their rapid commercialization of innovation. Finally, GM has been deeply involved in the pacesetting of automotive standards all the way back to when a California government mandate was the catalyst for GM’s launch of the EV1. More recently, GM has invested heavily in environmental testing facilities at its Warren Technical Center to demonstrate to regulators that battery-powered vehicles are both safe and reliable in any weather.

Now, we don’t expect your company to have an incumbent’s advantage in each of the areas we’ve outlined here. GM is a fairly unique case in that regard. However, you may have additional assets or capabilities with crown jewel potential beyond these seven categories that we have highlighted. Your homework is to identify your potential crown jewels within each area, then score them against the tests above (essential to customer value, uniquely controlled by you, and hard to replicate by others). The ones that pass all three tests represent your basis for incumbent’s advantage and your starting point in applying the six rules of Goliath’s Revenge.