In fact, E-Trade provided self-directed traders a wide variety of ways to execute trades, that included the Web, well before Schwab even thought about going online. But because of inferior financial resources and weaker management, E-Trade was unable to sustain its lead against Schwab's persistent and well-financed attack on the online trading market. As a result, E-Trade has tumbled to No. 3.
How Schwab achieved the leading market share in online trading throws Christensen's thesis into question. Schwab's chairman, Charles Schwab, began pushing his firm into online trading in October 1995. He was well aware that the company's rivals - Lombard Securities and E-Trade - were already offering trading on the Web and that low-end customers were using the new services. If it can be believed now, it was actually unclear at the time whether such services would achieve widespread popularity.
In October 1995, Schwab's computer lab developed a prototype online trading system. Schwab was thrilled when he used it to trade 100 shares of stock. Within six weeks, Schwab had hired Gideon Sasson, VP of IBM (IBM)'s Web business, as executive VP of electronic brokerage.
Schwab pushed Sasson to launch the online trading system in 90 days. For less than $1 million, Schwab's internal team achieved that goal. Since then, the company has struggled to keep up with the tremendous demand for online trading. Schwab remains No. 1 in online trading, though.
Let's apply Christensen's theory to Schwab. When Schwab began its online efforts in 1995, online trading was a disruptive technology. Contrary to Christensen's prescription, Schwab did not respond to this disruptive technology by establishing a separate online trading subsidiary to compete with the parent. Instead, Charles Schwab hired an executive VP to build what became a successful online trading business at Schwab's core.
Schwab succeeded because it could see that online trading was doing to its discount brokerage business what Schwab had done to Merrill Lynch (MER)'s full-service brokerage business in the 1980s. Schwab had no intention of letting E-Trade do what it had done to Merrill. So Schwab reinvented itself.
The case of Hewlett-Packard in inkjet printers similarly undermines Christensen's theory. HP discovered the inkjet technology by accident in 1978, literally in a broom closet, at its ailing Vancouver, Wash., division. At the time, the division's primary product was printers. Faced with the choice of either closing down or finding a way to exploit inkjet technology, the Vancouver division built the inkjet technology into a business with more than $6 billion in revenues.
It took HP more than 10 years to figure out how to make inkjet a commercial success. While reviewing market-share charts one day in the fall of 1989, HP execs realized that they had been targeting the wrong enemy. Instead of positioning the inkjet as a low-cost alternative to HP's laser printers, the managers decided to attack the Japanese-dominated dot-matrix market. Dot matrix had poor print and color quality. Furthermore, Epson, the dot-matrix leader, had no competitive inkjet product and was distracted by an expensive and failing effort to sell PCs.
In a nutshell, HP replicated the strengths of Epson's strategy and attacked its weaknesses. The result: Between 1984 and 1994 HP's share of the U.S. printer market grew from 2 percent to 55 percent.
Christensen would have told HP to create a separate inkjet subsidiary to compete with the parent company. In fact, the Vancouver division already existed. HP succeeded by competing with Epson's dot-matrix printers, not by competing with its own laser printer business.
