There is a huge difference between competing in a market and disrupting a market. When competing, a company tries to make a similar product in a given market segment, then competes against incumbent products on price or features to gain share and hopefully profits. When disrupting, a company produces a whole new product (or a viable derivative) that creates or changes a market, then dominates share and profits in that segment.

Competing is comparatively easy; disrupting is hard, expensive, bet-your-business risky, and prone to failure. But the rewards are sweet.

I went to business school back in the day when dinosaurs roamed the earth. The one thing that they drummed in to me was that corporate success was measured in market share. The bigger the share, the higher the revenue, the greater the profit, the better the success. A implies B implies C implies D. For some industries, that’s probably still true, look at oil or retail, the bigger the market share, the better the revenue.

But in the modern, nimble, changing technology business environment, larger market share no longer implies larger share of market profits. In fact, it seems the opposite is true, niche players are drawing all the profits. Yet analysts, market watchers, the media and the market players themselves still focus on share, not profits.

You know I’m building up to a point about Apple, Google, Microsoft and the other big players, but bear with me.

Lets look at the car market, my favorite example stalking ground. Kia chose to compete. They produce a line of generic cars that fit each market segment from small hatches though sedans to SUV’s. In each segment, they produce a similarly equipped car to the Toyota, Nissan, Mazda triumvirate, add a few extra features and price just below their competition. As a result, Kia has gained a huge percentage of market share off their rivals. Kia competes very well. By the old rules, they should make more profit. But they don’t. In tech, think HP, Asus, Dell and all the other clone PC makers.

Subaru, on the other hand, chose to disrupt. One could argue that they produce cars in the same market segments as Kia, but that would be missing the point. They decided to differentiate their products by ensuring all Subaru’s are 4WD and boast higher-performance engines. By creating ‘cooler’, outdoorsy, quirky, fun, greener cars, they created new market segments out of traditional ones, disrupting the market, in which they now dominate. And they do bring in the profits. In tech, think Apple.

You don’t have to disrupt with your entire product line either. Toyota competes in all its lines, just like Kia, and is struggling. But they did create one disruptive product, the Prius. They created a new market segment, the small hybrid, and dominated it for years. Note that the Prius though is in no way a better product, the build is Toyota’s usual, but the pricing is higher, and the fuel economy and environmental benefits are handily beaten by the Bluetec diesel engines popular in Europe. But it disrupted the market so much that they not only created the hybrid market segment, but dominated it’s share and profits for years.

So, getting back to the tech industry.

Today, Apple is the world’s most successful company. But it’s not even within spitting distance of owning the market share that old school business teachings say it should have. Lets take a closer look at the iPod, the iPhone and the iPad.

Back when Apple announced the first iPod, there were hundreds of portable media players in the market. Apple’s iPod did not try to compete against these, it totally disrupted the market. The iPod created a new market where having more songs, a sexy device and an easy-to-purchase ecosystem existed. The other players were competing against the old walkman market or whether to include FM radios. It still took a while for Apple to gain market share, but they were raking in the profits from day one.

The iPhone is the same disruptive business idea. RIMM’s Blackberry and Palm’s Treo owned the smartphone market, until the iPhone launched and totally disrupted their business. Today, the iPhone barely holds 2 digits in global smartphone market share, yet rakes in more than two thirds of all global profits from smartphones. In response, all smartphones now look like iPhone clones, which means the other manufacturers are competing, not trying to disrupt the iPhone juggernaut. And they are all barely breaking even. Or their businesses are failing.

And the iPad redefined the nascent tablet market. It’s running hot as it’s still being the main disruptor. To date, the competition is still trying to make a competing tablet to the iPad, and none have yet tried to disrupt it.

So, last week, Microsoft announced the Surface tablet. It seems nice. But in making the Surface, Microsoft played it safe and chose to compete, not disrupt. The Microsoft iPad competes with ultra-thin notebooks and full blown PCs with a traditional keyboard and desktop OS, it competes against the Apple iPad, Android tablets, Amazon’s Kindles, B&N Nooks and RIMMs playbook with it’s phone Metro interface. In choosing to compete, Microsoft blew it’s chance to create a stand-out tablet device that could challenge the iPad. And it’s a little too late. Competing in this highly competitive and highly dynamic space is unsustainable and unprofitable.

I actually think that Microsoft no longer has the talent to disrupt markets. Their XBox team managed to do it, by changing how social gaming works. Their Zune team did not disrupt. Their Windows Phone team may have a pretty Metro interface, but they are competing against Android and iOS, not disrupting. And their core operating system, enterprise and office businesses are languishing. They missed their chanced to disrupt even after the lessons learned and success of the XBox. Unfortunately the compete mindset has taken over.

And next week, the other big player in this space gets it’s chance to make a move, at Google IO. There, they will announce a new version of Android. But all that does is keep them competing in the smart phone space. It won’t disrupt.

But they will also announce their new Android tablet software, and here they have the chance to disrupt the iPad market. How? By using their core assets to create a disruptive tablet product, from hardware to services, soup to nuts as they say.

Let me put on my Robert X Cringely tinfoil hat and start making wild predictions based on known Google strengths. Google can do hardware, the Nexus phone hardware and Chromebook are both excellent devices. They can do software, the latest version of Android is excellent. They can do services, is there any data or service not available today that does not have a Google moniker - mail, web browsing, documents, collaboration, finance, social networks, media (books, music and movies), photo sharing, and then some. Integrating their own hardware, with their own operating system and their own services creates a compelling tablet, but that only competes with the iPad.

Google also has a large amount of WiMAX spectrum and dark internet fiber sitting idle. If they took this device and married it to a carrier-less, Google-owned and run network, they will totally disrupt both the tablet and probably the phone market too. Imagine a device with Google hardware, Google OS, Google services and cheap always-on Google network access, and you’ll have the ultimate all-in-one communicator. By introducing a compelling tablet and taking the hated carriers out of the game, they’ll disrupt it all, and people will switch in droves. I believe they can do this, disrupt it all, I just don’t know if they have the risk appetite to do it.

If you intend to move into the technology market space, you need to disrupt it. Making yet another clone phone, clone tablet, clone media player, clone TV is not good enough. Sony, are you listening? Making a disruptive phone, disruptive tablet, disruptive media player, disruptive TV is how to succeed. Apple did it with the Apple II, and again recently with the iPod, iPhone and iPad. Microsoft, Google, RIMM, Motorola and Nokia used to do it. They all grew through disruption. If they want to succeed again, they’ll need to disrupt again.