Facebook and Instagram was a perfect example. Facebook has money, time, and resources to build an Instagram competitor. But they didn't, because they still don't know how to monetize their mobile traffic (which should answer the question, "Why is Facebook's mobile app so awful?") They tried last minute to build Facebook camera, and when that had no traction because Instagram had already captured that market they had to cut their losses and buy it. My guess is Instagram realized that Facebook was basically forced to buy them and made them pay for it ($1B).
So I work on a startup in the news/journalism industry. If we're to follow the argument (which I believe is spot on), our goal is to build something that the New York Times or Washington Post wouldn't dare build, because it would destroy the revenue from their newspaper sales (yes, we have to compete against the likes of the Huffington Post too, but it's easier to illustrate it against the background of business models that haven't changed since the 1950's).
What Steve Jobs always preached was true - if you're not willing to cannibalize yourself, someone else will cannibalize you. As a startup, one strategy is to find those companies not willing to cannibalize themselves and help them out a little bit. But in doing so you run a risk; if you don't generate traction quickly enough and they see that it's inevitable, they'll just build it on their own and leave you hanging out to dry.