Distruptive innovation – a term coined and popularized by Professor Clayton Christensen – has serious implications for business. No wonder all the top bschools include in in their MBA curriculum (either through lectures, case studies, or group assignments).
Many Indian MBA applicants have a technology + engineering background. So it’s imperative to understand how disruptive technologies can impact your business…and your future, as a top MBA graduate at the helm of creative and innovative companies.
Avinash Errigineni is back with another hot MBA theory dissecting article. In this guest post, he delves into the world of innovative disruption and tries to go beneath the meaning by using an example.
“Good management is the most powerful reason they [good companies] failed to stay atop their industries. Precisely because these firms listened to their customers, invested aggressively in new technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership.” says Professor Clayton Christensen in his book, The Innovator’s Dilemma.
Welcome to the world of disruptive innovation!
Though his assertion may sound ironic, it actually isn’t if you understand the underlying cause. Disruptive innovations could upset the status quo in any industry. An industry that has big organizations developing products targeting a big market is a fertile ground for disruptive technologies. Typically companies in this category do extensive market research to understand customer requirements and design products that suit customer’s needs.
The products have a well-defined market too. The technology keeps getting better as companies invest more; the customers get better products. It appears, there is hardly any room for disruption but that’s only until you understand the characteristics of a disruptive innovation.
Disruptive technologies do not have a clearly defined market. And, because there is no defined market, sources of revenue for disruptive technologies are not identifiable. When they are first introduced, the performance of such technologies is very low when compared to that of existing products in the mainstream but the rate of increase in performance is high.
As a result of these characteristics, disruptive products do not pose perceivable threat to products in the mainstream. Established organizations are not keen to develop these products because revenue sources for disruptive products are not predictable while existing products generate revenues by catering to the needs of customers. Also, because performance of existing technology meets customers’ demands, they are reluctant to switch to a new technology for their performance is low.
The key strength of disruptive technologies, however, is that the rate of increase in performance is generally higher when compared to that of the existing technologies, and at one point their performance will catch-up with that of existing technologies. It is at this point that disruption becomes more apparent.
Once the disruptive technology tends to offer the same performance of an existing technology, often at lower price, it invariably tends to bite into the market share of existing technologies. This could result in the downfall of companies that rely solely on revenues from existing technologies.
Let’s understand this with the help of an example from the tech-world. Personal computers were first introduced in 1977. In the 35 years since, their performance has improved drastically to an extent where today there are PCs that fit into an envelope yet can offer good performance.
While it has taken a significant amount of innovation (sustaining) to get here, most of these improvements in technologies have been incremental innovations that many companies have well-adjusted to. Tablets, beginning from the introduction of the iPad, appear to possess all the characteristics of a disruptive innovation. In 2010, when the iPad was introduced its performance was low when compared to PCs in the main stream, and the market for such devices simply did not exist – Apple created the market.
By stripping off many of the features of a laptop and introducing touch capabilities, Apple had in fact made the iPad so simple that it could not be worth replacing a full-blown PC. But, it is precisely that simplicity that catered to the need of people who wanted to use a computer while on-the-go. As Prof Christensen says, “the attributes that make disruptive technologies worthless in mainstream markets typically become their strongest selling points in emerging markets.” The iPad fits perfectly to this assertion.
Leading PC manufacturers have not introduced tablets; one plausible reason could be that tablets can’t be used by a big chunk of their customers as a replacement for existing PCs. The companies may not see a tablet device as a threat to PCs. However, If the rate of performance improvement in tablets is greater than the corresponding rate in PCs, there could well come a time when tablets replace PCs.
With accelerated improvements in software (iOS and Android) and hardware (accessories such as keyboards) there is plenty of evidence already that tablets are being increasingly used for content creation. It may be interesting to note that in 2010, the iPad was primarily viewed as a content consumption device.
Is it possible to overcome such disruption at all? Microsoft is a good example of a company that has made changes to adapt to this disruption posed by tablets. Microsoft unveiled its tablet called ‘Surface’ a few months ago. With a keyboard and the Windows 8 metro styled OS, Surface is a prospective competitor to the iPad.
Surface is the first piece of technology whose software as well as the hardware is being made by Microsoft. This corroborates another aspect of disruptive innovations that changes in the way an organization works are required to counter such innovations.
Many software companies too are changing the interface of their products to accommodate touch capabilities. This is evident in products such as Gmail where the buttons on the interface have been enlarged to accommodate inputs from fingers on a touchscreen rather than just the pointer of a mouse; the hyper-links are bigger rectangular boxes and not merely text.
But, not all companies adapt to disruption quickly enough and often tend to get left behind. It would be interesting to see if the companies that are leaders in the PC industry today would still be at the top a few years from now. If they are not, we already know the reason.
The Innovator’s Dilemma