Choose to Disrupt
Date: Saturday , March 31, 2007
Whether it is venture capitalists, entrepreneurs, or fresh college graduates, everyone has a stake in understanding the process of innovation. It is a myth that innovative ideas come from a stroke of genius or a flash of brilliance. No doubt, it helps to have some of those faculties, but one can also find opportunities for successful innovation by being aware of the different types of innovations and their impact on industry participants (customers, startups vs. incumbent vendors). The key difference between innovation and invention is that unlike invention, successful innovation is judged on its ability to earn a profit.
In this article, I would like to remind folks that technology commercialization strategy as opposed to the nature of the underlying technology determines whether or not an innovation is disruptive or sustaining. Furthermore since large, established firms have difficulty identifying or responding to disruptive innovations, upstarts or startups have a better chance at success if they choose to deploy a disruptive innovation strategy to commercialize their innovation.
Disruptive vs. Sustaining Innovation:
An innovation is disruptive if it results in the creation of new / emerging market or increases the consumption of a product by bringing in a larger number of buyers into a market (for example, by making the current product cheaper, easier to use). Digital photography is a disruptive innovation. The benefits of storing and archiving pictures on a hard drive and the ease of sharing pictures enabled by digital cameras far outweighed the lower picture quality of the first generation of digital cameras. Its initial market that gravitated to the above value proposition was the rapidly growing number of computer savvy, email / SMS-happy consumers.
Over time, the picture quality of digital camera has improved to the point that it is equal or better than the traditional film cameras for most applications. Therein lies a key characteristic of disruptive innovations. Disruptive innovations (digital cameras) often have lower performance (print quality) along the performance metrics (number of mega pixels) of mainstream consumers of the current technology, but offer something of value (picture storage, sharing,) to a new user segment. However, as is true of most high technology products, as the new technology matures, its performance improves such that it can also address the mainstream market, This in part explains the woes of companies such as Kodak that are struggling with the digital revolution. Other examples of disruptive innovations are;
1. VOIP technology is disruptive to the Plain Old Telephone System (POTS).
2. IPTV vs. traditional Cable TV.
3. Manned fighter jets vs. un-manned military aircrafts (drones).
Sustaining innovations are innovations that improve the performance of a product along the already established technical metrics of the mainstream consumers. These innovations typically make a current product faster and better performing. Examples of sustaining innovations are:
1. Successive generations of Intel Pentium processors (Pentium 3, Pentium 4, Pentium 5, etc.); they increase the performance along the technical metrics (MHz, GIGAFLOPS) of the mainstream consumers.
2. Successive generations of Microsoft Office application suite
However, the idea of market disruption has its roots in the demand (market) side of technology, i.e., how the technology is introduced to the market; by finding new markets, competing against non-consumption of current product, or by giving a better product to current consumers (sustaining innovation). A technology innovation can be commercialized disruptively or in a sustaining fashion depending upon timing of entry and the state/maturity of the technology.
Let’s take the example of IPTV and see how a disruptive innovation strategy to commercialize this technology would differ from a sustaining innovation strategy. IPTV is the offering of television by telecommunication companies trying to create a “triple play” of services that compete with cable company’s TV, internet, and phone offerings.
To offer IPTV technology as a sustaining innovation would mean continuing to invest R&D dollars until IPTV can outperform the current offering (Cable TV) along the existing metrics customers expect from cable TV (i.e., good picture quality, programming variety). To improve upon the current cable offerings they could use their set top box as a digital video recorder, like TiVo. The ability to watch higher resolution TV and skip commercials would be considered better by the existing metrics of the market.
However, others may choose a disruptive strategy to bring the IPTV innovation to market by exploiting the two-way communication abilities of IPTV. In order to be successful using this route, one needs to find applications where users may be willing to tradeoff picture quality for the two-way communication capabilities of IPTV.
Example of interactivity may be that while watching a show, users can vote for performers, ask questions to the host, chat with other viewers, and watch videos created by users instead of just big media companies. Mainstream TV watchers may find the new features of IPTV distracting but the new features may attract a large following of new users. Getting a foothold into a niche application will give the technology time to bake. Over time, as carriers upgrade their networks and improve the network’s capability of handling video, the quality of IPTV will improve to the point that it may outperform Cable TV along all the dimensions.
If you are an upstart, the reason you want to choose the disruptive path is simply because large established firms are handicapped when facing disruptive innovations. They will fight tooth and nail if you try and steal away their existing customers, but may not notice as much if you are going after a different customer base, i,e, will not notice until it is too late. Clayton Christensen has made this clear in his series of books but the basic principles of why disruptive innovation are tough on incumbents are summarized below.
1 Small markets don’t solve the growth needs of large companies with large revenue base. Disruptive innovations typically result in new markets that are initially small but destined to become big in the future. Large companies sometimes under invest in new markets until it is too late.
2. Lack of market research data available to analyze disruptive markets. Sound market research and good planning followed by execution according to plan are the hallmarks of good, market-dominant firms. Although such an approach is perfect when dealing with sustaining innovations, they break down in the face of disruptive innovations which lack a lot of market data.
3. Current customer trap: Companies depend upon their existing customers and investors for resources like revenue, profits and financing. The current customers may unknowingly distract large companies from pursuing disruptive innovations.
4. New innovation, especially disruptive innovation involves the creation of a new “value network” (the company and its customers, suppliers, complementors, and substitutors). It is hard for large firms to break away from their current value network.
5. Organizations’ capabilities also define their disabilities. A company organizes its Resource, Process, and Values (RPV framework) to efficiently address its current market. In the face of disruptive innovations the companies processes and values may conflict with the requirements of the disruptive opportunity and become a handicap.
Since large companies almost always have more resources compared to startups, it will be foolish to go up against them with a sustaining strategy and expect to win. You must choose to Disrupt!
The author is a visiting lecturer at University of Illinois, Urbana-Champaign. He can be reached at firstname.lastname@example.org