Disruptive Innovation – The Toxicity of Success

The econ­o­mist and author Clay­ton Chris­tensen, who died last week, was con­sid­ered a Sil­i­con Val­ley thought leader and pio­neer of inno­va­tion research. He became known for the con­cept of dis­rup­tive inno­va­tion (cf. Wikipedia) in his 1997 book “The Inno­va­tor’s Dilem­ma” (Ama­zon affil­i­ate link). Since then, this term has been used infla­tion­ary for every more or less ground­break­ing tech­no­log­i­cal change. This dilu­tion is dan­ger­ous because it clouds the view of tru­ly dis­rup­tive inno­va­tion, which can take on dimen­sions that threat­en the very exis­tence of the company.

When Is Innovation Disruptive and When Not?

In his book, Clay­ton Chris­tensen dis­tin­guish­es between sus­tain­ing inno­va­tion on the one hand and dis­rup­tive inno­va­tion on the oth­er. The main dis­tin­guish­ing fea­ture is the effect of the inno­va­tion on exist­ing mar­kets. Sus­tain­ing or dis­rup­tive there­fore does not refer to the inno­va­tion per se, but rather to its effects on exist­ing markets.

Thus, sus­tain­ing inno­va­tion has no sig­nif­i­cant effect on mar­kets, no mat­ter how ground­break­ing the tech­nol­o­gy may be. Dig­i­tal music in the form of CDs, for exam­ple, has not sig­nif­i­cant­ly changed the music mar­ket. Only the pos­si­bil­i­ty of down­load­ing indi­vid­ual tracks (instead of entire albums, as the music indus­try was used to and favoured for eco­nom­i­cal­ly under­stand­able rea­sons), first ille­gal­ly via peer-to-peer net­works and then legal­ly via the iTunes store and lat­er lis­ten­ing to them via stream­ing, had a dis­rup­tive effect on the music mar­ket. The exam­ple also shows that it is rarely a dis­rup­tive tech­nol­o­gy alone, but rather the new busi­ness mod­el made pos­si­ble by the technology.

It is char­ac­ter­is­tic that dis­rup­tive inno­va­tions start at the low­er end of a mar­ket, in a niche that is not very attrac­tive for the estab­lished com­pa­nies. IBM, for exam­ple, took a sig­nif­i­cant posi­tion in the main­frame com­put­er mar­ket and grad­u­al­ly expand­ed this posi­tion with (sus­tain­ing) inno­va­tions for cus­tomers who could and want­ed to afford those com­put­ers. And that were main­ly large cor­po­ra­tions. Small­er com­pa­nies were not eco­nom­i­cal­ly attrac­tive for IBM in this mar­ket. It was pre­cise­ly in this niche that Dig­i­tal Equipement Cor­po­ra­tion (DEC) placed mini com­put­ers such as the PDP‑8 in the 1960s, which were much less pow­er­ful than main­frame com­put­ers, but much cheap­er and much more portable.

A dis­rup­tive inno­va­tion is a tech­no­log­i­cal­ly sim­ple inno­va­tion in the form of a prod­uct, ser­vice, or busi­ness mod­el that takes root in a tier of the mar­ket that is unat­trac­tive to the estab­lished lead­ers in an industry.

Clay­ton Christensen

There are many nich­es and niche providers as well, how­ev­er, they only become a dis­rup­tive inno­va­tion if tech­no­log­i­cal advances and new busi­ness mod­els suc­ceed in pen­e­trat­ing the main part of the mar­ket sig­nif­i­cant­ly. Since the per­for­mance of com­put­er chips dou­bles approx­i­mate­ly every 18 months, the small com­put­ers of DEC became a real alter­na­tive for many cus­tomers of main­frame com­put­ers and thus a prob­lem for IBM. 

There is no rea­son any­one would want a com­put­er in their home.

Ken Olsen, Founder of Dig­i­tal Equip­ment Cor­po­ra­tion, 1977

Now DEC has fur­ther expand­ed its posi­tion and opti­mized its offer with focus on its cus­tomers. Pri­vate indi­vid­u­als were not in focus at all, as this leg­endary quote from Ken Olsen, the founder of DEC, shows. At this then unno­ticed cor­ner of the com­put­er mar­ket, com­pa­nies such as Apple or Com­modore began to offer their home com­put­ers. And his­to­ry repeat­ed itself: What was ini­tial­ly a gim­mick for a few nerds and not pow­er­ful enough for the cus­tomers of DEC and IBM at that time became an exis­ten­tial threat to both through increas­ing­ly pow­er­ful chips.

The iPhone Moment

When Steve Jobs intro­duced the first iPhone on Jan­u­ary 9, 2007, it was also at the low­er end of the mobile phone mar­ket by the usu­al stan­dards of the time. It only had 2G, had only a 2 megapix­el cam­era, dropped phone calls again and again, no key­board and had to be recharged after one day. On the oth­er hand, it was a new type of pock­et com­put­er that com­bined iPod, Per­son­al Dig­i­tal Assis­tant (PDA), tele­phone and espe­cial­ly per­ma­nent access to the Inter­net through cor­re­spond­ing data tar­iffs with mobile phone providers and made it intu­itive­ly usable for every­one through an inno­v­a­tive user inter­face concept. 

Our ver­dict is that, despite some flaws and fea­ture omis­sions, the iPhone is, on bal­ance, a beau­ti­ful and break­through hand­held com­put­er. Its soft­ware, espe­cial­ly, sets a new bar for the smart-phone indus­try, and its clever fin­ger-touch inter­face, which dis­pens­es with a sty­lus and most but­tons, works well, though it some­times adds steps to com­mon functions.

Wal­ter S. Moss­berg and Kather­ine Boehret. Wall Street Jour­nal (Juni 2007)

On the oth­er hand, despite its undis­put­ed weak­ness­es, the num­ber of cus­tomers was quite con­sid­er­able (the first mil­lion iPhones were sold after 74 days; a mile­stone for which the iPod had pre­vi­ous­ly tak­en two years). Com­pared to the mass­es Nokia was deal­ing with at the time, how­ev­er, the num­ber of iPhone cus­tomers was neg­li­gi­ble, so that as late as Novem­ber 2007, Forbes mag­a­zine asked the rhetor­i­cal ques­tion on its cov­er who could catch the cell phone king.

In his rec­om­mend­able book “Trans­form­ing Nokia” (Ama­zon Affil­i­ate Link), Ris­to Siilas­maa sum­ma­rizes the sit­u­a­tion in the chap­ter “The Tox­i­c­i­ty of Suc­cess” from the inside per­spec­tive. For Nokia, the key dif­fer­en­ti­at­ing fac­tor in the mobile phone mar­ket they dom­i­nat­ed for so long was of course the radio chips. At the time, a great deal of R&D effort went into the devel­op­ment of the new 3G radio chips and it was there­fore believed that no new play­er would be able to enter the market. 

But now com­pa­nies like Qual­comm and Medi­aTek were spe­cial­iz­ing in just such chips and offer­ing them to oth­er man­u­fac­tur­ers, who could then use them to build mobile phones imme­di­ate­ly with­out any devel­op­ment costs for radio. Although Nokia was well aware of this sit­u­a­tion, the com­pa­ny had because of their vast suc­cess in the past a ten­den­cy to be condescending:

The unspo­ken mes­sage I heard was: We are Nokia. We invent­ed this indus­try. Let’s keep doing what we do so well. Nobody does it better.

Ris­to Siilas­maa. Trans­form­ing Nokia (2019)

Nokia got the receipt for this just as quick­ly as mer­ci­less­ly: The mar­ket share shrank from about 50% in 2007 to less than 3% at the end of 2011 due to this dis­rup­tive innovation. 

In the age of dig­i­tal­iza­tion, com­pa­nies today more than ever need a good bal­ance between opti­miz­ing today’s prod­ucts and busi­ness mod­els on the one hand and a good instinct for the prod­ucts and busi­ness mod­els of tomor­row on the oth­er. And nat­u­ral­ly, this bal­ance tends to be lost in favor of today’s prof­itable busi­ness. This is pre­cise­ly why the sixth and final the­sis in the Man­i­festo for Human(e) Lead­er­ship is also called “Coura­geous­ly explor­ing the new over effi­cient­ly exploit­ing the old.” Clay­ton Chris­tensen’s con­cept of dis­rup­tive inno­va­tion, prop­er­ly under­stood and applied, is the key to this. 

This is the most impor­tant rea­son why orga­ni­za­tions miss the future: Lead­ers have failed to write off their long deval­ued intel­lec­tu­al capital.

Gary Hamel. brand eins 10 / 2017