Disruptive Innovation – The Toxicity of Success

How companies become blinded by their successful products to innovations that creepingly start on the unattractive periphery of their market and from there penetrate the market.

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)
The cover of Forbes magazine in November 2007 when Nokia was already unnoticed victim of a disruptive innovation.
Forbes, Novem­ber 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. 

The sixth thesis of the Manifest for Human(e) Leadership: Courageously exploring the new over efficiently exploiting the old.
The sixth the­sis of the Man­i­fest for Human(e) Leadership

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

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