A V Vedpuriswar and V Pattabhi Ram
Service Sam was teaching a new course titled “Managing Innovation.” There was rapt attention as everyone realized that in the outside world it was innovation that segregated the men from the boys. But as was his wont Sam wasn’t discussing banal inanities. He was now pushing the class into the insights of the celebrated innovation guru and HBS professor, Clayton Christensen. “Any guess on Christensen’s path breaking book?” asked Sam, certain that despite their high IQ none in the class would have read it.
Well, he couldn’t have been more wrong. The resident quizzer asked, “Would it be ‘The Innovator’s Dilemma’?” Flowers put up his hand. “That book talks about two kinds of technologies: one, sustaining technology and two, disruptive technology”. Boka joined the discussion. “Sir, sustaining technologies improve the performance of established products, in line with what the principal customers in major markets want. The lollypop faced Debbie remarked, “Then there are disruptive technologies which dramatically change the rules of the game bringing to the table a very different value proposition. New customer segments love such technologies”. Goggles closed out, “Products based on disruptive technology are typically cheaper, simpler, smaller and more convenient to use.” Wow. Sam was impressed.
Since the discussion had been rather technical thus far Sam decided to offer some examples of disruptive innovation. He believed that examples drove home the concepts better. And there were examples galore. Small motorcycles introduced in North America and Europe by Honda, Kawasaki and Yamaha had disrupted gas-guzzlers like BMW creating a new class of users. Transistors had disrupted vacuum tubes. The Walkman had virtually killed large stereo systems. PCs had knocked the bottom out of mainframes. The business model of health maintenance organizations had disrupted that of conventional health insurers. Internet appliances like the Blackberry were slowly overthrowing personal computers. Sam said, “In each case the new product offered an inferior performance, relative to the existing product, but was cheaper, more convenient and user friendly”.
The girl in the middle row (GITMR) spoke, “this perhaps has to do with unbundling the features and offering only what is relevant.” Sam agreed. “Often customers do not want more than what they can use. At least, they will not pay for the extra features”. Flowers whispered, “The MS Office suite has several features 50% of which customers rarely use.” Sam continued, “Market leaders improve technologies faster than what the market can absorb, so as to provide superior products that would help earn higher margins. And this is where disruptive technologies get in”. Debbie remarked, “These products begin by under-performing but over time catch up. Take PCs. When they arrived, they were slow. They did not even have a hard disc. Today, PCs can perform many complicated processing operations”. She could not have been more right.
Sam brought the discussion back to sustaining technologies. “On the other hand, products whose features match market needs today overshoot market needs tomorrow. Many customers who once needed mainframe computers for their data processing requirements no longer need them. These customers can meet most of their needs with the help of desktops that are linked to file servers. In other words, the processing needs of many computer users have increased more slowly than the rate at which computer vendors have improved their designs!” Flowers remarked, “It doesn’t matter a jot whether the speed of my computer processing is doubled if all that I do with it is Word, Excel and power-point.” He was bang on target.
Flowers chipped in. “In their attempts to stay ahead of their rivals, by developing superior products, many companies rapidly move up-market, over-satisfying the needs of their original customers. In doing so, they create a vacuum at lower price points. It is into this vacuum that the disruptive innovators enter”.
Sam added: “The innovator’s dilemma surfaces because established companies are not comfortable about investing in disruptive technologies. Disruptive products look inferior; offer lower margins and at least initially target emerging markets. The most profitable customers of the current market leaders generally don’t want the disruptive technologies. The market leaders are used to listening to their best customers and identifying new products that promise more profits and more growth. They are therefore rarely able to build a business case for investing in disruptive technologies until it is too late.
This is in a way linked to the way established companies take decision. They believe in sound market research and good planning, followed by planned execution. Such companies get paralyzed when faced with disruptive technologies, which are characterized by great uncertainty and lack of market data. The current market leaders demand market data when none exists and make judgments based on financial projections when neither revenues nor costs can be known with reasonable accuracy. Market leaders also have a cost structure tailored to compete in high-end markets. Their business model makes it difficult to operate in low-end markets.”
Sam asked the class: “How do you think the market leaders should deal with this mindset problem?”
Boka responded: “Successful companies are used to a certain way of working. It will be difficult to change that mindset. So it makes sense to create an independent profit center with a cost structure tailored to achieve profits at the low margins characteristic of most disruptive technologies. The new unit must be shielded from the bureaucracy of the parent organization. This is the only viable way for established firms to harness this principle. This is exactly how IBM developed the personal computer.”
Flowers added: “I think talking to the most valuable customers does not help beyond a point. These customers want new features that make the product too complicated for most other customers. Instead, companies must try to understand what the average customer is looking for and make an inexpensive, no frills product that can meet this requirement. Then the chances of success are greater.”
Sam summed up: “All this talk about customer relationship management (CRM) needs to be taken with a pinch of salt. CRM is focused on the needs of the existing markets. It is essentially pampering the largest and most lucrative customers. It is precisely because market leaders are good at listening to customers and incorporating their suggestions that they become vulnerable to attack by disruptive innovators who go beyond the existing customers and try to identify new segments”. That’s precisely what Drucker had meant when the had said, “looking at the needs of people who are not consumers today is as important as looking at the needs of those who are.”