Saturday, March 23, 2013

Surviving Disruptive Innovations

I have recently made a presentation on Disruptive Technologies at the Chennai Chapter of ISACA. While chose the topic in the context of presenting a picture of the pace at which the disruption is happening in IT world and what are the upcoming Disruptions to watch out for. But As I was preparing the agenda and content for the presentation, I was curious to find out how successful enterprises are managing rather surviving disruptions and in the process have stumbled upon some of the research work done by Clayton Christensen.

It was interesting to observe few things from his theory, which are the following:

Good Management principles would not be of great help in managing or surviving the disruptive innovations. Christensen sites the examples of how Toyota came up disrupting General Motors. He sees a pattern in the happening of disruptions in the form of an S curve, where the top of the curve is a cliff. Leaders / Leadership teams follow the bese management principles to climb up the S Curve and when they reach top they just fall off the cliff.

Extendable core is the key enabler of of innovations becoming disruptive. The potential disruptive innovations would appear as if it is insignificant in terms of the competitive capabilities of the incumbent’s existing products and thus tempting the incumbent to ignore it. But having an extendable core within it, the new entrant quietly enhances its capabilities and slowly get into the mainstream market of the incumbent and then disrupting a whole market resulting in driving the big and well managed incumbents out of the market.

Emerges from where it is least expected. For example, we now find it very comfortable to use a smartphone to various jobs which otherwise were performed by some special purpose devices. Examples include GPS devices, Digital Cameras and even PCs. While GPS device manufacturers still believe that GPS feature of Smartphone is not a threat for them as the special purpose GPS devices have certain unique advantages, which Smartphones don’t. But be reminded that the smartphones have the extendable core and can easily address this capability gap and soon GPS devices will be a thing of the past and we are already seeing the signs of it.

While there are many other interesting observations to note, I would leave it for you to find those out. I was then curious to look into the cases of disruptions that happened in the past. the following three cases of disruptions were of interest to me:

Kodak: Kodak ruled the photography market for a whole century. Their management as all the best qualities and were praised in all respects. Kodak has many innovations to its credit and have many firsts as well. With such a performance it has recently gone into bankruptcy and has sold its patent portfolio, which included close to 1000 patents to salvage some value. It is natural for us to think that the emergence of Digital Cameras would have disrupted Kodak in a big way. But as many would know, Kodak knew that digital era is emerging and they were the first to introduce a Digital Camera in the 1970s. But then what went wrong and how did they miss to sustain that innovation and stay alive in the market? Kodak has been believing till early 200 that the Photographic films wouldn’t die so soon. The other interesting observation out of Kodak’s failure is that with a heavyweight team of experts, sustaining innovation is really expensive and the outside view is most likely ignored.

That’s where the management tend to give up on some of the innovations as the time and investment in it may not worth it as they are making decent business with their current line of products. The situation is different for new entrants as the startups usually break the rules of convention and are in a position to pursue such innovations relatively a lot cheaper and also in an progressive manner. Startups usually start to focus a market which is ignored or to which the incumbents don’t pay much attention and there by not drawing the attention of the incumbents till a point when it will be difficult for the incumbent to respond to.

NOKIA: Nokia came big in the cellular phone, but failed to get its innovation strategy right with the smartphones. Even in NOKIA’s case, its research team came up with a prototype of smartphone with internet access and touch interface, way back in 2003, but the management, again going by good management principles, citing the risk involved in the product being successful and the very high cost of its development has turned down the proposal to pursue this plan further. Exactly three years later Apple launched its iPhone.

NetFlix: Netflix case is a little different. Netflix has been very successful in its DVD Rental business and in fact has seen the emergence of disruptive innovations in the form of streaming videos. It even responded to it by pursuing its research activities in that direction and has developed a service of streaming videos. What went wrong according to analysts is that it got is business model and pricing wrong as it combined both the traditional service and the digital streaming service as a bundle and increased the pricing. Ideally it would have been more appropriate to have offered the digital streaming under a different brand or as a separate service, as the surveys indicated that the DVD rentals still account for 70% of the total video sales in the US.

Now, given that just good management principles don’t help in sustaining or surviving the disruptive innovations, what should the organizations do to stay alive in todays world where IT has enabled the disruptive innovations to emerge with much faster pace leaving very little time for the incumbents to respond to. We also keep hearing that the “break the rules” is the way to go to foster innovation. While disruption is always seen as a risk to be managed, how well enterprises come up with the right risk mitigation and contingency plans to handle the risk of disruption is still a mystery.

You may check out my presentation on the subject at Slideshare and feel free to share your views and thoughts on this topic. You may google to find out some of the great articles and papers on the theory of disruptive innovation by Clayton Christensen. You will also find some good video lectures of his on YouTube.