Disruptive technologies: Prediction or just recommendations?
Disruptive technologies: prediction or recommendation? Stephen J. Stose July 2008BackgroundCrossbows and longbows enable precise shooting and hence are an effective weapon, butonly when employed by trained expert users. When the musket was invented, however, itprovided an easy to learn substitute for the unskilled everyman, but with much lessprecision and effectiveness. This made almost anyone a soldier, and over time, as thisweapon’s demand allowed the innovation of stronger qualities, it obliterated even theexpert’s need for a crossbow to be an effective soldier.A similar phenomenon was witnessed with the introduction of desktop copiers in the1980’s. Their introduction meant that businesses no longer had to outsource their copyingcosts to copy centers, nor did individuals have to wait in line at one of these centers.In a provocative 1996 articlei, Clayton M. Christensen and Joseph Bower coined the term“disruptive technology” to describe this process. Low-end disruption occurs when aparticular product or service overshoots the need of the ordinary mainstream user (e.g.,the crossbow). When a similar, lower-cost replacement product is developed (e.g., themusket) to fill the need of these “low-end” users with lower performance needs, it gains afoothold in the market. At first, this company is satisfied to serve these less profitablecustomers, but over time it begins to innovate and improve its profit margin, and little bylittle begins to enter specialty markets. As this is occurring, the incumbent company willdo little to move down-market, but is squeezed into ever more profitable sectors of high-end users, until eventually driven out by the more dominant disrupter that now is able tocompete in all sectors with better prices.
2The theory has been extensively praised in the business press, and Christensen has beenelevated to the status of “guru” for his work in this areaii. His work is indeed of anuncommon quality for the scholarly study of business administration, and we praise it.However, while explaining in more detail some of its theoretical implications, we wish tohighlight some important issues that qualify some of the rather exaggerated pretensions tothe theory’s validity and predictive capacity, as well as its implications for businessincumbents. Specifically, we will address three assertions: 1. Disruptive technology fails as a theory, but succeeds in making strategic recommendations. 2. Potential markets may be the key to forecasting disruptive technology. 3. Disruptive technology is distinct from disruptive business models.These assertions support our larger goal of addressing the need for informationalstructures thatDisruptive technology fails as a theory, but succeeds in making strategicrecommendations.The theory’s beauty lies in its unintuitive implications for strategic decision making inthe planning of sustained technological growth. Concentrating on a profitable niche thatcontinually demands higher performance may indeed sustain the technology and allowgreat innovations to emerge from its success. Nevertheless, such specialization begins toignore the less stringent performance demands of the mainstream. “Products based ondisruptive technology are typically cheaper, simpler, smaller, and, frequently, moreconvenient to useiii.” Thus, traditional “good management practices” that make thecompany competitive and extract the most value from a company’s assets are the veryfactor that destroys the company.
3Managers may well heed these words when making strategic planning decisions. Acommonly cited disruptive technology is the bare bones terminal that serves only theneeds of Internet and basic spreadsheet users, and is backed up through a centralizedserver. Some analysts project a 10-40% savings with the use of such machines in theworkplace, as such machines require less maintenance, are refreshed less often, and areoften more secureiv. The technology for technology’s sake mentality may keep managersfrom making the move, however; the belief that technology equals automatic value isdeeply entrenched in the American mind. In Japan, on the other hand, where performanceinstead of capital budgeting serves as the benchmark, such machines (actually just olderterminals leveraged) play a part in many successful firms. There, performance on themarket drives management strategy, whereas here many managers do not question theassumption that cutting-edge technology is the smartest and cheapest choicev.Additionally, Christensen argues that his theory can help managers predict whichtechnologies will prove disruptive to their current product line. In the case of these“dumb machines,” it may be obvious which technology is going to be disruptive. Manyargue, however, that disruptive technologies can only be described after the fact. Themain criticism his idea has undergone is that it sampled the very success stories it meantto explain. Hindsight is 20/20, but can managers predict ex ante based on the currentemerging technologies what the market will demand in terms of performance variables,or does this occur merely by chancevi?We argue that successful emergent technologies that disrupt the market from belowindeed can be observed, but only once they have caught the attention of observers.Historical extrapolation of earlier trends gives little insight into future demands. Demandis created by the very success of sustaining technologies, but Christensen’s frameworkprovides no convincing way of allowing managers to predict when and if it will occurand to which sector.There are ways for incumbents facing technological disruption not to fail
4And what about the incumbents that do succeed? Does innovation ever originate from thesame industry leaders of that sector? To this effect, some have garnered evidence thatdirectly contradict Christensen’s claim that companies facing disruptive technologiesultimately fail. After reviewing some of the negative examples, instead of just the onesChristensen chose to delineate in support of his theory, this “incumbent’s curse” becomesobviously overstatedvii. One example is how most major radio manufacturers wereresponsible for the incredible breakthroughs in television transmission, and did not failbecause of it.One principle that has been established is: Firms with prior experience with other marketsectors often surviveviii. For example, Charles Schwab took over E*trade, an entrantonline company with disruptive technology, but had previous experience fighting anotherdisrupter in Merril Lynch’s discount brokerage threats. Also, Kodak and Fuji survived thedigital camera onslaught, a commonly cited disruptive technology, whereas Polaroidfailed to. Another explanation is that success or failure depends on the degree oftechnological shift. Many successful disrupters introduce new technologies thatincumbent competencies cannot adapt to. In other words, they are “competency-destroying,” whereas surviving incumbents were able to enhance their existingcompetencies. This may explain why Polaroid failed to survive. In any case, given thatthere is no current theoretical explanation for why some firms adapt and other fail in theface of technological disruption, little can be advocated in the way of predictive validityfor future forecasting.Another issue that many analysts point to for such explanation is a closer analysis into thekinds of disrupters. Some researchers have pointed to a separate kind of disruptersdistinct from technological disrupters: business-model disruptersix. These kinds ofdisrupters have been cited with being much less robust against potential incumbents,insofar as they have little likelihood of becoming the industry standard. Take Internetbanking, Internet brokerage, or budget no-frills airlines. While all of these business-models have had phenomenal success, as a business model (and not a product or
5technology per se), they are not necessarily superior to the models incumbent companiesalready employ.It may certainly call for a cost-benefit analysis to consider the pros and cons of whethersuch a business model might reasonably be created in replacement of the currentprocesses, or whether a separate unit may be budgeted that incorporates a new business-model (e.g., the e-commerce model) alongside the current one. In any case, mostbusiness-model adjustments in the face of potential disrupters just do not make muchsense for many businesses, as these business-processes are typically part and parcel of thevalue they offer. For instance, many airlines rely on travel agents, something the budgetairlines have bypassed for savings passed to the consumer. As a result, they havecaptured at 20% of the market, but may never replace the old way of doing business.Thus, not all companies facing disruptive innovation fail, indicating the need for muchmore precise thinking if the theory is to be externally valid and enable precisepredictions. There are some indicators that allow business leader to do some forecasting,however. The degree of technical shift may need to be measured as a continuous variable,instead of categorized. There have been many definitional problems with the termtechnological disruption, as it is easily confused with innovation or revolution. Suchprecision may clear the air. Additionally, a companies experience with prior shifts hasalso been an indication of success. We’d like to discuss one more indicator oftechnological disruption: the study of potential untapped markets.Potential markets may be the key to forecasting disruptive technologyChristensen and Bower (1996) state, "Our conclusion is that a primary reason why suchfirms lose their positions of industry leadership when faced with certain types oftechnological change … because they listen too carefully to their customers" (p. 198).While Christensen exaggerates his own position on prediction, here others exaggerate forhim and argue that managers should not be so customer-focused at all. Herein lies the
6double-edged sword for strategic managers: they need to listen to their current customersand their potential customers. Indeed, Chandy and Tellis (1998), for example, found thatcompanies with more product innovation often focused more on future customers, insteadof only sustaining their current products by listening exclusively to the ever-narrowingniche of high-end users. In this sense, they must “cannibalize” their assets to serve themainstream needsx.Instead, disruption occurs due to incumbent’s lack of insight into sacrificing its “goodmanagement practices” and hence dipping into its assets in order to serve the needs of thelower-end market. Indeed, they often fail to monitor those consumers/businesses that arenot using the product, as they often are to willing to and perhaps restrained on justpleasing the current users. In other words, strategic planning needs to take intoconsideration not only the attributes and metric of the increasing product-consumerspecialization tendencies, but also the negative attributes and metric of the product-consumer relationship that have changed over the products evolution. Thus, the questionshould become not only how should the product evolve for the current users; but whatusers are being abandoned and, due to this evolution, what attributes of the product needbe reconsidered to also maintain a strategic advantage to those whose requirements theinitial model no longer satisfy.This also requires companies to develop insight into more than just a superficialevaluation of customer needs. Often, sustaining technologies focus on only a subset ofselection criteria, typically those that made the product popular in the first place. Ascustomers mature with the product, however, latent and untapped preferences develop.This could imply considering price and real educational need in the case of the creationof network-compatible laptops such as Apple attempted with its eMac. Also, disk storagetechnologies were disrupted when companies realized that the capacity of the driveoutstripped most customer needs, and that customers were interested in smaller devices,such that pen-drive technology emerged and matured.
7We do side with Christensen, however, and agree with his recommendations thatallocation-driven companies must dedicate part of their overhead to research intodisruptive technologies. However, doing so may lead to other problems. When manycompanies attempt to develop an online presence to compete, they often forgo developingtheir competence in qualities important to their initial ventures, like marketing, branding,purchasing, and customer service. Barnes and Noble is a classic example.ConclusionWhat we recommend to strategic planners is to not allow technology for its own sake todrive decision-making. Users are savvy, but savvyness includes a realization thatparticular types of products are unnecessary and—while impressive—may not evolvewith customer or business realities. This should not imply they should not innovateaccording to good management practices for their evolving clients; but that they shouldsacrifice the speed of this evolution for continued research into the evolving tastes andpreferences of the market sector it either slowly abandons due to over-specialization,unreasonable costs, or uselessness, just initially ignored; and the market sector perhapsignored in the first place. Businesses sometimes get caught up rewarding its originalfans, at the expense of potential clients. Additionally, if businesses are to use the “theory”of disruptive technology, independent samples must be drawn—not just those confirmingthe dependent variable—of both companies that fail in the face of disrupters, but alsothose that adapt and succeed. In this way, a clearer and more refined analysis of theprecursors of success and failure given different kinds of disrupters can be outlined andtested. In any case, the idea does make strong recommendations to businesses, which Ihope to have outlined here effectively.
8Footnotesi Christensen, Clayton M. and Bower, Joseph L. (1996). Customer Power, StrategicInvestment, and the Failure of Leading Firms. Strategic Management Journal 17 (3):197–218.ii Scherreik, Susan (2000). When a Guru Manages Money. Business Week , July 31,2000. http://www.businessweek.com/2000/00_31/b3692113.htm.iii Christensen, Clayton M. and Bower, Joseph L. (1996). Ibid.iv Lawson, Christopher (January 2007). ‘Dumb terminals’ can be a smart move. WSJ.http://online.wsj.com/public/article/SB117011971274291861-oJ6FWrnA8NMPfMXw3vBILth1EiE_20080129.html.v Bensaou, M. & Earl, M. (1998). The right mind-set for managing informationtechnology. Harvard Business Review,vi Barney, Jay B. (1997). On Flipping Coins and Making Technology Choices: Luck as anExplanation of Technological Foresight and Oversight. In: Technological Innovation:Oversights and Foresights. R. Garud, P.R. Nayyar, and Z.B. Shapira (eds.). New York:Cambridge University Press, 13–19.vii Chandy, Rajesh K. and Tellis, Gerard J. (2000). The Incumbents Curse? Incumbency,Size, and Radical Product Innovation. Journal of Marketing 64 (3): 1–17. Linksviii King, Andrew A. and Tucci, Christopher L. (2002). Incumbent Entry into New MarketNiches: The Role of Experience and Managerial Choice in the Creation of DynamicCapabilities. Management Science 48 (2): 171–86.ix Markides, C. (2005). Disruptive management: In need of better theory. Journal ofProduct Innovation Management, 23(1).x Chandy, Rajesh K. and Tellis, Gerard J. (1998). Organizing for Radical ProductInnovation: The Overlooked Role of Willingness to Cannibalize. Journal of MarketingResearch, 35(4): 474–87.