Planned Disruption!

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Planned Disruption!

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Planned Disruption!

  1. 1. The disruptive innovation is probably one of the most important innovation theories of the 1last decade. The core concepts behind it circulated so fast that already in 1998, one yearafter the publication of the theory, people were using the term without making reference toHarvard professor Clayton Christensen or to his book The Innovator’s Dilemma (HarvardBusiness School Press).The term disruptive innovation as we know it todayfirst appeared in the 1997 best-seller The Innovator’sDilemma. In the book Harvard Business Schoolprofessor Clayton Christensen investigated why someinnovations that were radical in nature reinforced theincumbent’s position in a certain industry, contrary towhat previous models (for instance the Henderson –Clark model) would predict. More specifically heanalyzed extensively the disk drive industry because itrepresented the most dynamic, technologicallydiscontinuous and complex industry one could find inour economy. Just consider that the memory capacity packed into a square inch of diskincreased by 35% per year, from 50 kilobytes in 1967 to 1, 7 megabytes in 1973, 12megabytes in 1981 and 1100 megabytes in 1995.Christensen describes how one of his friends was responsible for that choice when hecommented that “those who study genetics avoid studying humans because newgenerations come along only every thirty years or so, it takes a long time to understand thecause and effect of any changes. Instead, they study fruit flies, because they are conceived,born, and mature and die all within a single day. If you want to understand why somethinghappens in business, study the disk drive industry. Those companies are the closest thingsto fruit flies that the business world will ever see”.
  2. 2. Sustaining vs. Disruptive InnovationThe central theory of Christensen’s work is the dichotomy of sustaining and disruptive innovation. A sustaining innovation hardly results 2 in the downfall of established companies because it improves the performance of existing products along the dimensions that mainstream customer’s value. Disruptive innovation, on the other hand, will oftenhave characteristics that traditional customer segments may not want, at least initially.Such innovations will appear as cheaper, simpler and even with inferior quality ifcompared to existing products, but some marginal or new segment will value it.The disk drive industryThe first disk drive was developed in IBM’s San Jose research laboratories, around 1954. Itwas as large as a refrigerator and it could store 5 megabytes of data. By 1976 $1 billionworth of disk drives was being produced annually, divided between integrated producers(IBM, Control Data, Univac, and others) and OEM producers (Nixdorf, Wang, Prime, andothers).By 1996 the disk drive market was worth $18 billion, but out of the many companies thatwere operating in 1976 only IBM was still in the market. About 129 firms entered themarket during that period, and 109 of them ceased to exist. Most of the technologicaldiscontinuities that emerged in the industry were sustaining innovations. For example in
  3. 3. the 1970’s the oxide disks started to reach a physical limit (in terms of bytes of informationcontained), forcing the leading companies to develop an alternative. IBM, Control Data andother incumbents invested more than $50 million developing thin-film coatings, andvirtually all of the established firms managed to keep their position in the face of such 3sustaining innovation.In contrast, there have been very few disruptive innovations over the same period, butthose were responsible for the downfall of established firms. As Christensen highlights themost important disruptive technologies were the architectural innovations that shrunk thesize of the drives, from 14-inch diameter disks to 8’, 5.25’ and 3.5’, and then from 2.5’ to1.8’.The passage from 14-inch to 8-inch disksThe 14-inch disk drives were produced to supply mainframes, and the two parametersmainframe producers would consider as a performance measure were the capacity and thecost per megabyte. Around 1980 some new firms ( including Micropolis, Priam smaller 8-inch drives, but those packed 10 to 40 megabytes of capacity while mainframes weredemanding 400 megabytedrives. The leading companiesproducing 14-inch drivescould have developed 8-inchdrives internally withoutmuch of a trouble, after all thetechnological innovationinvolved was simple andarchitectural in nature. Whythey did not, you might ask? Because their main customers, the mainframe manufacturers,were not interested at all in the smaller hard drives.The new entrants would not be able to sell the 8’inch drive for mainframe producers;consequently they were forced to look for new applications that would eventually value the
  4. 4. characteristics of their product, mainly the reduced size. They found such application in theminicomputer. Manufacturers like DEC, Prime and HP were willing to pay a higher cost permegabyte in order to get smaller disk drives.Customer demand for capacity was growing at 25% every year, while producers of 8’inch 4disk drives found that with sustaining innovations they were able to increase their diskcapacity by 40% every year, almost twice as fast. Notice that most disruptive innovationswill improve faster than what is demanded by mainstream customers, meaning that aftersome time disruptors should be able to attack established firms as the figure belowillustrates.After some years the 8-inch drives were offering an inferior cost per megabyte than 14-inch ones and the capacity was already enough to supply lower-end mainframes. Theincumbents of the 14-inch generation witnessed their markets being invaded; andobviously it was too late to react. Only one third of 14-inch producers managed to make thetransition into the new technology, but eventually all of them went out of the market.The story repeats itselfThe same pattern was observed when Seagate introduced the 5.25-inch disk drive; itscapacity of 10 megabytes was of no interest to microcomputer producers. Seagate and theother 5.25-inch drive producers (Computer Memories, International Memories, MiniScribeand others) needed again to find a new application for their product. As Christensen writes“they went by trial and error, selling drives to whoever would buy them”.The application was found in the desktop computers, and just like with under the 8-inchgeneration 5.25-inch disk drives improved their performance via sustaining innovationsfaster than what minicomputer customers were demanding. After a couple of years 5.25drives invaded the 8-inch market, and virtually all the leaders under the 8-inch technologystruggled out of the market.
  5. 5. By now I think you are already guessing what happened when the 3.5-inch disk drivesemerged right? Almost all of the established players under the 5.25 generation were againforced out of the market. 5What are the reasons?How could we possibly explain such pattern? Clearly it was not a matter of technologicalcomplexity; incumbents were perfectly able to cope with the architectural innovations thatshrunk the disk drive sizes. Some of the leading 5.25-inch producers even developed the3.5-inch drives internally before new entrants, but they shelved the innovation as soon astheir mainstream customers demonstrated no interest in them (5.25 drives were used fordesktop computers while the 3.5-inch ones would be employed in notebooks). According toChristensen the crucial factor to understand is the concept of value network, described as“the context within which a firm identifies and responds to customers’ needs, solveproblems, procure inputs, react to competitors and strive for profits”.First of all, operating under such value network might lead a company to “listen too much”to its main customers. As a result it will not recognize potentially disruptive innovationsthat serve only marginal customers. Secondly large companies will not be interested insmall markets; they hardly offer significant growth opportunities. Again this will leadcompanies to completely ignore the disruptive innovation or to wait until the market is“large enough to be attractive”. That is exactly when new entrants attack incumbent’s turf,and by that time it is usually too late.What is a possible solution?In order to solve both of these problems organizations should create an independentbusiness unit whose size matches the emerging market. Quantum Corporation, a leadingproducer of 8-inch drives, recognized that 3.5-inch drives could have some applications inthe computer industry, but they were not sure what those applications were exactly.Instead of shelving the project they created a spin-off unit to develop such 3.5.inch drives.
  6. 6. After ten years the 8-inch market had completely disappeared while their small venturehad grown to become the world largest disk drive producer.Other examples of disruptive innovations: 6 Telephone (disrupted the telegraph) Semiconductors (disrupted vacuum tubes) Steamships (disrupted sailing ships)

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