19 Part 3: 3 Sustaining and disruptive innovation
Once an innovation starts diffusing into the marketplace it can have differing degrees of impact. As mentioned in Part 1, although innovations generally offer progress, there are some that complement existing ways of doing things and some that are more dramatic in their impact. In his book called The Innovator's Dilemma Clayton M. Christensen (2003) labels these two types of innovation sustaining and disruptive.
Sustaining innovations are those that improve the performance of established products so they meet the needs of most current customers – perhaps making the products more reliable, faster or cheaper. Such innovations can be incremental or radical in their nature but usually have a sustaining effect for leading firms in a given industry. For example successive innovations in the provision of conventional telephone equipment and services served to sustain the major players – such as British Telecom and Cable & Wireless in the UK – in their market position. However the arrival of mobile telephones proved to be a disruptive innovation in the field of telecommunications and younger companies – such as Motorola, Ericsson, Nokia – exploited this new market.
Disruptive technologies usually introduce a new way of operating in a particular market sector that challenges existing companies to decide whether to ignore or embrace such new developments. You saw above that innovations often under-perform in their early incarnations. Compared with conventional mature products they may seem unpromising to existing companies. However such innovations can have other features that some existing and many new customers value. Christensen (2003, p. xviii) put forward the view that,
Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently more convenient to use.
Sometimes these disruptive innovations go on to capture new as well as current customers to the extent that they rival or in some cases surpass the market for the existing technology. Examples include photocopying (compared with carbon paper copying), digital photography (compared with chemical film processing), online retailing (compared with face-to-face shopping) and even distance learning (compared with classroom-based learning).
Companies regularly listen to their best customers and tend to develop new products based on the immediate promise of profitability and growth. These companies are often not able to build a case for investing in disruptive technologies until it's too late because:
Disruptive innovations are simpler and cheaper, promising lower profit margins.
Disruptive innovations are usually first commercialised in emerging markets that are often perceived as insignificant.
Leading firms’ most profit-conscious customers are generally tied in to existing successful products and don't want that disrupted.
According to Christensen the ‘innovator's dilemma’ is that outstanding companies can do everything right – such as listen carefully to their customers or invest heavily in new technologies – but still lose their market leadership. They miss ‘the next great wave’ unless they know when to abandon traditional business practices in the face of certain types of market and technology change. For example, IBM dominated the mainframe computer market but missed the emergence of the simpler minicomputer. A company called DEC created the minicomputer market (Figure 76) along with Hewlett-Packard and others but they all missed the desktop personal computer market that was captured by Apple, Commodore, Compaq and IBM's new, independent PC division. For many years Xerox dominated the market for large-volume photocopiers used in copy centres but missed out on the huge market for small tabletop office photocopiers, ending up as only a minor player.
There are times when it's right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets.
(Christensen, 2003, p. xv)
Disruptive technologies tend to lead to new markets with significant advantages for companies who enter the market early. But large established companies need to ensure a level of growth not possible in the early stages of a new, small market – even though often that new market will become large in the future. Often, established companies adopt a strategy of waiting to see if the market will grow sufficiently large to deliver the sales they need. However, then they run the risk of being too far behind early entrants to catch up. Those who have succeeded have tended to devolve the responsibility for commercialising the disruptive technology to a smaller offshoot organisation that can respond more easily to the opportunities for growth in a small market – like with IBM's PC division.
Part of the innovator's dilemma is that with disruptive innovation there are clear advantages to entering the market early but it's largely unknown territory. Companies can't have market data if little or none exists or make financial projections when they don't know likely income or costs. Companies poised to market a disruptive innovation have to keep a close watch on the market and their competitors, be ready to act quickly to change their product if necessary and be prepared to take risks.
Even the desire of established companies to try to improve their products to maintain competitive advantage over their rivals can work against them. For example the rate of improved performance offered by computer manufacturers has grown faster than most computer users’ needs. Accordingly the performance of mainframe computers grew to exceed the data processing requirements of many of their customers, who were able to have their needs met by simpler and cheaper desktop machines linked to devices that stored the data.
When the performance of two or more competing products has improved beyond what the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then to convenience, and, ultimately, to price.
(Christensen, 2003. p. xxviii)
Christensen says that companies need to discover how their mainstream customers use their products in order to be able to identify the points at which this basis of competition changes. Then they can act quickly to defend themselves against competitors entering the market with disruptive innovations.
Other than the examples given, can you think of a disruptive technology leading to a new market?
The domestic video cassette recorder introduced into the UK in the late 1970s could be considered a disruptive technology. It challenged TV and film companies to create video versions of their products, encouraged a new rental industry to start up and spawned innovations in technology for home entertainment.