Technolog
Established Market
Emerging Market
Market Strategy at Entry
Statistics for all companies,
%
Sales
%
Sales
regardless of technology strategy:
S
F
N
T
Success ($millions)
S
F
N
T
Success ($millions)
Start-ups
3
18
7
27
11%
$2,721.0
Start-ups
7 11
3
21
33%
$48,423.0
Related-Technology
0
5
0
5
0%
191.6
Related-Technology
4
2
0
6
67%
11,461.0
Related-Market
0
15
0
15
0%
362.6
Related-Market
1
4
0
5
20%
2,239.0
Forward Integrators
0
4
0
4
0%
17.7
Forward Integrators
0
0
0
0
—
—
Total
3
42
7 51
6%
$3,292.9
Total
12 17
3
32
37%
$62,123.0
Source: Data are from various issues of Disk/Trend Report.
Note: S indicates success, F indicates failure, N indicates no, T indicates total.
Match the Size of the Organization to the Size of the Market | 1 3 1
initial products and those at the top using one or more new component technologies.3 The horizontal axis charts market strategies, with firms at the left having entered already established value networks and those at the right having entered emerging value networks.4 Another way to characterize this matrix is to note that companies that were agressive at entry in developing and adopting sustaining innovations appear in the two top boxes, left and right, while companies that led at entry in creating new value networks appear in the two right-hand boxes, top and bottom. T h e companies in the right boxes include all companies that attempted to create new value networks, even those networks that did not materialize into substantial markets (such as removable hard drives).
Each quadrant displays the number of companies that entered using the strategy represented. Under the S (for "success") are the number of firms that successfully generated $ 1 0 0 million in revenues in at least one year, even if the firm subsequently failed; F (for "failure") shows the number of firms that failed ever to reach the $ 1 0 0 million revenue thresh-old and that have subsequently exited the industry; N (for "no") indicates the number of firms for which there is as yet no verdict because, while still operating in 1 9 9 4 , they had not yet reached $ 1 0 0 million in sales; and T (for "total") lists the total number of firms that entered in each category.5 T h e column labeled "% Success" indicates the percentage of the total number of firms that reached $ 1 0 0 million in sales. Finally, beneath the matrix are the sums of the data in the two quadrants above.
T h e numbers beneath the matrix show that only three of the fifty-one firms (6 percent) that entered established markets ever reached the $ 1 0 0
million revenue benchmark. In contrast, 37 percent of the firms that led in disruptive technological innovation—those entering markets that were less than two years old—surpassed the $ 1 0 0 million level, as shown on the right side of Table 6 . 1 . Whether a firm was a start-up or a diversified firm had little impact on its success rate. W h a t mattered appears not to have been its organizational form, but whether it was a leader in introducing disruptive products and creating the markets in which they were sold.6
Only 13 percent of the firms that entered attempting to lead in sustaining component technologies (the top half of the matrix) succeeded, while 20
percent of the firms that followed were successful. Clearly, the lower-right quadrant offered the most fertile ground for success.
T h e cumulative sales numbers in the right-most columns in each quadrant show the total, cumulative revenues logged by all firms pursuing each of the strategies; these are summarized below the matrix. The result
1 3 2 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
is quite stunning. The firms that led in launching disruptive products together logged a cumulative total of $ 6 2 billion dollars in revenues between 1 9 7 6 and 1 9 9 4 . 7 Those that followed into the markets later, after those markets had become established, logged only $ 3 . 3 billion in total revenue. It is, indeed, an innovator's dilemma. Firms that sought growth by entering small, emerging markets logged twenty times the revenues of the firms pursuing growth in larger markets. The difference in revenues per firm is even more striking: The firms that followed late into the markets enabled by disruptive technology, on the left half of the matrix, generated an average cumulative total of $ 6 4 . 5 million per firm. The average company that led in disruptive technology generated $ 1 . 9 billion in revenues. The firms on the left side seem to have made a sour bargain.
They exchanged a market risk, the risk that an emerging market for the disruptive technology might not develop after all, for a competitive risk, the risk of entering markets against entrenched competition.8
C O M P A N Y S I Z E A N D L E A D E R S H I P I N
D I S R U P T I V E T E C H N O L O G I E S
Despite evidence that leadership in disruptive innovation pays such huge dividends, established firms, as shown in the first four chapters of this book, often fail to take the lead. Customers of established firms can hold the organizations captive, working through rational, well-functioning resource allocation processes to keep them from commercializing disruptive technologies. One cruel additional disabling factor that afflicts established firms as they work to maintain their growth rate is that the larger and more successful they become, the more difficult it is to muster the rationale for entering an emerging market in its early stages, when the evidence above shows that entry is so crucial.
Good managers are driven to keep their organizations growing for many reasons. One is that growth rates have a strong effect on share prices. To the extent that a company's stock price represents the discounted present value of some consensus forecast of its future earnings stream, then the level of the stock price—whether it goes up or down—is driven by changes in the projected rate of growth in earnings.9 In other words, if a company's current share price is predicated on a consensus growth forecast of 20 percent, and the market's consensus for growth is subsequently revised downward to 15 percent growth, then the company's share price will likely fall—even though its revenues and earnings will
Match the Size of the Organization to the Size of the Market | 1 3 3
still be growing at a healthy rate. A strong and increasing stock price, of course, gives a company access to capital on favorable terms; happy investors are a great asset to a company.
Rising share prices make stock option plans an inexpensive way to provide incentive to and to reward valuable employees. When share prices stagnate or fall, options lose their value. In addition, company growth creates room at the top for high-performing employees to expand the scope of their responsibilities. When companies stop growing, they begin losing many of their most promising future leaders, who see less opportunity for advancement.
Finally, there is substantial evidence that growing companies find it much easier to justify investments in new product and process technologies than do companies whose growth has stopped.10
Unfortunately, companies that become large and successful find that maintaining growth becomes progressively more difficult. T h e math is simple: A $ 4 0 million company that needs to grow profitably at 20 percent to sustain its stock price and organizational vitality needs an additional $8 million in revenues the first year, $ 9 . 6 million the following year, and so on; a $ 4 0 0 million company with a 20 percent targeted growth rate needs new business worth $ 8 0 million in the first year, $ 9 6 million in the next, and so on; and a $4 billion company with a 20 percent goal needs to find $ 8 0 0 million, $ 9 6 0 million, and so on, in each successive year.
This problem is particularly vexing for big companies confronting disruptive technologies. Disruptive technologies facilitate the emergence of new markets, and there are no $ 8 0 0 million emerging markets. But it is precisely when emerging markets are small—when they are least attractive to large companies in search of big chunks of new revenue—that entry into them is so critical.
H o w can a manager of a large, successful company deal with these realities of size and growth when confronted by disruptive change? I have observed three approaches in my study of this problem: 1. Try to affect the growth rate of the emerging market, so that it becomes big enough, fast enough, to make a meaningful dent on the trajectory of profit and revenue growth of a large company.
2. Wait until the market has emerged and become better defined, and then enter after it "has become large enough to be interesting."
3. Place responsibility to commercialize disruptive technologies in organizations small enough that their performance will be mean-
1 3 4 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
ingfully affected by the revenues, profits, and small orders flowing from the disruptive business in its earliest years.
As the following case studies show, the first two approaches are fraught with problems. The third has its share of drawbacks too, but offers more evidence of promise.
C A S E S T U D Y : P U S H I N G T H E G R O W T H R A T E
O F A N E M E R G I N G M A R K E T
The history of Apple Computer's early entry into the hand-held computer, or personal digital assistant (PDA), market helps to clarify the difficulties confronting large companies in small markets.
Apple Computer introduced its Apple I in 1 9 7 6 . It was at best a preliminary product with limited functionality, and the company sold a total of 2 0 0 units at $ 6 6 6 each before withdrawing it from the market. But the Apple I wasn't a financial disaster. Apple had spent modestly on its development, and both Apple and its customers learned a lot about how desktop personal computers might be used. Apple incorporated this learning into its Apple II computer, introduced in 1 9 7 7 , which was highly successful. Apple sold 4 3 , 0 0 0 Apple II computers in the first two years they were on the market,11 and the product's success positioned the company as the leader in the personal computer industry. On the basis of the Apple IPs success Apple went public in 1 9 8 0 .
A decade after the release of the Apple II, Apple Computer had grown into a $5 billion company, and like all large and successful companies, it found itself having to add large chunks of revenue each year to preserve its equity value and organizational vitality. In the early 1 9 9 0 s , the emerging market for hand-held PDAs presented itself as a potential vehicle for achieving that needed growth. In many ways, this opportunity, analogous to that in 1 9 7 8 when the Apple II computer helped shape its industry, was a great fit for Apple. Apple's distinctive design expertise was in user-friendly products, and user-friendliness and convenience were the basis of the PDA concept.
H o w did Apple approach this opportunity? Aggressively. It invested scores of millions of dollars to develop its product, dubbed the "Newton."
The Newton's features were defined through one of the most thoroughly executed market research efforts in corporate history; focus groups and surveys of every type were used to determine what features consumers
Match the Size of the Organization to the Size of the Market | 1 3 5
would want. The PDA had many of the characteristics of a disruptive computing technology, and recognizing the potential problems, Apple C E O J o h n Sculley made the Newton's development a personal priority, promoting the product widely, and ensuring that the effort got the technical and financial resources it needed.
Apple sold 1 4 0 , 0 0 0 Newtons in 1 9 9 3 and 1 9 9 4 , its first two years on the market. M o s t observers, of course, viewed the Newton as a big flop.
Technically, its handwriting recognition capabilities were disappointing, and its wireless communications technologies had made it expensive. But what was most damning was that while Sculley had publicly positioned the Newton as a key product to sustain the company's growth, its first-year sales amounted to about 1 percent of Apple's revenues. Despite all the effort, the Newton made hardly a dent in Apple's need for new growth.
But was the Newton a failure? T h e timing of Newton's entry into the handheld market was akin to the timing of the Apple II into the desktop market. It was a market-creating, disruptive product targeted at an unde-finable set of users whose needs were unknown to either themselves or Apple. On that basis, Newton's sales should have been a pleasant surprise to Apple's executives: It outsold the Apple II in its first two years by a factor of more than three to one. But while selling 4 3 , 0 0 0 units was viewed as an IPO-qualifying triumph in the smaller Apple of 1 9 7 9 , selling 1 4 0 , 0 0 0 Newtons was viewed as a failure in the giant Apple of 1 9 9 4 .
As chapter 7 will show, disruptive technologies often enable something to be done that previously had been deemed impossible. Because of this, when they initially emerge, neither manufacturers nor customers know how or why the products will be used, and hence do not know what specific features of the product will and will not ultimately be valued.
Building such markets entails a process of mutual discovery by customers and manufacturers—and this simply takes time. In Apple's development of the desktop computer, for example, the Apple I failed, the first Apple II was lackluster, and the Apple I I + succeeded. T h e Apple III was a market failure because of quality problems, and the Lisa was a failure. T h e first two generations of the Macintosh computer also stumbled. It wasn't until the third iteration of the Macintosh that Apple and its customers finally found "it": the standard for convenient, user-friendly computing to which the rest of the industry ultimately had to conform.12
In launching the Newton, however, Apple was desperate to short-circuit this coalescent process for defining the ultimate product and market.
It assumed that its customers knew what they wanted and spent very
1 3 6 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
aggressively to find out what this was. (As the next chapter will show, this is impossible.) Then to give customers what they thought they wanted, Apple had to assume the precarious role of a sustaining technology leader in an emerging industry. It spent enormous sums to push mobile data communications and handwriting recognition technologies beyond the state of the art. And finally, it spent aggressively to convince people to buy what it had designed.
Because emerging markets are small by definition, the organizations competing in them must be able to become profitable at small scale. This is crucial because organizations or projects that are perceived as being profitable and successful can continue to attract financial and human resources both from their corporate parents and from capital markets.
Initiatives perceived as failures have a difficult time attracting either. Unfortunately, the scale of the investments Apple made in its Newton in order to hasten the emergence of the PDA market made it very difficult to earn an attractive return. Hence, the Newton came to be broadly viewed as a flop.
As with most business disappointments, hindsight reveals the faults in Apple's Newton project. But I believe that the root cause of Apple's struggle was not inappropriate management. T h e executives' actions were a symptom of a deeper problem: Small markets cannot satisfy the near-term growth requirements of big organizations.
C A S E S T U D Y : W A I T I N G U N T I L A M A R K E T I S L A R G E
E N O U G H T O B E I N T E R E S T I N G
A second way that many large companies have responded to the disruptive technology trap is to wait for emerging markets to "get large enough to be interesting" before they enter. Sometimes this works, as I B M ' s well-timed 1 9 8 1 entry into the desktop PC business demonstrated. But it is a seductive logic that can backfire, because the firms creating new markets often forge capabilities that are closely attuned to the requirements of those markets and that later entrants find difficult to replicate. Two examples from the disk drive industry illustrate this problem.
Priam Corporation, which ascended to leadership of the market for 8-inch drives sold to minicomputer makers after its entry in 1 9 7 8 , had built the capability in that market to develop its drives on a two-year rhythm.
This pace of new product introduction was consistent with the rhythm by
Match the Size of the Organization to the Size of the Market | 1 3 7
which its customers, minicomputer makers, introduced their new products into the market.
Seagate's first 5.25-inch drive, introduced to the emerging desktop market in 1 9 8 0 , was disruptively slow compared to the performance of Priam's drives in the minicomputer market. But by 1 9 8 3 , Seagate and the other firms that led in implementing the disruptive 5.25-inch technology had developed a one-year product introduction rhythm in their market. Because Seagate and Priam achieved similar percentage improvements in speed with each new product generation, Seagate, by introducing new generations on a one-year rhythm, quickly began to converge on Priam's performance advantage.
Priam introduced its first 5.25-inch drive in 1 9 8 2 . But the rhythm by which it introduced its subsequent 5.25-inch models was the two-year capability it had honed in the minicomputer market—not the one-year cycle required to compete in the desktop marketplace. As a consequence, it was never able to secure a single major O E M order from a desktop computer manufacturer: It just couldn't hit their design windows with its new products. And Seagate, by taking many more steps forward than did Priam, was able to close the performance gap between them. Priam closed its doors in 1 9 9 0 .
The second example occurred in the next disruptive generation. Seagate Technology was the second in the industry to develop a 3.5-inch drive in 1 9 8 4 . Analysts at one point had speculated that Seagate might ship 3 . 5 -
inch drives as early as 1 9 8 5 ; and indeed, Seagate showed a 10 MB model at the fall 1 9 8 5 Comdex Show. When Seagate still had not shipped a 3 . 5 -
inch drive by late 1 9 8 6 , C E O Al Shugart explained, "So far, there just isn't a big enough market for it, as y e t . " 1 3 In 1 9 8 7 , when the 3.5-inch market at $ 1 . 6 billion had gotten "big enough to be interesting," Seagate finally launched its offering. By 1 9 9 1 , however, even though Seagate had by then built substantial volume in 3.5-inch drives, it had not yet succeeded in selling a single drive to a maker of portable computers: Its models were all sold into the desktop market, defensively cannibalizing its sales of 5.25-inch drives. Why?
One likely reason for this phenomenon is that Conner Peripherals, which pioneered and maintained the lead in selling 3.5-inch drives to portable computer makers, fundamentally changed the way drive makers had to approach the portables market. As one Conner executive described it,
1 3 8 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
From the beginning of the OEM disk drive industry, product development had proceeded in three sequential steps. First you designed the drive; then you made it; and then you sold it. We changed all that. We first sell the drives; then we design them; and then we build them.14
In other words, Conner set a pattern whereby drives for the portable computer market were custom-designed for major customers. And it refined a set of capabilities in its marketing, engineering, and manufacturing processes that were tailored to that pattern.15 Said another Conner executive, "Seagate was never able to figure out how to sell drives in the portable market. They just never got i t . " 1 6
C A S E S T U D Y : G I V I N G S M A L L O P P O R T U N I T I E S T O
S M A L L O R G A N I Z A T I O N S
Every innovation is difficult. That difficulty is compounded immeasurably, however, when a project is embedded in an organization in which most people are continually questioning why the project is being done at all.
Projects make sense to people if they address the needs of important customers, if they positively impact the organization's needs for profit and growth, and if participating in the project enhances the career opportunities of talented employees. When a project doesn't have these characteristics, its manager spends much time and energy justifying why it merits resources and cannot manage the project as effectively. Frequently in such circumstances, the best people do not want to be associated with the project—and when things get tight, projects viewed as nonessential are the first to be canceled or postponed.
Executives can give an enormous boost to a project's probability of success, therefore, when they ensure that it is being executed in an environment in which everyone involved views the endeavor as crucial to the organization's future growth and profitability. Under these conditions, when the inevitable disappointments, unforeseen problems, and schedule slippages occur, the organization will be more likely to find ways to muster whatever is required to solve the problem.
As we have seen, a project to commercialize a disruptive technology in a small, emerging market is very unlikely to be considered essential to success in a large company; small markets don't solve the growth problems of big companies. Rather than continually working to convince and remind everyone that the small, disruptive technology might someday be signifi-
Match the Size of the Organization to the Size of the Market \ 1 3 9
cant or that it is at least strategically important, large companies should seek to embed the project in an organization that is small enough to be motivated by the opportunity offered by a disruptive technology in its early years. This can be done either by spinning out an independent organization or by acquiring an appropriately small company. Expecting achievement-driven employees in a large organization to devote a critical mass of resources, attention, and energy to a disruptive project targeted at a small and poorly defined market is equivalent to flapping one's arms in an effort to fly: It denies an important tendency in the way organizations w o r k . 1 7
There are many success stories to the credit of this approach. Control Data, for example, which had essentially missed the 8-inch disk drive generation, sent a group to Oklahoma City to commercialize its 5 . 2 5 -
inch drive. In addition to CDC's need to escape the power of its mainstream customers, the firm explicitly wanted to create an organization whose size matched the opportunity. "We needed an organization," reflected one manager, "that could get excited about a $ 5 0 , 0 0 0 order. In Minneapolis [which derived nearly $1 billion from the sale of 14-inch drives in the mainframe market] you needed a million-dollar order just to turn anyone's head." CDC's Oklahoma City venture proved to be a significant success.
Another way of matching the size of an organization to the size of the opportunity is to acquire a small company within which to incubate the disruptive technology. This is how Allen Bradley negotiated its very successful disruptive transition from mechanical to electronic motor controls.
For decades the Allen Bradley Company (AB) in Milwaukee has been the undisputed leader in the motor controls industry, making heavy-duty, sophisticated switches that turn large electric motors off and on and protect them from overloads and surges in current. AB's customers were makers of machine tools and cranes as well as contractors who installed fans and pumps for industrial and commercial heating, ventilating, and air conditioning (HVAC) systems. M o t o r controls were electromechanical devices that operated on the same principle as residential light switches, although on a larger scale. In sophisticated machine tools and HVAC
systems, electric motors and their controls were often linked, through systems of electromechanical relay switches, to turn on and off in particular sequences and under particular conditions. Because of the value of the equipment they controlled and the high cost of equipment downtime,
1 4 0 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
controls were required to be rugged, capable of turning on and off millions of times and of withstanding the vibrations and dirt that characterized the environments in which they were used.
In 1 9 6 8 , a startup company, Modicon, began selling electronic programmable motor controls—a disruptive technology from the point of view of mainstream users of electromechanical controls. Texas Instruments (TI) entered the fray shortly thereafter with its own electronic controller.
Because early electronic controllers lacked the real and perceived ruggedness and robustness for harsh environments of the hefty AB-type controllers, Modicon and TI were unable to sell their products to mainstream machine tool makers and HVAC contractors. As performance was measured in the mainstream markets, electronic products underperformed conventional controllers, and few mainstream customers needed the programmable flexibility offered by electronic controllers.
As a consequence, Modicon and TI were forced to cultivate an emerging market for programmable controllers: the market for factory automation.
Customers in this emerging market were not equipment manufacturers, but equipment users, such as Ford and General Motors, who were just beginning their attempt to integrate pieces of automatic manufacturing equipment.
Of the five leading manufacturers of electromechanical motor controls—Allen Bradley, Square D, Cutler Hammer, General Electric, and Westinghouse—only Allen Bradley retained a strong market position as programmable electronic controls improved in ruggedness and began to invade the core motor control markets. Allen Bradley entered the electronic controller market just two years after Modicon and built a market-leading position in the new technology within a few years, even as it kept its strength in its old electromechanical products. It subsequently transformed itself into a major supplier of electronic controllers for factory automation. The other four companies, by contrast, introduced electronic controllers much later and subsequently either exited the controller business or were reduced to weak positions. From a capabilities perspective this is a surprising outcome, because General Electric and Westinghouse had much deeper expertise in microelectronics technologies at that time than did Allen Bradley, which had no institutional experience in the technology.
W h a t did Allen Bradley do differently? In 1 9 6 9 , just one year after Modicon entered the market, AB executives bought a 25 percent interest
Match the Size of the Organization to the Size of the Market | 1 4 1
in Information Instruments, Inc., a fledgling programmable controller start-up based in Ann Arbor, Michigan. The following year it purchased outright a nascent division of Bunker R a m o , which was focused on programmable electronic controls and their emerging markets. AB
combined these acquisitions into a single unit and maintained it as a business separate from its mainstream electromechanical products operation in Milwaukee. Over time, the electronics products have significantly eaten into the electromechanical controller business, as one AB division attacked the other.18 By contrast, each of the other four companies tried to manage its electronic controller businesses from within its mainstream electromechanical divisions, whose customers did not initially need or want electronic controls. Each failed to develop a viable position in the new technology.
Johnson & Johnson has with great success followed a strategy similar to Allen Bradley's in dealing with disruptive technologies such as endoscopic surgical equipment and disposable contact lenses. Though its total revenues amount to more than $ 2 0 billion, J&cJ comprises 1 6 0 autonomously operating companies, which range from its huge MacNeil and Janssen pharmaceuticals companies to small companies with annual revenues of less than $ 2 0 million. Johnson Sc Johnson's strategy is to launch products of disruptive technologies through very small companies acquired for that purpose.
S U M M A R Y
It is not crucial for managers pursuing growth and competitive advantage to be leaders in every element of their business. In sustaining technologies, in fact, evidence strongly suggests that companies which focus on extending the performance of conventional technologies, and choose to be followers in adopting new ones, can remain strong and competitive. This is not the case with disruptive technologies, however. There are enormous returns and significant first-mover advantages associated with early entry into the emerging markets in which disruptive technologies are initially used.. Disk drive manufacturers that led in commercializing disruptive technology grew at vastly greater rates than did companies that were disruptive technology followers.
Despite the evidence that leadership in commercializing disruptive technologies is crucial, large, successful innovators encounter a significant
142 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
dilemma in the pursuit of such leadership. In addition to dealing with the power of present customers as discussed in the last chapter, large, growth-oriented companies face the problem that small markets don't solve the near-term growth needs of large companies. The markets whose emergence is enabled by disruptive technologies all began as small ones. The first orders that the pioneering companies received in those markets were small ones. And the companies that cultivated those markets had to develop cost structures enabling them to become profitable at small scale. Each of these factors argues for a policy of implanting projects to commercialize disruptive innovations in small organizations that will view the projects as being on their critical path to growth and success, rather than as being distractions from the main business of the company.
This recommendation is not new, of course; a host of other management scholars have also argued that smallness and independence confer certain advantages in innovation. It is my hope that chapters 5 and 6 provide deeper insight about why and under what circumstances this strategy is appropriate.
N O T E S
1. The benefits of persistently pursuing incremental improvements versus taking big strategic leaps have been capably argued by Robert Hayes in "Strategic Planning: Forward in Reverse?" Harvard Business Review, November-December, 1985,190-197.
I believe that there are some specific situations in which leadership in sustaining technology is crucial, however. In a private conversation, Professor Kim Clark characterized these situations as those affecting knife-edge businesses, that is, businesses in which the basis of competition is simple and unidimensional and there is little room for error. An example of such a knife-edge industry is the photolithographic aligner (PLA) industry, studied by Rebecca M. Henderson and Kim B. Clark, in "Architectural Innovation: The Reconfiguration of Existing Systems and the Failure of Established Firms,"
Administrative Science Quarterly (35), March, 1990, 9-30. In this case, aligner manufacturers failed when they fell behind technologically in the face of sustaining architectural changes. This is because the basis of competition in the PLA industry was quite straightforward even though the products themselves were very complex: products either made the narrowest line width on silicon wafers of any in the industry or no one bought them. This is because PLA customers, makers of integrated circuits, simply had to have the fastest and most capable photolithographic alignment equipment or they
Match the Size of the Organization to the Size of the Market | 1 4 3
could not remain competitive in their own markets. The knife-edge existed because product functionality was the only basis of competition: PLA manufacturers would either fall off one side to rapid success or off the other side to failure. Clearly, such knife-edge situations make leadership in sustaining technology very important.
In most other sustaining situations, however, leadership is not crucial. This far more common situation is the subject of Richard S. Rosenbloom's study of the transition by National Cash Register from electro-mechanical to electronic technology. (See Richard S. Rosenbloom, "From Gears to Chips: The Transformation of NCR and Harris in the Digital Era," Working paper, Harvard Business School Business History Seminar, 1988). In this case, NCR
was very late in its industry in developing and launching a line of electronic cash registers. So late was NCR with this technology, in fact, that its sales of new cash registers dropped essentially to zero for an entire year in the early 1980s. Nonetheless, the company had such a strong field service capability that it survived by serving its installed base for the year it took to develop and launch its electronic cash registers. NCR then leveraged the strength of its brand name and field sales presence to quickly recapture its share of the market.
Even though a cash register is a simpler machine than a photolithographic aligner, I would characterize its market as complex, in that there are multiple bases of competition, and hence multiple ways to survive. As a general rule, the more complex a market, the less important is leadership in sustaining technological innovations. It is in dealing with knife-edge markets or with disruptive technologies that leadership appears to be crucial. I am indebted to Professors Kim B. Clark and Robert Hayes for their contributions to my thinking on this topic.
2. This is not to say that firms whose product performance or product cost consistently lagged behind the competition were able to prosper. I assert that there is no evidence that leadership in sustaining technological innovation confers a discernible and enduring competitive advantage over companies that have adopted a follower strategy because there are numerous ways to
"skin the cat" in improving the performance of a complex product such as a disk drive. Developing and adopting new component technologies, such as thin-film and magneto-resistive heads, is one way to improve performance, but there are innumerable other avenues for extending the performance of conventional technologies while waiting for new approaches to become better understood and more reliable. This argument is presented more fully in Clayton M. Christensen, "Exploring the Limits of the Technology S-Curve,"
Production and Operations Management (1), 1992, 334-366.
3. For the purposes of this analysis, a technology was classed as "new or unproven" if less than two years had elapsed from the time it had first
144 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
appeared in a product that was manufactured and sold by a company somewhere in the world or if, even though it had been in the market for more than two years, less than 20 percent of the disk drive makers had used the technology in one of their products.
4. In this analysis, emerging markets or value networks were those in which two years or less had elapsed since the first rigid disk drive had been used with that class of computers; established markets or value networks were those in which more than two years had elapsed since the first drive was used.
5. Entry by acquisition was a rare route of entry in the disk drive industry.
Xerox followed this strategy, acquiring Diablo, Century Data, and Shugart Associates. The performance of these companies after acquisition was so poor that few other companies followed Xerox's lead. The only other example of entry by acquisition was the acquisition of Tandon by Western Digital, a manufacturer of controllers. In the case of Xerox and Western Digital, the entry strategy of the firms they acquired is recorded in Table 6.1. Similarly, the start-up of Plus Development Corporation, a spin-out of Quantum, appears in Table 6.1 as a separate company.
6. The evidence summarized in this matrix may be of some use to venture capital investors, as a general way to frame the riskiness of proposed investments.
It suggests that start-ups which propose to commercialize a breakthrough technology that is essentially sustaining in character have a far lower likelihood of success than start-ups whose vision is to use proven technology to disrupt an established industry with something that is simpler, more reliable, and more convenient. The established firms in an industry have every incentive to catch up with a supposed sustaining technological breakthrough, while they have strong disincentives to pursue disruptive initiatives.
7. Not all of the small, emerging markets actually became large ones. The market for removable drive modules, for example, remained a small niche for more than a decade, only beginning to grow to significant size in the mid-1990s. The conclusion in the text that emerging markets offer a higher probability for success reflects the average, not an invariant result.
8. The notions that one ought not accept the risks of innovating simultaneously along both market and technology dimensions are often discussed among venture capitalists. It is also a focus of chapter 5 in Lowell W. Steele, Managing Technology (New York: McGraw Hill, 1989). The study reported here of the posterior probabilities of success for different innovation strategies builds upon the concepts of Steele and Lyle Ochs (whom Steele cites). I was also stimulated by ideas presented in Allan N. Afuah and Nik Bahram, "The Hypercube of Innovation," Research Policy (21), 1992.
9. The simplest equation used by financial analysts to determine share price is
Match the Size of the Organization to the Size of the Market | 1 4 5
P = D/(C-G), where P = price per share, D = dividends per share, C =
the company's cost of capital, and G = projected long-term growth rate.
10. This evidence is summarized by Clayton M. Christensen in "Is Growth an Enabler of Good Management, or the Result of It?" Harvard Business School working paper, 1996.
11. Scott Lewis, "Apple Computer, Inc.," in Adele Hast, ed., International Direc-tory of Company Histories (Chicago: St. James Press, 1991), 115-116.
12. An insightful history of the emergence of the personal computer industry appears in Paul Frieberger and Michael Swaine, Fire in the Valley: The Making of the Personal Computer (Berkeley, CA: Osborne-McGraw Hill, 1984).
13. "Can 3.5" Drives Displace 5.25s in Personal Computing?" Electronic Business, 1 August, 1986, 81-84.
14. Personal interview with Mr. William Schroeder, Vice Chairman, Conner Peripherals Corporation, November 19, 1991.
15. An insightful study on the linkage among a company's historical experience, its capabilities, and what it consequently can and cannot do, appears in Dorothy Leonard-Barton, "Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development," Strategic Management Journal (13), 1992, 111-125.
16. Personal interview with Mr. John Squires, cofounder and Executive Vice President, Conner Peripherals Corporation, April 27, 1992.
17. See, for example, George Gilder, "The Revitalization of Everything: The Law of the Microcosm," Harvard Business Review, March-April, 1988, 49-62.
18. Much of this information about Allen Bradley has been taken from John Gurda, The Bradley Legacy (Milwaukee: The Lynde and Harry Bradley Foundation, 1992).
C H A P T E R S E V E N
Discovering New and
Emerging Markets
Markets that do not exist cannot be analyzed: Suppliers and customers must discover them together. Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable. The strategies and plans that managers formulate for confronting disruptive technological change, therefore, should be plans for learning and discovery rather than plans for execution. This is an important point to understand, because managers who believe they know a market's future will plan and invest very differently from those who recognize the uncertainties of a developing market.
Most managers learn about innovation in a sustaining technology context because most technologies developed by established companies are sustaining in character. Such innovations are, by definition, targeted at known markets in which customer needs are understood. In this environment, a planned, researched approach to evaluating, developing, and marketing innovative products is not only possible, it is critical to success.
W h a t this means, however, is that much of what the best executives in successful companies have learned about managing innovation is not relevant to disruptive technologies. M o s t marketers, for example, have been schooled extensively, at universities and on the j o b , in the important art of listening to their customers, but few have any theoretical or practical training in how to discover markets that do not yet exist. T h e problem
1 4 8 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
with this lopsided experience base is that when the same analytical and decision-making processes learned in the school of sustaining innovation are applied to enabling or disruptive technologies, the effect on the company can be paralyzing. These processes demand crisply quantified information when none exists, accurate estimates of financial returns when neither revenues nor costs can be known, and management according to detailed plans and budgets that cannot be formulated. Applying inappropriate marketing, investment, and management processes can render good companies incapable of creating the new markets in which enabling or disruptive technologies are first used.
In this chapter we shall see how experts in the disk drive industry were able to forecast the markets for sustaining technologies with stunning accuracy but had great difficulty in spotting the advent and predicting the size of new markets for disruptive innovations. Additional case histories in the motorcycle and microprocessor industries further demonstrate the uncertainty about emerging market applications for disruptive or enabling technologies, even those that, in retrospect, appear obvious.
F O R E C A S T I N G M A R K E T S F O R S U S T A I N I N G V E R S U S
D I S R U P T I V E T E C H N O L O G I E S
An unusual amount of market information has been available about the disk drive industry from its earliest days—a major reason why studying it has yielded such rich insights. The primary source of data, Disk/Trend Report, published annually by Disk/Trend, Inc., of Mountain View, California, lists every model of disk drive that has ever been offered for sale by any company in the world, for each of the years from 1 9 7 5 to the present. It shows the month and year in which each model was first shipped, lists the performance specifications of the drive, and details the component technologies used. In addition, every manufacturer in the world shares with Disk/Trend its sales by product type, with information about what types of customers bought which drive. Editors at Disk/Trend then aggregate this data to derive the size of each narrowly defined market segment and publish a listing of the major competitors' shares, carefully guarding all proprietary data. Manufacturers in the industry find the reports so valuable that they all continue to share their proprietary data with Disk/Trend.
In each edition, Disk/Trend publishes the actual unit volumes and dollar sales in each market segment for the year just past and offers its forecasts
Discovering New and Emerging Markets | 1 4 9
for each of the next four years in each category. Given its unparalleled access to industry data spanning two decades, this publication offers an unusual chance to test through unfolding market history the accuracy of past predictions. Over all, Disk/Trend has a remarkable track record in forecasting the future of established markets, but it has struggled to estimate accurately the size of new markets enabled by disruptive disk drive technologies.
The evidence is summarized in Figure 7 . 1 , which compares the total unit volumes that Disk/Trend Report had forecast would be shipped in the first four years after commercial shipments of each new disk drive architecture began, to the total volumes that were actually shipped over
Figure 7.1 The Four Years after the First Commercial Shipments: Sustaining versus Disruptive Technologies
Source: D a t a a r e f r o m v a r i o u s i s s u e s of Disk/Trend Report.
1 5 0 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
that four-year period. To facilitate comparison, the heights of the bars measuring forecast shipments were normalized to a value of 1 0 0 , and the volumes actually shipped were scaled as a percentage of the forecast. Of the five new architectures for which Disk/Trend's forecasts were available, the 14-inch Winchester and the 2.5-inch generation were sustaining innovations, which were sold into the same value networks as the preceding generation of drives. T h e other three, 5 . 2 5 - , 3 . 5 - , and 1.8-inch drives, were disruptive innovations that facilitated the emergence of new value networks. {Disk/Trend did not publish separate forecasts for 8-inch drives.)
Notice that Disk/Trend's forecasts for the sustaining 2.5-inch and 1 4 -
inch Winchester technologies were within 8 percent and 7 percent, respectively, of what the industry actually shipped. But its estimates were off by 2 6 5 percent for 5.25-inch drives, 35 percent for 3.5-inch drives (really quite close), and 5 5 0 percent for 1.8-inch drives. Notably, the 1.8-inch drive, the forecast of which Disk/Trend missed so badly, was the first generation of drives with a primarily non-computer market.
The Disk/Trend staff used the same methods to generate the forecasts for sustaining architectures as they did for disruptive ones: interviewing leading customers and industry experts, trend analysis, economic model-ing, and so on. The techniques that worked so extraordinarily well when applied to sustaining technologies, however, clearly failed badly when applied to markets or applications that did not yet exist.
I D E N T I F Y I N G T H E M A R K E T F O R T H E H P 1 . 3 - I N C H
K I T T Y H A W K D R I V E
Differences in the forecastablity of sustaining versus disruptive technologies profoundly affected Hewlett-Packard's efforts to forge a market for its revolutionary, disruptive 1.3-inch Kittyhawk disk drive.1 In 1 9 9 1 , Hewlett-Packard's Disk Memory Division ( D M D ) , based in Boise, Idaho, generated about $ 6 0 0 million in disk drive revenues for its $ 2 0 billion parent company. That year a group of D M D employees conceived of a tiny, 1.3-inch 20 MB drive, which they code-named Kittyhawk. This was indeed a radical program for HP: The smallest drive previously made by D M D
had been 3.5-inches, and D M D had been one of the last in the industry to introduce one. T h e 1.3-inch Kittyhawk represented a significant leapfrog for the company—and, most notably, was HP's first attempt to lead in a disruptive technology.
Discovering New and Emerging Markets | 1 5 1
For the project to make sense in a large organization with ambitious growth plans, HP executives mandated that Kittyhawk's revenues had to ramp to $ 1 5 0 million within three years. Fortunately for Kittyhawk's proponents, however, a significant market for this tiny drive loomed on the horizon: hand-held palm-top computers, or personal digital assistants (PDAs). Kittyhawk's sponsors, after studying projections for this market, decided that they could scale the revenue ramp that had been set for them.
They consulted a market research firm, which confirmed HP's belief that the market for Kittyhawk would indeed be substantial.
HP's marketers developed deep relationships with senior executives at major companies in the computer industry, for example, M o t o r o l a , ATT, I B M , Apple, Microsoft, Intel, N C R , and Hewlett-Packard itself, as well as at a host of lesser-known startup companies. All had placed substantial product development bets on the PDA market. M a n y of their products were designed with Kittyhawk's features in mind, and Kittyhawk's design in turn reflected these customers' well-researched needs.
The Kittyhawk team concluded that developing a drive that met these customers' requirements would be a demanding but feasible technological stretch, and they launched an aggressive twelve-month effort to develop the tiny device. The result, shown in Figure 7 . 2 , was impressive. The first version packed 20 M B , and a second model, introduced a year later, stored 40 M B . To meet the ruggedness demanded in its target market of PDAs and electronic notebooks, Kittyhawk was equipped with an impact sensor similar to those used in automobile airbag crash sensors and could withstand a three-foot drop onto concrete without data loss. It was designed to sell initially at $ 2 5 0 per unit.
Although Kittyhawk's technical development went according to plan, the development of applications for it did not. The PDA market failed to materialize substantially, as sales of Apple's Newton and competing devices fell far short of aspirations. This surprised many of the computer industry experts whose opinions HP's marketers had worked so hard to synthesize. During its first two years on the market, Kittyhawk logged just a fraction of the sales that had been forecast. The sales achieved might have initially satisfied startup companies and venture capitalists, but for HP's management, the volumes were far below expectations and far too small to satisfy D M D ' s need to grow and gain overall market share. Even more surprising, the applications that contributed most significantly to Kittyhawk's sales were not in computers at all. They were Japanese-language portable word processors, miniature cash registers,
1 5 2 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
Figure 7.2 Hewlett-Packard's Kittyhawk Drive
Source: H e w l e t t P a c k a r d C o m p a n y . U s e d b y p e r m i s s i o n .
electronic cameras, and industrial scanners, none of which had figured in Kittyhawk's original marketing plans.
Even more frustrating, as the second anniversary of Kittyhawk's launch approached, were the inquiries received by HP marketers from companies making mass-market video game systems to buy very large volumes of Kittyhawk—if HP could make a version available at a lower price point.
These companies had been aware of Kittyhawk for two years, but they reported that it had taken some time for them to see what could be done with a storage device so small.
To a significant extent, HP had designed Kittyhawk to be a sustaining technology for mobile computing. Along many of the metrics of value in that application—small size, low weight and power consumption, and ruggedness—Kittyhawk constituted a discontinuous sustaining improvement relative to 2 . 5 - and 1.8-inch drives. Only in capacity (which HP
had pushed as far as possible) was Kittyhawk deficient. The large inquiries and orders that finally began arriving for the Kittyhawk, however, were for a truly disruptive product: something priced at $ 5 0 per unit and with
Discovering New and Emerging Markets | 1 5 3
limited functionality. For these applications, a capacity of 10 MB would have been perfectly adequate.
Unfortunately, because HP had positioned the drive with the expensive features needed for the PDA market rather than designing it as a truly disruptive product, it simply could not meet the price required by home video game manufacturers. Having invested so aggressively to hit its original targets as defined by the PDA application, management had little patience and no money to redesign a simpler, defeatured 1.3-inch drive that fit the market applications that had finally become clear. HP withdrew Kittyhawk from the market in late 1 9 9 4 .
The HP project managers concede in retrospect that their most serious mistake in managing the Kittyhawk initiative was to act as if their forecasts about the market were right, rather than as if they were wrong. They had invested aggressively in manufacturing capacity for producing the volumes forecast for the PDA market and had incorporated design features, such as the shock sensor, that were crucial to acceptance in the PDA market they had so carefully researched. Such planning and investment is crucial to success in a sustaining technology, but, the managers reflected, it was not right for a disruptive product like Kittyhawk. If they had the opportunity to launch Kittyhawk all over again, they would assume that neither they nor anyone else knew for sure what kinds of customers would want it or in what volumes. This would lead them toward a much more explor-atory, flexible approach toward product design and investment in manufacturing capacity; they would, given another chance, feel their way into the market, leaving enough resources to redirect their program if necessary and building upon what they learned on the way.
Hewlett-Packard's disk drive makers are not the only ones, of course, who behaved as if they knew what the market for a disruptive technology would be. They are in stellar company, as the following case histories show.
H O N D A ' S I N V A S I O N O F T H E N O R T H A M E R I C A N
M O T O R C Y C L E I N D U S T R Y
Honda's success in attacking and dominating the North American and European motorcycle markets has been cited as a superb example of clear strategic thinking coupled with aggressive and coherent execution.
According to these accounts, Honda employed a deliberate manufacturing strategy based on an experience curve in which it cut prices, built volume, aggressively reduced costs, cut prices some more, reduced costs further,
1 5 4 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
and built an unassailable volume-based low-cost manufacturing position in the motorcycle market. Honda then used that base to move upmarket and ultimately blew all established motorcycle manufacturers out of the market except for Harley-Davidson and B M W , which barely survived.2
Honda combined this manufacturing triumph with a clever product design, catchy advertising, and a convenient, broad-based distributor/retailer network tailored to the informal cyclists who constituted Honda's core customer base. Told in this manner, Honda's history is a tale of strategic brilliance and operational excellence that all managers dream will be told about them someday. The reality of Honda's achievement, as recounted by the Honda employees who were managing the business at the time, however, is quite different.3
During Japan's years of post-war reconstruction and poverty, Honda had emerged as a supplier of small, rugged motorized bicycles that were used by distributors and retailers in congested urban areas to make small deliveries to local customers. Honda developed considerable expertise in designing small, efficient engines for these bikes. Its Japanese market sales grew from an initial annual volume of 1,200 units in 1 9 4 9 to 2 8 5 , 0 0 0
units in 1 9 5 9 .
Honda's executives were eager to exploit the company's low labor costs to export motorbikes to North America, but there was no equivalent market there for its popular Japanese "Supercub" delivery bike. Honda's research showed that Americans used motorcyles primarily for over-the-road distance driving in which size, power, and speed were the most highly valued product attributes. Accordingly, Honda engineers designed a fast, powerful motorcycle specifically for the American market, and in 1 9 5 9
Honda dispatched three employees to Los Angeles to begin marketing efforts. To save living expenses, the three shared an apartment, and each brought with him a Supercub bike to provide cheap transportation around the city.
T h e venture was a frustrating experience from the beginning. Honda's products offered no advantage to prospective customers other than cost, and most motorcycle dealers refused to accept the unproven product line.
When the team finally succeeded in finding some dealers and selling a few hundred units, the results were disastrous. Honda's understanding of engine design turned out not to be transferable to highway applications, in which bikes were driven at high speeds for extended periods: The engines sprung oil leaks and the clutches wore out. Honda's expenses in air-freighting the warrantied replacement motorcycles between Japan and Los Angeles nearly sunk the company.
Discovering New and Emerging Markets | 1 5 5
Meanwhile, one Saturday, Kihachiro Kawashima, the Honda executive in charge of the North American venture, decided to vent his frustrations by taking his Supercub into the hills east of Los Angeles. It helped: He felt better after zipping around in the dirt. A few weeks later he sought relief dirt-biking again. Eventually he invited his two colleagues to join him on their Supercubs. Their neighbors and others who saw them zipping around the hills began inquiring where they could buy those cute little bikes, and the trio obliged by special-ordering Supercub models for them from Japan. This private use of what became known as off-road dirt bikes continued for a couple of years. At one point a Sears buyer tried to order Supercubs for the company's outdoor power equipment departments, but Honda ignored the opportunity, preferring to focus on selling large, powerful, over-the-road cycles, a strategy that continued to be unsuccessful.
Finally, as more and more people clamored for their own little Honda Supercubs to join their dirt-biking friends, the potential for a very different market dawned on Honda's U.S. team: Maybe there was an undeveloped off-the-road recreational motorbike market in North America for which—
quite by accident—the company's little 5 0 c c Supercub was nicely suited.
Although it took much arguing and arm-twisting, the Los Angeles team ultimately convinced corporate management in Japan that while the company's large bike strategy was doomed to failure, another quite different opportunity to create a totally new market segment merited pursuit.
Once the small-bike strategy was formally adopted, the team found that securing dealers for the Supercub was an even more vexing challenge than it had been for its big bikes. There just weren't any retailers selling that class of product. Ultimately, Honda persuaded a few sporting goods dealers to take on its line of motorbikes, and as they began to promote the bikes successfully, Honda's innovative distribution strategy was born.
Honda had no money for a sophisticated advertising campaign. But a UCLA student who had gone dirt-biking with his friends came up with the advertising slogan, "You meet the nicest people on a Honda," for a paper he wrote in an advertising course. Encouraged by his teacher, he sold the idea to an advertising agency, which then convinced Honda to use it in what became an award-winning advertising campaign. These serendipitous events were, of course, followed by truly world-class design engineering and manufacturing execution, which enabled Honda to repeatedly lower its prices as it improved its product quality and increased its production volumes.
Honda's 5 0 c c motorbike was a disruptive technology in the North American market. The rank-ordering of product attributes that Honda's
1 5 6 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
customers employed in their product decision making defined for Honda a very different value network than the established network in which Harley-Davidson, B M W , and other traditional motorcycle makers had competed.
From its low-cost manufacturing base for reliable motorbikes, using a strategy reminiscent of the upmarket invasions described earlier in disk drives, steel, excavators, and retailing, Honda turned its sights upmarket, introducing between 1 9 7 0 and 1 9 8 8 a series of bikes with progressively more powerful engines.
For a time in the late 1 9 6 0 s and early 1 9 7 0 s , Harley attempted to compete head-on with Honda and to capitalize on the expanding low-end market by producing a line of small-engine ( 1 5 0 to 3 0 0 cc) bikes acquired from the Italian motorcycle maker Aeromecchania. Harley attempted to sell the bikes through its North American dealer network.
Although Honda's manufacturing prowess clearly disadvantaged Harley in this effort, a primary cause of Harley's failure to establish a strong presence in the small-bike value network was the opposition of its dealer network. Their profit margins were far greater on high-end bikes, and many of them felt the small machines compromised Harley-Davidson's image with their core customers.
Recall from chapter 2 the finding that within a given value network, the disk drive companies and their computer-manufacturing customers had developed "very similar economic models or cost structures, which determined the sorts of business that appeared profitable to them. We see the same phenomenon here. Within their value network, the economics of Harley's dealers drove them to favor the same type of business that Harley had come to favor. Their coexistence within the value network made it difficult for either Harley or its dealers to exit the network through its bottom. In the late 1 9 7 0 s Harley gave in and repositioned itself at the very high end of the motorcycle market—a strategy reminiscent of Seagate's repositioning in disk drives, and of the upmarket retreats of the cable excavator companies and the integrated steel mills.
Interestingly, Honda proved just as inaccurate in estimating how large the potential North American motorcycle market was as it had been in understanding what it was. Its initial aspirations upon entry in 1 9 5 9 had been to capture 10 percent of a market estimated at 5 5 0 , 0 0 0 units per year with annual growth of 5 percent. By 1 9 7 5 the market had grown 16 percent per year to 5 , 0 0 0 , 0 0 0 annual units—units that came largely from an application that Honda could not have foreseen.4
Discovering New and Emerging Markets | 1 5 7
I N T E L ' S D I S C O V E R Y O F T H E M I C R O P R O C E S S O R M A R K E T
Intel Corporation, whose founders launched the company in 1 9 6 9 based on their pioneering development of metal-on-silicon ( M O S ) technology to produce the world's first dynamic random access memory ( D R A M ) integrated circuits, had become by 1 9 9 5 one of the world's most profitable major companies. Its storied success is even more remarkable because, when its initial leadership position in the D R A M market began crumbling between 1 9 7 8 and 1 9 8 6 under the onslaught of Japanese semiconductor manufacturers, Intel transformed itself from a second-tier D R A M company into the world's dominant microprocessor manufacturer. H o w did Intel do it?
Intel developed the original microprocessor under a contract development arrangement with a Japanese calculator manufacturer. When the project was over, Intel's engineering team persuaded company executives to purchase the microprocessor patent from the calculator maker, which owned it under the terms of its contract with Intel. Intel had no explicit strategy for building a market for this new microprocessor; the company simply sold the chip to whoever seemed to be able to use it.
Mainstream as they seem today, microprocessors were disruptive technologies when they first emerged. They were capable only of limited functionality, compared to the complex logic circuits that constituted the central processing units of large computers in the 1 9 6 0 s . But they were small and simple, and they enabled affordable logic and computation in applications where this previously had not been feasible.
Through the 1 9 7 0 s , as competition in the D R A M market intensified, margins began to decline on Intel's D R A M revenues while margins on its microprocessor product line, where there was less competition, stayed robust. Intel's system for allocating production capacity operated according to a formula whereby capacity was committed in proportion to the gross margins earned by each product line. The system therefore imperceptibly began diverting investment capital and manufacturing capacity away from the D R A M business and into microprocessors—without an explicit management decision to do so.5 In fact, Intel senior management continued to focus most of its own attention and energy on D R A M , even while the company's resource allocation processes were gradually implementing an exit from that business.
This de facto strategy shift, driven by Intel's autonomously operating resource allocation process, was fortuitous. Because so little was known
1 5 8 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
of the microprocessor market at that time, explicit analysis would have provided little justification for a bold move into microprocessors. Gordon M o o r e , Intel co-founder and chairman, for example, recalled that IBM's choice of the Intel 8 0 8 8 microprocessor as the "brain" of its new personal computer was viewed within Intel as a "small design win."6 Even after I B M ' s stunning success with its personal computers, Intel's internal forecast of the potential applications for the company's next-generation 2 8 6
chip did not include personal computers in its list of the fifty highest-volume applications.7
In retrospect, the application of microprocessors to personal computers is an obvious match. But in the heat of the battle, of the many applications in which microprocessors might have been used, even a management team as astute as Intel's could not know which would emerge as the most important and what volumes and profits it would yield.
U N P R E D I C T A B I L I T Y A N D D O W N W A R D I M M O B I L I T Y I N
E S T A B L I S H E D F I R M S
The reaction of some managers to the difficulty of correctly planning the markets for disruptive technologies is to work harder and plan smarter.
While this approach works for sustaining innovations, it denies the evidence about the nature of disruptive ones. Amid all the uncertainty surrounding disruptive technologies, managers can always count on one anchor: Experts' forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be. An important corollary is that, because markets for disruptive technologies are unpredictable, companies' initial strategies for entering these markets will generally be wrong.
H o w does this statement square with the findings presented in Table 6 . 1 , which showed a stunning difference in the posterior probabilities of success between firms that entered new, emerging value networks (37
percent) and those that entered existing value networks (6 percent)? If markets cannot be predicted in advance, how can firms that target them be more successful? Indeed, when I have shown the matrix in Table 6.1
to managerial audiences, they are quite astonished by the differences in the magnitudes and probabilities of success. But it is clear that the managers don't believe that the results can be generalized to their own situations.
Discovering New and Emerging Markets | 1 5 9
The findings violate their intuitive sense that creating new markets is a genuinely risky business.8
Failed Ideas versus Failed Businesses
The case studies reviewed in this chapter suggest a resolution to this puzzle. There is a big difference between the failure of an idea and the failure of a firm. Many of the ideas prevailing at Intel about where the disruptive microprocessor could be used were wrong; fortunately, Intel had not expended all of its resources implementing wrong-headed marketing plans while the right market direction was still unknowable. As a company, Intel survived many false starts in its search for the major market for microprocessors. Similarly, Honda's idea about how to enter the North American motorcycle market was wrong, but the company didn't deplete its resources pursuing its big-bike strategy and was able to invest aggressively in the winning strategy after it had emerged. Hewlett-Packard's Kittyhawk team was not as fortunate. Believing they had identified the winning strategy, its managers spent their budget on a product design and the manufacturing capacity for a market application that never emerged.
When the ultimate applications for the tiny drive ultimately began to coalesce, the Kittyhawk team had no resources left to pursue them.
Research has shown, in fact, that the vast majority of successful new business ventures abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work in the market.9 The dominant difference between successful ventures and failed ones, generally, is not the astuteness of their original strategy. Guessing the right strategy at the outset isn't nearly as important to success as conserving enough resources (or having the relationships with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right. Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.
Failed Ideas and Failed Managers
In most companies, however, individual managers don't have the luxury of surviving a string of trials and errors in pursuit of the strategy that works. Rightly or wrongly, individual managers in most organizations believe that they cannot fail: If they champion a project that fails because the initial marketing plan was wrong, it will constitute a blotch on their
1 6 0 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
track record, blocking their rise through the organization. Because failure is intrinsic to the process of finding new markets for disruptive technologies, the inability or unwillingness of individual managers to put their careers at risk acts as a powerful deterrent to the movement of established firms into the value networks created by those technologies. As Joseph Bower observed in his classic study of the resource allocation process at a major chemical company, "Pressure from the market reduces both the probability and the cost of being wrong.10
Bower's observation is consistent with the findings in this book about the disk drive industry. When demand for an innovation was assured, as was the case with sustaining technologies, the industry's established leaders were capable of placing huge, long, and risky bets to develop whatever technology was required. When demand was not assured, as was the case in disruptive technologies, the established firms could not even make the technologically straightforward bets required to commercialize such innovations. That is why 65 percent of the companies entering the disk drive industry attempted to do so in an established, rather than emerging market. Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there.
Plans to Learn versus Plans to Execute
Because failure is intrinsic to the search for initial market applications for disruptive technologies, managers need an approach very different from what they would take toward a sustaining technology. In general, for sustaining technologies, plans must be made before action is taken, forecasts can be accurate, and customer inputs can be reasonably reliable.
Careful planning, followed by aggressive execution, is the right formula for success in sustaining technology.
But in disruptive situations, action must be taken before careful plans are made. Because much less can be known about what markets need or how large they can become, plans must serve a very different purpose: They must be plans for learning rather than plans for implementation.
By approaching a disruptive business with the mindset that they can't know where the market is, managers would identify what critical information about new markets is most necessary and in what sequence that information is needed. Project and business plans would mirror those priorities, so that key pieces of information would be created, or important
Discovering New and Emerging Markets | 1 6 1
uncertainties resolved, before expensive commitments of capital, time, and money were required.
Discovery-driven planning, which requires managers to identify the assumptions upon which their business plans or aspirations are based,11
works well in addressing disruptive technologies. In the case of Hewlett-Packard's Kittyhawk disk drive, for example, HP invested significant sums with its manufacturing partner, the Citizen Watch Company, in building and tooling a highly automated production line. This commitment was based on an assumption that the volumes forecast for the drive, built around forecasts by HP customers of PDA sales, were accurate. Had HP's managers instead assumed that nobody knew in what volume PDAs would sell, they might have built small modules of production capacity rather than a single, high-volume line. They could then have held to capacity or added or reduced capacity as key events confirmed or disproved their assumptions.
Similarly, the Kittyhawk product development plan was based on an assumption that the dominant application for the little drive was in PDAs, which demanded high ruggedness. Based on this assumption, the Kittyhawk team committed to components and a product architecture that made the product too expensive to be sold to the price-sensitive video game makers at the emerging low end of the market. Discovery-driven planning would have forced the team to test its market assumptions before making commitments that were expensive to reverse—in this case, possibly by creating a modularized design that easily could be reconfigured or defeatured to address different markets and price points, as events in the marketplace clarified the validity of their assumptions.
Philosophies such as management by objective and management by exception often impede the discovery of new markets because of where they focus management attention. Typically, when performance falls short of plan, these systems encourage management to close the gap between what was planned and what happened. That is, they focus on unanticipated failures. But as Honda's experience in the North American motorcycle market illustrates, markets for disruptive technologies often emerge from unanticipated successes, on which many planning systems do not focus the attention of senior management.12 Such discoveries often come by watching how people use products, rather than by listening to what they say.
I have come to call this approach to discovering the emerging markets for disruptive technologies agnostic marketing, by which I mean marketing
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under an explicit assumption that no one—not us, not our customers—can know whether, how, or in what quantities a disruptive product can or will be used before they have experience using it. Some managers, faced with such uncertainty, prefer to wait until others have defined the market.
Given the powerful first-mover advantages at stake, however, managers confronting disruptive technologies need to get out of their laboratories and focus groups and directly create knowledge about new customers and new applications through discovery-driven expeditions into the marketplace.
N O T E S
1. What follows is a summary of the fuller history recounted in "Hewlett-Packard: The Flight of the Kittyhawk," Harvard Business School, Case No.
9-697-060, 1996.
2. Examples of such histories of Honda's success include the Harvard Business School case study, "A Note on the Motorcycle Industry—1975," No. 9-578-210, and a report published by The Boston Consulting Group, "Strategy Alternatives for the British Motorcycle Industry," 1975.
3. Richard Pascale and E. Tatum Christiansen, "Honda (A)," Harvard Business School Teaching, Case No. 9-384-049, 1984, and "Honda (B)," Harvard Business School, Teaching Case No. 9-384-050, 1984.
4. Statistical Abstract of the United States (Washington, D.C.: United States Bureau of the Census, 1980), 648.
5. Intel's exit from the DRAM business and entry into microprocessors has been chronicled by Robert A. Burgelman in "Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments," Administrative Science Quarterly (39), 1994,24-56. This thoroughly researched and compellingly written study of the process of strategy evolution is well worth reading.
6. George W. Cogan and Robert A. Burgelman, "Intel Corporation (A): The DRAM Decision," Stanford Business School, Case PS-BP-256.
7. Robert A. Burgelman, "Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments," Administrative Science Quarterly (39) 1994.
8. Studies of how managers define and perceive risk can shed significant light on this puzzle. Amos Tversky and Daniel Kahneman, for example, have shown that people tend to regard propositions that they do not understand as more risky, regardless of their intrinsic risk, and to regard things they do understand as less risky, again without regard to intrinsic risk. (Amos Tversky and Daniel Kahneman, "Judgment Under Uncertainty: Heuristics and Biases,"
Science [185], 1974, 1124-1131.) Managers, therefore, may view creation
Discovering New and Emerging Markets | 1 6 3
of new markets as risky propositions, in the face of contrary evidence, because they do not understand non-existent markets; similarly, they may regard investment in sustaining technologies, even those with high intrinsic risk, as safe because they understand the market need.
9. Among the excellent studies in this tradition are Myra M. Hart, Founding Resource Choices: Influences and Effects, DBA thesis, Harvard University Graduate School of Business Administration, 1995; Amar Bhide, "How Entrepreneurs Craft Strategies that Work," Harvard Business Review, March-April, 1994, 150-163; Amar Bhide, "Bootstrap Finance: The Art of Start-Ups," Harvard Business Review, November-December 1992,109-118;
"Hewlett-Packard's Kittyhawk," Harvard Business School, Case No. 9-697-060; and "Vallourec's Venture into Metal Injection Molding," Harvard Business School, Case No. 9-697-001.
10. Joseph Bower, Managing the Resource Allocation Process (Homewood, IL: Richard D. Irwin, 1970), 254.
11. Rita G. McGrath and Ian C. MacMillan, "Discovery-Driven Planning," Harvard Business Review, July-August, 1995, 4-12.
12. This point is persuasively argued in Peter F. Drucker, Innovation and Entrepre-neurship (New York: Harper & Row, 1985). Below, in chapter 8,1 recount how software maker Intuit discovered that many of the people buying its Quicken personal financial management software were, in fact, using it to keep the books of their small businesses. Intuit had not anticipated this application, but it consequently adapted the product more closely to small business needs and launched Quickbooks, which captured more than 70
percent of the small business accounting software market within two years.
C H A P T E R E I G H T
Performance Provided,
Market Demand, and the
Product Life Cycle
The graphs in this book showing the intersecting technology and market trajectories have proven useful in explaining how leading firms can stumble from positions of industry leadership.
In each of the several industries explored, technologists were able to provide rates of performance improvement that have exceeded the rates of performance improvement that the market has needed or was able to absorb. Historically, when this performance oversupply occurs, it creates an opportunity for a disruptive technology to emerge and subsequently to invade established markets from below.
As it creates this threat or opportunity for a disruptive technology, performance oversupply also triggers a fundamental change in the basis of competition in the product's market: The rank-ordering of the criteria by which customers choose one product or service over another will change, signaling a transition from one phase (variously defined by management theorists) to the next of the product life cycle. In other words, the intersecting trajectories of performance supplied and performance demanded are fundamental triggers behind the phases in the product life cycle. Because of this, trajectory maps such as those used in this book usefully characterize how an industry's competitive dynamics and its basis of competition are likely to change over time.
As with past chapters, this discussion begins with an analysis from the
1 6 6 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
disk drive industry of what can happen when the performance supplied exceeds the market's demands. After seeing the same phenomenon played out in the markets for accounting software and for diabetes care products, the link between this pattern and the phases of the product life cycle will be clear.
P E R F O R M A N C E O V E R S U P P L Y A N D C H A N G I N G B A S E S O F
C O M P E T I T I O N
The phenomenon of performance oversupply is charted in Figure 8 . 1 , an extract from Figure 1.7. It shows that by 1 9 8 8 , the capacity of the average 3.5-inch drive had finally increased to equal the capacity demanded in the mainstream desktop personal computer market, and that the capacity of the average 5.25-inch drive had by that time surpassed what the mainstream desktop market demanded by nearly 3 0 0 percent. At this point, for the first time since the desktop market emerged, computer makers had a choice of drives to buy: The 5 . 2 5 - and 3.5-inch drives both provided perfectly adequate capacity.
W h a t was the result? The desktop personal computer makers began switching to 3.5-inch drives in droves. Figure 8.2 illustrates this, using a substitution curve format in which the vertical axis measures the ratio of new- to old-technology units sold. In 1 9 8 5 this measure was . 0 0 7 , meaning that less than 1 percent ( . 0 0 6 9 ) of the desktop market had switched to the 3.5-inch format. By 1 9 8 7 , the ratio had advanced 0 . 2 0 , meaning that 1 6 . 7 percent of the units sold into this market that year were 3.5-inch drives. By 1 9 8 9 , the measure was 1.5, that is, only four years after the 3.5-inch product had appeared as a faint blip on the radar screen of the market, it accounted for 60 percent of drive sales.
Why did the 3.5-inch drive so decisively conquer the desktop PC market? A standard economic guess might be that the 3.5-inch format represented a more cost-effective architecture: If there were no longer any meaningful differentiation between two types of products (both had adequate capacity), price competition would intensify. This was not the case here, however. Indeed, computer makers had to pay, on average, 20 percent more per megabyte to use 3.5-inch drives, and yet they still flocked to the product. Moreover, computer manufacturers opted for the costlier drive while facing fierce price competition in their own product markets.
Why?
Performance oversupply triggered a change in the basis of competition.
Performance Provided, Market Demand, Product Life Cycle | 1 6 7
Figure 8.1 Intersecting Trajectories of Capacity Demanded versus Capacity Supplied in Rigid Disk Drives
Source: D a t a are f r o m v a r i o u s i s s u e s of Disk/Trend Report.
Once the demand for capacity was satiated, other attributes, whose performance had not yet satisfied market demands, came to be more highly valued and to constitute the dimensions along which drive makers sought to differentiate their products. In concept, this meant that the most important attribute measured on the vertical axis of figures such as 8.1
changed, and that new trajectories of product performance, compared to market demands, took shape.
1 6 8 | M A N A G I N G D I S R U P T I V E T E C H N O L O G I C A L C H A N G E
Figure 8.2 Substitution of 8-, 5.25-, and 3.5-Inch Drives of 30 to 100 MB
Market Share of
New Architecture
Market Share of
Old Architecture
Source: D a t a a r e f r o m v a r i o u s i s s u e s of Disk/Trend Report.
Specifically, in the desktop personal computer marketplace between 1 9 8 6 and 1 9 8 8 , the smallness of the drive began to matter more than other features. The smaller 3.5-inch drive allowed computer manufacturers to reduce the size, or desktop footprint, of their machines. At I B M , for example, the large X T / A T b o x gave way to the much smaller PS1/PS2
generation machines.
For a time, when the availability of small drives did not satisfy market demands, desktop computer makers continued to pay a hefty premium for 3.5-inch drives. In fact, using the hedonic regression analysis described in chapter 4, the 1 9 8 6 shadow price for a one-cubic-inch reduction in the volume of a disk drive was $ 4 . 7 2 . But once the computer makers had
Performance Provided, Market Demand, Product Life Cycle | 1 6 9
configured their new generations of desktop machines to use the smaller drive, their demand for even more smallness was satiated. As a result, the 1 9 8 9 shadow price, or the price premium accorded to smaller drives, diminished to $ 0 . 0 6 for a one-cubic-inch reduction.
Generally, once the performance level demanded of a particular attribute has been achieved, customers indicate their satiation by being less willing to pay a premium price for continued improvement in that attribute.
Hence, performance oversupply triggers a shift in the basis of competition, and the criteria used by customers to choose one product over another changes to attributes for which market demands are not yet satisfied.
Figure 8.3 summarizes what seems to have happened in the desktop PC market: The attribute measured on the vertical axis repeatedly changed.
Performance oversupply in capacity triggered the first redefinition of the vertical axis, from capacity to physical size. When performance on this new dimension satisfied market needs, the definition of performance on the vertical axis changed once more, to reflect demand for reliability. For a time, products offering competitively superior shock resistance and mean time between failure ( M T B F ) were accorded a significant price premium, compared to competitive offerings. But as M T B F values approached one million hours,1 the shadow price accorded to an increment of one hundred hours M T B F approached zero, suggesting performance oversupply on that dimension of product performance. The subsequent and current phase is an intense price-based competition, with gross margins tumbling below 12 percent in some instances.
W H E N D O E S A P R O D U C T B E C O M E A C O M M O D I T Y ?
The process of commoditization of disk drives was defined by the interplay between the trajectories of what the market demanded and what the technology supplied. The 5.25-inch drive had become a price-driven commodity in the desktop market by about 1 9 8 8 , when the 3.5-inch drive was still at a premium price. The 5.25-inch drive, in addition, even though priced as a commodity in desktop applications, was at the same time, relative to 8-inch drives, achieving substantial price premiums in higher-tier markets. As described in chapter 4, this explains the aggressive moves upmarket made by established companies.
A product becomes a commodity within a specific market segment when the repeated changes in the basis of competition, as described above, completely play themselves out, that is, when market needs on each attri-
Figure 8.3 Changes in the Basis of Competition in the Disk Drive Industry T h e basis of c o m p e t i t i v e s u c c e s s
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Performance Provided, Market Demand, Product Life Cycle | 1 7 1
bute or dimension of performance have been fully satisfied by more than one available product. The performance oversupply framework may help consultants, managers, and researchers to understand the frustrated comments they regularly hear from salespeople beaten down in price negotia-tions with customers: "Those stupid guys are just treating our product like it was a commodity. Can't they see how much better our product is than the competition's?" It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands.
P E R F O R M A N C E O V E R S U P P L Y A N D T H E E V O L U T I O N O F
P R O D U C T C O M P E T I T I O N
The marketing literature provides numerous descriptions of the product life cycle and of the ways in which the characteristics of products within given categories evolve over time.2 The findings in this book suggest that, for many of these models, performance oversupply is an important factor driving the transition from one phase of the cycle to the next.
Consider, for example, the product evolution model, called the buying hierarchy by its creators, Windermere Associates of San Francisco, California, which describes as typical the following four phases: functionality, reliability, convenience, and price. Initially, when no available product satisfies the functionality requirements the market, the basis of competition, or the criteria by which product choice is made, tends to be product functionality. (Sometimes, as in disk drives, a market may cycle through several different functionality dimensions.) Once two or more products credibly satisfy the market's demand for functionality, however, customers can no longer base their choice of products on functionality, but tend to choose a product and vendor based on reliability. As long as market demand for reliability exceeds what vendors are able to provide, customers choose products on this basis—and the most reliable vendors of the most reliable products earn a premium for it.
But when two or more vendors improve to the point that they more than satisfy the reliability demanded by the market, the basis of competition shifts to convenience. Customers will prefer those products that are the most convenient to use and those vendors that are most convenient to deal with. Again, as long as the market demand for convenience exceeds what vendors are able to provide, customers choose products on this basis
172 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
and reward vendors with premium prices for the convenience they offer.
Finally, when multiple vendors offer a package of convenient products and services that fully satisfies market demand, the basis of competition shifts to price. T h e factor driving the transition from one phase of the buying hierarchy to the next is performance oversupply.
Another useful conception of industry evolution, formulated by Geoffrey M o o r e in his book Crossing the Chasm,3 has a similar underlying logic, but articulates the stages in terms of the user rather than the product.
M o o r e suggests that products are initially used by innovators and early adopters in an industry—customers who base their choice solely on the product's functionality. During this phase the top-performing products command significant price premiums. M o o r e observes that markets then expand dramatically after the demand for functionality in the mainstream market has been met, and vendors begin to address the need for reliability among what he terms early majority customers. A third wave of growth occurs when product and vendor reliability issues have been resolved, and the basis of innovation and competition shifts to convenience, thus pulling in the late majority customers. Underlying Moore's model is the notion that technology can improve to the point that market demand for a given dimension of performance can be satiated.
This evolving pattern in the basis of competition—from functionality, to reliability and convenience, and finally to price—has been seen in many of the markets so far discussed. In fact, a key characteristic of a disruptive technology is that it heralds a change in the basis of competition.
O T H E R C O N S I S T E N T C H A R A C T E R I S T I C S
O F D I S R U P T I V E T E C H N O L O G I E S
Two additional important characteristics of disruptive technologies consistently affect product life cycles and competitive dynamics: First, the attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets; and second, disruptive products tend to be simpler, cheaper, and more reliable and convenient than established products. Managers must understand these characteristics to effectively chart their own strategies for designing, building, and selling disruptive products. Even though the specific market applications for disruptive technologies cannot be known in advance, managers can bet on these two regularities.
Performance Provided, Market Demand, Product Life Cycle | 1 7 3
1. The Weaknesses of Disruptive Technologies Are Their Strengths The relation between disruptive technologies and the basis of competition in an industry is complex. In the interplay among performance oversupply, the product life cycle, and the emergence of disruptive technologies, it is often the very attributes that render disruptive technologies useless in mainstream markets that constitute their value in new markets.
In general, companies that have succeeded in disruptive innovation initially took the characteristics and capabilities of the technology for granted and sought to find or create a new market that would value or accept those attributes. Thus, Conner Peripherals created a market for small drives in portable computers, where smallness was valued; J. C.
Bamford and J. I. Case built a market for excavators among residential contractors, where small buckets and tractor mobility actually created value; and Nucor found a market that didn't mind the surface blemishes on its thin-slab-cast sheet steel.
The companies toppled by these disruptive technologies, in contrast, each took the established market's needs as given, and did not attempt to market the technology until they felt it was good enough to be valued in the mainstream market. Thus, Seagate's marketers took the firm's early 3.5-inch drives to I B M for evaluation, rather than asking, "Where is the market that would actually value a smaller, lower-capacity drive?" When Bucyrus Erie acquired its Hydrohoe hydraulic excavator line in 1 9 5 1 , its managers apparently did not ask, "Where is the market that actually wants a mobile excavator that can only dig narrow trenches?" They assumed instead that the market needed the largest possible bucket size and the longest possible reach; they jury-rigged the Hydrohoe with cables, pulleys, clutches, and winches and attempted to sell it to general excavation contractors. When U.S. Steel was evaluating continuous thin-slab casting, they did not ask, "Where is the market for low-priced sheet steel with poor surface appearance?" Rather, they took it for granted that the market needed the highest-possible quality of surface finish and invested more capital in a conventional caster. They applied to a disruptive innovation a way of thinking appropriate to a sustaining technology.
In the instances studied in this book, established firms confronted with disruptive technology typically viewed their primary development challenge as a technological one: to improve the disruptive technology enough that it suits known markets. In contrast, the firms that were most successful in commercializing a disruptive technology were those framing their pri-
1 7 4 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
mary development challenge as a marketing one: to build or find a market where product competition occurred along dimensions that favored the disruptive attributes of the product.4
It is critical that managers confronting disruptive technology observe this principle. If history is any guide, companies that keep disruptive technologies bottled up in their labs, working to improve them until they suit mainstream markets, will not be nearly as successful as firms that find markets that embrace the attributes of disruptive technologies as they initially stand. These latter firms, by creating a commercial base and then moving upmarket, will ultimately address the mainstream market much more effectively than will firms that have framed disruptive technology as a laboratory, rather than a marketing, challenge.
2. Disruptive Technologies Are Typically Simpler, Cheaper, and More Reliable and Convenient than Established Technologies When performance oversupply has occurred and a disruptive technology attacks the underbelly of a mainstream market, the disruptive technology often succeeds both because it satisfies the market's need for functionality, in terms of the buying hierarchy, and because it is simpler, cheaper, and more reliable and convenient than mainstream products. Recall, for example, the attack of hydraulic excavation technology into the mainstream sewer and general excavation markets recounted in chapter 3. Once hydraulically powered excavators had the strength to handle buckets of 2 to 4 cubic yards of earth (surpassing the performance demanded in mainstream markets), contractors rapidly switched to these products even though the cable-actuated machines were capable of moving even more earth per scoop. Because both technologies provided adequate bucket capacity for their needs, contractors opted for the technology that was most reliable: hydraulics.
Because established companies are so prone to push for high-performance, high-profit products and markets, they find it very difficult not to overload their first disruptive products with features and functionality.
Hewlett-Packard's experience in designing its 1.3-inch Kittyhawk disk drive teaches just this lesson. Unable to design a product that was truly simple and cheap, Kittyhawk's champions pushed its capacity to the limits of technology and gave it levels of shock resistance and power consumption that would make it competitive as a sustaining product. When very
Performance Provided, Market Demand, Product Life Cycle | 1 7 5
high volume applications for a cheap, simple, single-function, 10 MB
drive began to emerge, HP's product was not disruptive enough to catch that wave. Apple committed a similar error in stretching the functionality of its Newton, instead of initially targeting simplicity and reliability.
P E R F O R M A N C E O V E R S U P P L Y I N T H E A C C O U N T I N G
S O F T W A R E M A R K E T
Intuit, the maker of financial management software, is known primarily for its extraordinarily successful personal financial software package, Quicken. Quicken dominates its market because it is easy and convenient.
Its makers pride themselves on the fact that the vast majority of Quicken customers simply buy the program, boot it up on their computers, and begin using it without having to read the instruction manual. Its developers made it so convenient to use, and continue to make it simpler and more convenient, by watching how customers use the product, not by listening to what they or the "experts" say they need. By watching for small hints of where the product might be difficult or confusing to use, the developers direct their energies toward a progressively simpler, more convenient product that provides adequate, rather than superior, functionality.5
Less well known is Intuit's commanding 70 percent share of the North American small business accounting software market.6 Intuit captured that share as a late entrant when it launched Quickbooks, a product based on three simple insights. First, previously available small business accounting packages had been created under the close guidance of certified public accountants and required users to have a basic knowledge of accounting (debits and credits, assets and liabilities, and so on) and to make every journal entry twice (thus providing an audit trail for each transaction). Second, most existing packages offered a comprehensive and sophisticated array of reports and analyses, an array that grew ever more complicated and specialized with each new release as developers sought to differentiate their products by offering greater functionality. And third, 85 percent of all companies in the United States were too small to employ an accountant: T h e books were kept by the proprietors or by family members, who had no need for or understanding of most of the entries and reports available from mainstream accounting software. They did not know what an audit trail was, let alone sense a need to use one.
Scott Cook, Intuit's founder, surmised that most of these small compa-
1 7 6 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
nies were run by proprietors who relied more on their intuition and direct knowledge of the business than on the information contained in accounting reports. In other words, Cook decided that the makers of accounting software for small businesses had overshot the functionality required by that market, thus creating an opportunity for a disruptive software technology that provided adequate, not superior functionality and was simple and more convenient to use. Intuit's disruptive Quickbooks changed the basis of product competition from functionality to convenience and captured 70 percent of its market within two years of its introduction.7 In fact, by 1 9 9 5 Quickbooks accounted for a larger share of Intuit's revenues than did Quicken.
The response of established makers of small business accounting software to Intuit's invasion, quite predictably, has been to move upmarket, continuing to release packages loaded with greater functionality; these focus on specific market subsegments, targeted at sophisticated users of information systems at loftier tiers of the market. Of the three leading suppliers of small business accounting software (each of which claimed about 30 percent of the market in 1 9 9 2 ) , one has disappeared and one is languishing. The third has introduced a simplified product to counter the success of Quickbooks, but it has claimed only a tiny portion of the market.
P E R F O R M A N C E O V E R S U P P L Y I N T H E P R O D U C T L I F E
C Y C L E O F I N S U L I N
Another case of performance oversupply and disruptive technology precipitating a change in the basis of competition—and threatening a change in industry leadership—is found in the worldwide insulin business. In 1 9 2 2 , four researchers in Toronto first successfully extracted insulin from the pancreases of animals and injected it, with miraculous results, into humans with diabetes. Because insulin was extracted from the ground-up pancreases of cows and pigs, improving the purity of insulin (measured in impure parts per million, or ppm) constituted a critical trajectory of performance improvement. Impurities dropped from 5 0 , 0 0 0 ppm in 1 9 2 5
to 1 0 , 0 0 0 ppm in 1 9 5 0 to 10 ppm in 1 9 8 0 , primarily as the result of persistent investment and effort by the world's leading insulin manufacturer, Eli Lilly and Company.
Despite this improvement, animal insulins, which are slightly different
Performance Provided, Market Demand, Product Life Cycle | 1 7 7
from human insulin, caused a fraction of a percent of diabetic patients to build up resistance in their immune systems. Thus, in 1 9 7 8 , Eli Lilly contracted with Genentech to create genetically altered bacteria that could produce insulin proteins that were the structural equivalent of human insulin proteins and 1 0 0 percent pure. The project was technically successful, and in the early 1 9 8 0 s , after a nearly $1 billion investment, Lilly introduced its Humulin-brand insulin to the market. Priced at a 25 percent premium over insulins of animal extraction, because of its human equivalence and its purity, Humulin was the first commercial-scale product for human consumption to emerge from the biotechnology industry.
The market's response to this technological miracle, however, was tepid.
Lilly found it very difficult to sustain a premium price over animal insulin, and the growth in the sales volume of Humulin was disappointingly slow.
"In retrospect," noted a Lilly researcher, "the market was not terribly dissatisfied with pork insulin. In fact, it was pretty happy with it."8 Lilly had spent enormous capital and organizational energy overshooting the market's demand for product purity. Once again, this was a differentiated product to which the market did not accord a price premium because the performance it provided exceeded what the market demanded.
Meanwhile, Novo, a much smaller Danish insulin maker, was busy developing a line of insulin pens, a more convenient way for taking insulin.
Conventionally, people with diabetes carried a separate syringe, inserted its needle into one glass insulin vial, pulled its plunger out to draw slightly more than the desired amount of insulin into the syringe, and held up the needle and flicked the syringe several times to dislodge any air bubbles that clung to the cylinder walls. They generally then had to repeat this process with a second, slower acting type of insulin. Only after squeezing the plunger slightly to force any remaining bubbles—and, inevitably, some insulin—out of the syringe could they inject themselves with the insulin.
This process typically took one to two minutes.
Novo's pen, in contrast, held a cartridge containing a couple of weeks'
supply of insulin, usually mixtures of both the fast-acting and the gradually released types. People using the Novo pen simply had to turn a small dial to the amount of insulin they needed to inject, poke the pen's needle under the skin, and press a button. The procedure took less than ten seconds.
In contrast to Lilly's struggle to command a premium price for Humulin, Novo's convenient pens easily sustained a 30 percent price premium per unit of insulin. Through the 1 9 8 0 s , propelled largely by the success of its
178 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
line of pens and pre-mixed cartridges, Novo increased its share of the worldwide insulin market substantially—and profitably. Lilly's and Novo's experiences offer further proof that a product whose performance exceeds market demands suffers commodity-like pricing, while disruptive products that redefine the basis of competition command a premium.
Teaching the Harvard Business School case to executives and M B A students about Lilly overshooting the market demand for insulin purity has been one of my most interesting professional experiences. In every class, the majority of students quickly pounce on Lilly for having missed something so obvious—that only a fraction of a percent of people with diabetes develop insulin resistance—and that the differentiation between highly purified pork insulin at 10 ppm and perfectly pure Humulin was not significant. Surely, they assert, a few simple focus groups in which patients and doctors were asked whether they wanted purer insulin would have given Lilly adequate guidance.
In every discussion, however, more thoughtful students soon begin to sway class opinion toward the view that (as we have seen over and over) what is obvious in retrospect might not be at all obvious in the thick of battle. Of all the physicians to whom Lilly's marketers listened, for example, which ones tended to carry the most credibility? Endocrinologists whose practices focused on diabetes care, the leading customers in this business. W h a t sorts of patients are most likely to consume the professional interests of these specialists? Those with the most advanced and intractable problems, among which insulin resistance was prominent.
What, therefore, were these leading customers likely to tell Lilly's marketers when they asked what should be done to improve the next-generation insulin product? Indeed, the power and influence of leading customers is a major reason why companies' product development trajectories overshoot the demands of mainstream markets.
Furthermore, thoughtful students observe that it would not even occur to most marketing managers to ask the question of whether a 1 0 0 percent pure human insulin might exceed market needs. For more than fifty years in a very successful company with a very strong culture, greater purity was the very definition of a better product. Coming up with purer insulins had always been the formula for staying ahead of the competition. Greater purity had always been a catching story that the salesforce could use to attract the time and attention of busy physicians. W h a t in the company's history would cause its culture-based assumptions suddenly to change
Performance Provided, Market Demand, Product Life Cycle | 1 7 9
and its executives to begin asking questions that never before had needed to be answered?9
C O N T R O L L I N G T H E E V O L U T I O N
O F P R O D U C T C O M P E T I T I O N
Figure 8.4 summarizes the model of performance oversupply, depicting a multi-tiered market in which the trajectory of performance improvement demanded by the market is shallower than the trajectory of improvement supplied by technologists. Hence, each tier of the market progresses through an evolutionary cycle marked by a shifting basis for product choice. Although other terms for product life cycles would yield similar results, this diagram uses the buying hierarchy devised by Windermere Associates, in which competition centers first on functionality, followed by relia-
Figure 8.4 Managing Changes in the Basis of Competition
1 8 0 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
bility, convenience, and, finally, price. In each of the cases reviewed in this chapter, the products heralding shifts in the basis of competition and progression to the next product life cycle phase were disruptive technologies.
The figure shows the strategic alternatives available to companies facing performance oversupply and the consequent likelihood that disruptive approaches will change the nature of competition in their industry. The first general option, labeled strategy 7, and the one most commonly pursued in the industries explored in this book, is to ascend the trajectory of sustaining technologies into ever-higher tiers of the market, ultimately abandoning lower-tier customers when simpler, more convenient, or less costly disruptive approaches emerge.
A second alternative, labeled strategy 2, is to march in lock-step with the needs of customers in a given tier of the market, catching successive waves of change in the basis of competition. Historically, this appears to have been difficult to do, for all of the reasons described in earlier chapters.
In the personal computer industry, for example, as the functionality of desktop machines came to satiate the demands of the lower tiers of the market, new entrants such as Dell and Gateway 2 0 0 0 entered with value propositions centered on convenience of purchase and use. In the face of this, Compaq responded by actively pursuing this second approach, aggressively fighting any upmarket drift by producing a line of computers with low prices and modest functionality targeted to the needs of the lower tiers of the market.
The third strategic option for dealing with these dynamics is to use marketing initiatives to steepen the slopes of the market trajectories so that customers demand the performance improvements that the technologists provide. Since a necessary condition for the playing out of these dynamics is that the slope of the technology trajectory be steeper than the market's trajectory, when the two slopes are parallel, performance oversupply—and the progression from one stage of the product life cycle to the next—does not occur or is at least postponed.
Some computer industry observers believe that Microsoft, Intel, and the disk drive companies have pursued this last strategy very effectively.
Microsoft has used its industry dominance to create and successfully market software packages that consume massive amounts of disk memory and require ever-faster microprocessors to execute. It has, essentially, increased the slopes of the trajectories of improvement in functionality demanded by their customers to parallel the slope of improvement provided by their technologists. The effect of this strategy is described in
Performance Provided, Market Demand, Product Life Cycle | 1 8 1
Figure 8.5, depicting recent events in the disk drive industry. (This chart updates through 1 9 9 6 the disk drive trajectory map in Figure 1.7.) Notice how the trajectories of capacity demanded in the mid-range, desktop, and notebook computer segments kinked upward in the 1 9 9 0 s along a path that essentially paralleled the capacity path blazed by the makers of 3 . 5 -
inch and 2.5-inch disk drives. Because of this, these markets have not
Figure 8.5 Changed Performance Demand Trajectories and the Deferred Impact of Disruptive Technologies
Source: A n earlier v e r s i o n o f this f i g u r e w a s p u b l i s h e d i n C l a y t o n M . C h r i s t e n s e n , " T h e R i g i d Disk Drive I n d u s t r y . A H i s t o r y of C o m m e r c i a l a n d T e c h n o l o g i c a l T u r b u l e n c e , " B u s i n e s s History Review
6 7 , n o . 4 (Winter 1993): 5 5 9 .
1 8 2 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
experienced performance oversupply in recent years. T h e 2.5-inch drive remains locked within the notebook computer market because capacity demanded on the desktop is increasing at too brisk a pace. The 3.5-inch drive remains solidly ensconced in the desktop market, and the 1.8-inch drive has penetrated few notebook computers, for the same reasons. In this situation, the companies whose products are positioned closest to the top of the market, such as Seagate and I B M , have been the most profitable, because in the absence of technology oversupply, a shift in the stages of the product life cycle at the high end of the market has been held at bay.
It is unclear how long the marketers at Microsoft, Intel, and Seagate can succeed in creating demand for whatever functionality their technologists can supply. Microsoft's Excel spreadsheet software, for example, required 1.2 MB of disk storage capacity in its version 1.2, released in 1 9 8 7 . Its version 5 . 0 , released in 1 9 9 5 , required 32 MB of disk storage capacity. Some industry observers believe that if a team of developers were to watch typical users, they would find that functionality has substantially overshot mainstream market demands. If true, this could create an opportunity for a disruptive technology—applets picked off the internet and used in simple internet appliances rather than in full-function computers, for example—to invade this market from below.
R I G H T A N D W R O N G S T R A T E G I E S
Which of the strategies illustrated in Figure 8.4 is best? This study finds clear evidence that there is no one best strategy. Any of the three, consciously pursued, can be successful. Hewlett-Packard's pursuit of the first strategy in its laser jet printer business has been enormously profitable.
In this instance, it has been a safe strategy as well, because HP is attacking its own position with disruptive ink-jet technology. Compaq Computer and the trinity of Intel, Microsoft, and the disk drive makers have successfully—at least to date—implemented the second and third strategies, respectively.
These successful practitioners have in common their apparent understanding—whether explicit or intuitive—of both their customers' trajectories of need and their own technologists' trajectories of supply.
Understanding these trajectories is the key to their success thus far. But
Performance Provided, Market Demand, Product Life Cycle | 1 8 3
the list of firms that have consistently done this is disturbingly short.
Most well-run companies migrate unconsciously to the northeast, setting themselves up to be caught by a change in the basis of competition and an attack from below by disruptive technology.
N O T E S
1. In disk drive industry convention, a mean time between failure measure of one million hours means that if one million disk drives were turned on simultaneously and operated continuously for one hour, one of those drives would fail within the first hour.
2. Three of the earliest and most influential papers that proposed the existence of product life cycles were Jay W. Forrester, "Industrial Dynamics," Harvard Business Review, July-August, 1958, 9-14; Arch Patton, "Stretch Your Products' Earning Years—Top Management's Stake in the Product Life Cycle,"
Management Review (38), June, 1959, 67-79; and William E. Cox, "Product Life Cycles as Marketing Models," Journal of Business (40), October, 1967, 375. Papers summarizing the conceptual and empirical problems surrounding the product life cycle concept include Nariman K. Dhalla and Sonia Yuspeh,
"Forget the Product Life Cycle Concept!" Harvard Business Review, Janu-ary-February, 1976, 102-112; David R. Rink and John E. Swan, "Product Life Cycle Research: A Literature Review," Journal of Business Research, 1979,219; and George S. Day, "The Product Life Cycle: Analysis and Applications Issues," Journal of Marketing (45), Fall, 1981, 60-67. A paper by Gerard J. Tellis and C. Merle Crawford, "An Evolutionary Approach to Product Growth Theory," Journal of Marketing (45), Fall, 1981, 125-132, contains a cogent critique of the product life cycle concept, and presents a theory of product evolution that presages many of the ideas presented in this section.
3. Geoffrey A. Moore, Crossing the Chasm (New York: HarperBusiness, 1991).
4. The same behavior characterized the emergence of portable radios. In the early 1950s, Akio Morita, the chairman of Sony, took up residence in an inexpensive New York City hotel in order to negotiate a license to AT&T's patented transistor technology, which its scientists had invented in 1947. Morita found AT&T to be a less-than-willing negotiator and had to visit the company repeatedly badgering AT&T to grant the license. Finally AT&T
relented. After the meeting ended in which the licensing documents were signed, an AT&T official asked Morita what Sony planned to do with the license. "We will build small radios," Morita replied. "Why would anyone care about smaller radios?" the official queried. "We'll see," was Morita's answer. Several months later Sony introduced to the U.S. market the first
184 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
portable transistor radio. According to the dominant metrics of radio performance in the mainstream market, these early transistor radios were really bad, offering far lower fidelity and much more static than the vacuum tube-based tabletop radios that were the dominant design of the time. But rather than work in his labs until his transistor radios were performance-competitive in the major market (which is what most of the leading electronics companies did with transistor technology), Morita instead found a market that valued the attributes of the technology as it existed at the time—the portable personal radio. Not surprisingly, none of the leading makers of tabletop radios became a leading producer of portable radios, and all were subsequently driven from the radio market. (This story was recounted to me by Dr. Sheldon Weinig, retired vice chairman for manufacturing and technology of Sony Corporation.)
5. John Case, "Customer Service: The Last Word," Inc. Magazine, April, 1991, 1-5.
6. This information in this section was given to the author by Scott Cook, the founder and chairman of Intuit Corporation, and by Jay O'Connor, marketing manager for Quickbooks.
7. Cook recounts that in the process of designing a simple and convenient accounting software package, Intuit's developers arrived at a profound insight.
The double-entry accounting system originally developed by Venetian mer-chants to catch arithmetical mistakes continued to be used in every available package of accounting software—even though computers typically do not make mistakes in addition and subtraction. Intuit was able to greatly simplify its product by eliminating this unneeded dimension of product functionality.
8. See "Eli Lilly &c Co.: Innovation in Diabetes Care," Harvard Business School, Case No. 9-696-077. This case notes that although Lilly was not able to achieve premium pricing for its Humulin insulin, it benefited from the investment. Humulin protected Lilly against a possible shortfall in the pancreas supply, threatened by declining red meat consumption, and it gave Lilly a very valuable experience and asset base in the volume manufacturing of bioengi-neered drugs.
9. Once such minority opinions have been raised in class, many students then begin to see that institutions widely regarded as among the best-managed and most successful in the world may have overshot what their mainstream markets demand. Intel, for example, has always measured the speed of its microprocessors on the vertical axis of its performance graphs. It has always assumed that the market demands ever-faster microprocessors, and evidence to the tune of billions of dollars in profit has certainly confirmed that belief. Certainly some leading-edge customers need chips that process instructions at rates of 200, 400, and 800 MHz. But what about the mainstream market? Is it possible that sometime soon the speed and cost of Intel's new microprocessors might
Performance Provided, Market Demand, Product Life Cycle | 1 8 5
overshoot market demands? And if technology oversupply is possible, how will thousands of Intel employees be able to recognize when this has occurred, accepting the change with enough conviction to completely alter the trajectory of their development efforts? Discerning technology oversupply is difficult.
Doing something about it is even more so.
C H A P T E R N I N E
Managing Disruptive
Technological Change:
A Case Study
As we approach the end of this book, we should better understand why great companies can stumble. Incompetence, bureaucracy, arrogance, tired executive blood, poor planning, and short-term investment horizons obviously have played leading roles in toppling many companies. But we have learned here that even the best managers are subject to certain laws that make disruptive innovation difficult. It is when great managers haven't understood or have attempted to fight these forces that their companies have stumbled.
This chapter uses the forces and principles described in earlier chapters to illustrate how managers can succeed when faced with disruptive technology change. To do so, I employ a case study format, using a personal voice, to suggest how I, as a hypothetical employee of a major automaker, might manage a program to develop and commercialize one of the most vexing innovations of our day: the electric vehicle. My purpose here is explicitly not to offer any so-called right answer to this particular challenge, nor to predict whether or how electric vehicles may become commercially successful. Rather, it is to suggest in a familiar but challenging context how managers might structure their thinking about a similar problem by proposing a sequence of questions that, if asked, can lead to a sound and useful answer.
1 8 8 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
H O W C A N W E K N O W I F A T E C H N O L O G Y I S D I S R U P T I V E ?
Electric-powered vehicles have hovered at the fringe of legitimacy since the early 1 9 0 0 s , when they lost the contest for the dominant vehicle design to gasoline power. Research on these vehicles accelerated during the 1 9 7 0 s , however, as policy makers increasingly looked to them as a way to reduce urban air pollution. The California Air Resources Board (CARB) forced an unprecedented infusion of resources into the effort in the early 1 9 9 0 s when it mandated that, starting in 1 9 9 8 , no automobile manufacturer would be allowed to sell any cars in California if electric vehicles did not constitute at least 2 percent of its unit sales in the state.1
In my hypothetical responsibility for managing an automaker's program, my first step would be to ask a series of questions: H o w much do we need to worry about electric cars? That is, aside from California's mandate, does the electric car pose a legitimate disruptive threat to companies making gasoline-powered automobiles? Does it constitute an opportunity for profitable growth?
To answer these questions, I would graph the trajectories of performance improvement demanded in the market versus the performance improvement supplied by the technology; in other words, I would create for electric vehicles a trajectory map similar to those in Figures 1.7 or 8.5. Such charts are the best method I know for identifying disruptive technologies.
The first step in making this chart involves defining current mainstream market needs and comparing them with the current capacity of electric vehicles. To measure market needs, I would watch carefully what customers do, not simply listen to what they say. Watching how customers actually use a product provides much more reliable information than can be gleaned from a verbal interview or a focus group.2 Thus, observations indicate that auto users today require a minimum cruising range (that is, the distance that can be driven without refueling) of about 1 2 5 to 1 5 0
miles; most electric vehicles only offer a minimum cruising range of 50
to 80 miles. Similarly, drivers seem to require cars that accelerate from 0
to 60 miles per hour in less than 10 seconds (necessary primarily to merge safely into high-speed traffic from freeway entrance ramps); most electric vehicles take nearly 20 seconds to get there. And, finally, buyers in the mainstream market demand a wide array of options, but it would be impossible for electric vehicle manufacturers to offer a similar variety within the small initial unit volumes that will characterize that business.3
According to almost any definition of functionality used for the vertical
Managing Disruptive Technological Change: A Case Study | 1 8 9
axis of our proposed chart, the electric vehicle will be deficient compared to a gasoline-powered car.
This information is not sufficient to characterize electric vehicles as disruptive, however. They will only be disruptive if we find that they are also on a trajectory of improvement that might someday make them competitive in parts of the mainstream market. To assess this possibility, we need to project trajectories measuring the performance improvement demanded in the market versus the performance improvement that electric vehicle technology may provide. If these trajectories are parallel, then electric vehicles are unlikely to become factors in the mainstream market; but if the technology will progress faster than the pace of improvement demanded in the market, then the threat of disruption is real.
Figure 9.1 shows that the trajectories of performance improvement demanded in the market—whether measured in terms of required acceleration, cruising range, or top cruising speed—are relatively flat. This is because traffic laws impose a limit on the usefulness of ever-more-powerful cars, and demographic, economic, and geographic considerations limit the increase in commuting miles for the average driver to less than 1
percent per year.4 At the same time, the performance of electric vehicles is improving at a faster rate—between 2 and 4 percent per year—
suggesting that sustaining technological advances might indeed carry electric vehicles from their position today, where they cannot compete in mainstream markets, to a position in the future where they might.5
In other words, as an automotive company executive, I would worry about the electric vehicle, not just because it is politically correct to be investing in environmentally friendly technologies, but because electric vehicles have the smell of a disruptive technology. They can't be used in mainstream markets; they offer a set of attributes that is orthogonal to those that command attention in the gasoline-powered value network; and the technology is moving ahead at a faster rate than the market's trajectory of need.
Because electric vehicles are not sustaining innovations, however, mainstream automakers naturally doubt that there is a market for them—
another symptom of a disruptive innovation. Consider this statement by the director of Ford's electric vehicle program: "The electric Ranger will sell at approximately $ 3 0 , 0 0 0 and have a lead-acid battery that will give it a range of 50 miles . . . . The 1 9 9 8 electric vehicle will be a difficult sell.
T h e products that will be available will not meet customer expectations in terms of range, cost or utility."6 Indeed, given their present performance
1 9 0 I M A N A G I N G D I S R U P T I V E T E C H N O L O G I C A L C H A N G E
Figure 9.1 The Electric Car
Source: D a t a a r e f r o m Dr. P a u l J . Miller, S e n i o r E n e r g y Fellow, W . A l t o n J o n e s F o u n d a t i o n a n d f r o m n u m e r o u s a r t i c l e s a b o u t electric v e h i c l e s .
Managing Disruptive Technological Change: A Case Study | 1 9 1
along these parameters, it will be about as easy to sell electric vehicles into the mainstream car market as it was to sell 5.25-inch disk drives to mainframe computer makers in 1 9 8 0 .
In evaluating these trajectories, I would be careful to keep asking the right question: Will the trajectory of electric vehicle performance ever intersect the trajectory of market demands (as revealed in the way customers use cars)? Industry experts may contend that electric vehicles will never perform as well as gasoline-powered cars, in effect comparing the trajectories of the two technologies. They are probably correct. But, recall-ing the experience of their counterparts in the disk drive industry, they will have the right answer to the wrong question. I also would note, but not be deterred by, the mountain of expert opinion averring that without a major technological breakthrough in battery technology, there will never be a substantial market for electric vehicles. The reason? If electric vehicles are viewed as a sustaining technology for established market value networks, they are clearly right. But because the track records of experts predicting the nature and size of markets for disruptive technologies is very poor, I would be particularly skeptical of the experts' skepticism, even as I remain uncertain about my own conclusions.
W H E R E I S T H E M A R K E T F O R E L E C T R I C V E H I C L E S ?
Having decided that electric vehicles are a potentially disruptive technology, my next challenge would be to define a marketing strategy that could lead my company to a legitimate, unsubsidized market in which electric cars might first be used. In formulating this marketing strategy, I would apply three findings from earlier chapters in this book.
First, I would acknowledge that, by definition, electric vehicles cannot initially be used in mainstream applications because they do not satisfy the basic performance requirements of that market. I would therefore be sure that everybody having anything to do with my program understands this point: Although we don't have a clue about where the market is, the one thing we know for certain is that it isn't in an established automobile market segment. Ironically, I would expect most automakers to focus precisely and myopically on the mainstream market because of the principle of resource dependence and the principle that small markets don't solve the growth and profit needs of big companies. I would not, therefore, follow the lead of other automakers in my search for customers, because
1 9 2 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE-I would recognize that their instincts and capabilities are likely to be trained on the wrong target.7
Nonetheless, my task is to find a market in which the vehicles can be used, because the early entrants into disruptive technology markets develop capabilities that constitute strong advantages over later entrants.
They're the ones that, from a profitable business base in this beachhead market, will most successfully throw impetus behind the sustaining innovations required to move the disruptive technology upmarket, toward the mainstream. Holding back from the market, waiting for laboratory researchers to develop a breakthrough battery technology, for example, is the path of least resistance for managers. But this strategy has rarely proven to be a viable route to success with a disruptive innovation.
Historically, as we have seen, the very attributes that make disruptive technologies uncompetitive in mainstream markets actually count as positive attributes in their emerging value network. In disk drives, the smallness of 5.25-inch models made them unusable in large computers but very useful on the desktop. While the small bucket capacity and short reach of early hydraulic excavators made them useless in general excavation, their ability to dig precise, narrow trenches made them useful in residential construction. Odd as it sounds, therefore, I would direct my marketers to focus on uncovering somewhere a group of buyers who have an undiscovered need for a vehicle that accelerates relatively slowly and can't be driven farther than 1 0 0 miles!
The second point on which I would base my marketing approach is that no one can learn from market research what the early market(s) for electric vehicles will be. I can hire consultants, but the only thing I can know for sure is that their findings will be wrong. Nor can customers tell me whether or how they might use electric vehicles, because they will discover how they might use the products at the same time as we discover it—just as Honda's Supercub opened an unforeseen new application for motorbiking. The only useful information about the market will be what I create through expeditions into the market, through testing and probing, trial and error, by selling real products to real people who pay real money.8
Government mandates, incidentally, are likely to distort rather than solve the problem of finding a market. I would, therefore, force my organization to live by its wits rather than to rely on capricious subsidies or non-economic-based California regulation to fuel my business.
The third point is that my business plan must be a plan for learning, not one for executing a preconceived strategy. Although I will do my best to hit the right market with the right product and the right strategy the
Managing Disruptive Technological Change: A Case Study \ 1 9 3
first time out, there is a high probability that a better direction will emerge as the business heads toward its initial target. I must therefore plan to be wrong and to learn what is right as fast as possible.9 I cannot spend all of my resources or all of my organizational credibility on an all-or-nothing first-time bet, as Apple did with its Newton or Hewlett-Packard did with its Kittyhawk. I need to conserve resources to get it right on the second or third try.
These three concepts would constitute the foundation of my marketing strategy.
Potential Markets: Some Speculation
W h a t might emerge as the initial value network for electric vehicles?
Again, though it is impossible to predict, it almost surely will be one in which the weaknesses of the electric vehicle will be seen as strengths. One of my students has suggested that the parents of high school students, who buy their children cars for basic transportation to and from school, friends' homes, and school events, might constitute a fertile market for electric vehicles.10 Given the option, these parents might see the product simplicity, slow acceleration, and limited driving range of electric vehicles as very desirable attributes for their teenagers' cars—especially if they were styled with teenagers in mind. Given the right marketing approach, who knows what might happen? An earlier generation met a lot of nice people on their Hondas.
Another possible early market might be taxis or small-parcel delivery vehicles destined for the growing, crowded, noisy, polluted cities of Southeast Asia. Vehicles can sit on Bangkok's roads all day, mostly idling in traffic jams and never accelerating above 30 miles per hour. Electric motors would not need to run and hence would not drain the battery while idling.
The maneuverability and ease of parking of these small vehicles would be additional attractions.
These or similar market ideas, whether or not they ultimately prove viable, are at least consistent with the way disruptive technologies develop and emerge.
How Are Today's Automobile Companies
Marketing Electric Vehicles?
T h e strategy proposed here for finding and defining the initial market for electric vehicles stands in stark contrast to the marketing approaches being used by today's major automakers, each of which is struggling to sell
1 9 4 MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
electric vehicles into its mainstream market in the time-honored tradition of established firms mishandling disruptive technologies. Consider this statement made in 1 9 9 5 by William Glaub, Chrysler general sales manager, discussing his company's planned offering for 1 9 9 8 . 1 1
Chrysler Corporation is preparing to provide an electric powered version of our slick new minivan in time for the 1998 model year. After an in-depth study of the option between a purpose-built vehicle and modification of an existing platform, the choice of the minivan to use as an electric powered platform, in retrospect, is an obvious best choice for us. Our experience shows that fleets will likely be the best opportunity to move any number of these vehicles . . . . The problem that we face is not in creating an attractive package. The new minivan is an attractive package. The problem is that sufficient energy storage capacity is not available on board the vehicle.12
To position its offering in the mainstream market, Chrysler has had to pack its minivan with 1,600 pounds of batteries. This, of course, makes its acceleration much slower, its driving range shorter, and its braking distance longer than other available gasoline-powered automobiles. Because of the way Chrysler has positioned its electric vehicle, industry analysts naturally compare it to gasoline-powered minivans, using the metrics paramount in the mainstream value network. At an estimated cost of $ 1 0 0 , 0 0 0 (compared with $ 2 2 , 0 0 0 for the gasoline-powered model), nobody in their right mind would consider buying Chrysler's product.
Chrysler's marketers are, naturally enough, very pessimistic about their ability to sell any electric minivans in California, despite the government's mandate that they do so. William Glaub, for example, continued the remarks cited above with the following observation: Markets are developed with fine products that customers desire to own. No salesman can take marginal product into the marketplace and have any hope of establishing a sustainable consumer base. Consumers will not be forced into a purchase that they do not want. Mandates will not work in a consumer-driven, free market economy. For electric vehicles to find a place in the market, respectable products comparable to today's gasoline-powered cars must be available.13
Chrysler's conclusion is absolutely correct, given the way its marketers have framed their challenge.14 Mainstream customers can never use a disruptive technology at its outset.
Managing Disruptive Technological Change: A Case Study | 1 9 5
W H A T S H O U L D B E O U R P R O D U C T , T E C H N O L O G Y , A N D D I S T R I B U T I O N S T R A T E G I E S ?
Product Development for Disruptive Innovations
Guiding my engineers in designing our initial electric vehicle will be a challenge, because of the classic chicken-and-egg problem: Without a market, there is no obvious or reliable source of customer input; without a product that addresses customers' needs, there can be no market. H o w can we design a product in such a vacuum? Fortunately, the principles described in this book give us some help.
The most valuable guidance comes from chapter 8, which indicated that the basis of competition will change over a product's life cycle and that the cycle of evolution itself is driven by the phenomenon of performance oversupply, that is, the condition in which the performance provided by a technology exceeds the actual needs of the market. Historically, performance oversupply opens the door for simpler, less expensive, and more convenient—and almost always disruptive—technologies to enter.
Performance oversupply indeed seems to have occurred in autos. There are practical limits to the size of auto bodies and engines, to the value of going from 0 to 60 in fewer seconds, and to the consumer's ability to cope with overchoice in available options. Thus, we can safely predict that the basis of product competition and customer choice will shift away from these measures of functionality toward other attributes, such as reliability and convenience. This is borne out by the nature of the most successful entrants into the North American market during the past thirty years; they have succeeded not because they introduced products with superior functionality, but because they competed on the basis of reliability and convenience.
Toyota, for example, entered the U.S. market with its simple, reliable Corona, establishing a low-end market position. Then, consistent with the inexorable attraction to migrate upmarket, Toyota introduced models, such as Camry, Previa, and Lexus, with added features and functionality, creating a vacuum at the low end of the market into which entrants such as Saturn and Hyundai have entered. Saturn's strategy has been to characterize the customer's entire experience of buying and owning the vehicle as reliable and convenient, but it, t o o , judging by recent reports,15
will soon take its turn moving upmarket, creating a new vacuum at the low end for even simpler, more convenient transportation.
1 9 6 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
In all likelihood, therefore, the winning design in the first stages of the electric vehicle race will be characterized by simplicity and convenience and will be incubated in an emerging value network in which these attributes are important measures of value. Each of the disruptive technologies studied in this book has been smaller, simpler, and more convenient than preceding products. Each was initially used in a new value network in which simplicity and convenience were valued. This was true for smaller, simpler disk drives; desktop and portable computers; hydraulic backhoes; steel minimills as opposed to integrated mills; insulin-injecting pens as opposed to syringes.16
Using these qualities as my guiding principles, I would instruct my design engineers to proceed according to the following three criteria.
First, this vehicle must be simple, reliable, and convenient. That probably means, for example, that figuring out a way to recharge its batteries quickly, using the commonly available electrical service, would be an immutable technological objective.
Second, because no one knows the ultimate market for the product or how it will ultimately be used, we must design a product platform in which feature, function, and styling changes can be made quickly and at low cost. Assuming, for example, that the initial customers for electric vehicles will be parents who buy them for their teenaged children to drive to and from school, friends' homes, and activities, the first model would have features and styling appropriate and appealing to teenagers. But, although we may target this market first, there's a high probability that our initial concept will prove wrong. So we've got to get the first models done fast and on a shoestring—leaving ample budget to get it right once feedback from the market starts coming i n . 1 7
Third, we must hit a low price point. Disruptive technologies typically have a lower sticker price per unit than products that are used in the mainstream, even though their cost in use is often higher. W h a t enabled the use of disk drives in desktop computers was not just their smaller size; it was their low unit price, which fit within the overall price points that personal computer makers needed to hit. The price per megabyte of the smaller disk drives was always higher than for the larger drives.
Similarly, in excavators the price per excavator was lower for the/early hydraulic models than for the established cable-actuated ones, but their total cost per cubic yard of earth moved per hour was much higher.
Accordingly, our electric vehicle must have a lower sticker price than the
Managing Disruptive Technological Change: A Case Study | 1 9 7
prevailing price for gasoline-powered cars, even if the operating cost per mile driven is higher. Customers have a long track record of paying price premiums for convenience.
Technology Strategy for Disruptive Innovations
Our technology plan cannot call for any technological breakthroughs on the path critical for the project's success. Historically, disruptive technologies involve no new technologies; rather, they consist of components built around proven technologies and put together in a novel product architecture that offers the customer a set of attributes never before available.
The major automakers engaged in electric vehicle development today all maintain that a breakthrough in battery technology is absolutely essential before electric vehicles can be commercially viable. J o h n R. Wallace, of Ford, for example, has stated the following:
The dilemma is that today's batteries cannot satisfy these consumer needs.
As anybody who is familiar with today's battery technology will tell you, electric vehicles are not ready for prime time. All of the batteries expected to be available in 1998 fall short of the 100-mile range [required by consumers]. The only solution for the problems of range and cost is improved battery technology. To ensure a commercially successful electric vehicle market, the focus of our resources should be on the development of battery technology.
Industry efforts such as those through the U.S. Advanced Battery consortium, along with cooperative efforts among all electric vehicle stakeholders—such as utilities, battery companies, environmentalists, regulators and converters—
are the most effective way to ensure the marketability of electric vehicles.18
William Glaub, of Chrysler, takes a similar position: "The advanced lead-acid batteries that will be used will provide less than the fuel storage equivalent of two gallons of gasoline. This is like leaving home every day with the 'low fuel' light on. In other words, the battery technology is simply not ready."19
The. reason these companies view a breakthrough in battery technology as the critical bottleneck to the commercial success of electric vehicles, of course, is that their executives have positioned their minds and their products in the mainstream market. For Chrysler, this means an electric minivan; for Ford, an electric Ranger. Given this position, they must deliver a sustaining technological impact from what is inherently a disruptive technology. They need a breakthrough in battery technology because they
1 9 8 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
made the choice to somehow position electric vehicles as a sustaining technology. A battery breakthrough is not likely to be required of companies whose executives choose to harness or account for the basic laws of disruptive technology by creating a market in which the weaknesses of the electric vehicle become its strengths.
Where will advances in battery technology eventually come from? Looking at the historical record, we can assert the following. The companies that ultimately achieve the advances in battery technology required to power cars for 150-mile cruises (if they are ever developed) will be those that pioneer the creation of a new value network using proven technology and then develop the sustaining technologies needed to carry them upward into more attractive markets.20 Our finding that well-managed companies are generally upwardly mobile and downwardly immobile, therefore, suggests that the impetus to find the battery breakthrough will indeed be strongest among the disruptive innovators, which will have built a low-end market for electric vehicles before trying to move upmarket toward the larger, more profitable mainstream.
Distribution Strategy for Disruptive Innovations It has almost always been the case that disruptive products redefine the dominant distribution channels, because dealers' economics—their models for how to make money—are powerfully shaped by the mainstream value network, just as the manufacturer's are. Sony's disruptive introduction of convenient and reliable portable transistorized radios and televisions shifted the dominant retail channel from appliance and department stores with expensive sales support and field service networks (required for sets built with vacuum tubes) to volume-oriented, low-overhead discount retailers. Honda's disruptive motorbikes were rejected by mainstream motorcycle dealers, forcing the company to create a new channel arhong sporting goods retailers. We saw, in fact, that a major reason why Harley-Davidson's small-bike initiative failed is that its dealers rejected it: The image and economics of the small Italian bikes Harley had acquired did not fit its dealer network.
The reason disruptive technologies and new distribution channels frequently go hand-in-hand is, in fact, an economic one. Retailers and distributors tend to have very clear formulas for making money, as the histories of Kresge and Woolworth in chapter 4 showed. Some make money by selling low volumes of big-ticket products at high margins; others make
Managing Disruptive Technological Change: A Case Study | 1 9 9
money by selling large volumes at razor-thin margins that cover minimal operating overheads; still others make their money servicing products already sold. Just as disruptive technologies don't fit the models of established firms for improving profits, they often don't fit the models of their distributors, either.
My electric vehicle program would, therefore, have as a basic strategic premise the need to find or create new distribution channels for electric vehicles. Unless proven otherwise, I'd bet that mainstream dealers of gasoline-powered automobiles would not view the sorts of disruptive electric vehicles we have in mind as critical to their success.
W H A T O R G A N I Z A T I O N B E S T S E R V E S
D I S R U P T I V E I N N O V A T I O N S ?
After identifying the electric vehicle as a potentially disruptive technology; setting realistic bearings for finding its potential markets; and establishing strategic parameters for the product's design, technology, and distribution network, as program manager I would next turn to organization. Creating an organizational context in which this effort can prosper will be crucial, because rational resource allocation processes in established companies consistently deny disruptive technologies the resources they need to survive, regardless of the commitment senior management may ostensibly have made to the program.
Spinning Off an Independent Organization
As we saw in the discussion of resource dependence in chapter 5, established firms that successfully built a strong market position in a disruptive technology were those that spun off from the mainstream company an independent, autonomously operated organization. Quantum, Control Data, IBM's PC Division, Allen Bradley, and Hewlett-Packard's desk-jet initiative all succeeded because they created organizations whose survival was predicated upon successful commercialization of the disruptive technology: These firms embedded a dedicated organization squarely within the emerging value network.
As program manager, therefore, I would strongly urge corporate management to create an independent organization to commercialize electric vehicle technology, either an autonomous business unit, such as GM's Saturn Division or the I B M PC Division, or an independent company
2 0 0 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
whose stock is largely owned by the corporation. In an independent organization, my best employees would be able to focus on electric vehicles without being repeatedly withdrawn from the project to solve pressing problems for customers who pay the present bills. Demands from our own customers, on the other hand, would help us to focus on and lend impetus and excitement to our program.
An independent organization would not only make resource dependence work for us rather than against us, but it would also address the principle that small markets cannot solve the growth or profit problems of large companies. For many years into the future, the market for electric vehicles will be so small that this business is unlikely to contribute significantly to the top or bottom lines of a major automaker's income statement.
Thus, since senior managers at these companies cannot be expected to focus either their priority attention or their priority resources on electric vehicles, the most talented managers and engineers would be unlikely to want to be associated with our project, which must inevitably be seen as a financially insignificant effort: To secure their own futures within the company, they naturally will want to work on mainstream programs, not peripheral ones.
In the early years of this new business, orders are likely to be denomi-nated in hundreds, not tens of thousands. If we are lucky enough to get a few wins, they almost surely will be small ones. In a small, independent organization, these small wins will generate energy and enthusiasm. In the mainstream, they would generate skepticism about whether we should even be in the business. I want my organization's customers to/answer the question of whether we should be in the business. I don't want to spend my precious managerial energy constantly defending our existence to efficiency analysts in the mainstream.
Innovations are fraught with difficulties and uncertainties. Because of this, I want always to be sure that the projects that I manage are positioned directly on the path everyone believes the organization must take to achieve higher growth and greater profitability. If my program is widely viewed as being on that path, then I have confidence that when the inevitable problems arise, somehow the organization will work with me to muster whatever it takes to solve them and succeed. If, on the other hand, my program is viewed by key people as nonessential to the organization's growth and profitability, or even worse, is viewed as an idea that might erode profits, then even if the technology is simple, the project will fail.
I can address this challenge in one of two ways: I could convince
Managing Disruptive Technological Change: A Case Study | 2 0 1
everyone in the mainstream (in their heads and their guts) that the disruptive technology is profitable, or I could create an organization that is small enough, with an appropriate cost structure, that my program can be viewed as being on its critical path to success. The latter alternative is a far more tractable management challenge.
In a small, independent organization I will more likely be able to create an appropriate attitude toward failure. Our initial stab into the market is not likely to be successful. We will, therefore, need the flexibility to fail, but to fail on a small scale, so that we can try again without having destroyed our credibility. Again, there are two ways to create the proper tolerance toward failure: change the values and culture of the mainstream organization or create a new organization. The problem with asking the mainstream organization to be more tolerant of risk-taking and failure is that, in general, we don't want to tolerate marketing failure when, as is most often the case, we are investing in sustaining technology change.
The mainstream organization is involved in taking sustaining technological innovations into existing markets populated by known customers with researchable needs. Getting it wrong the first time is not an intrinsic part of these processes: Such innovations are amenable to careful planning and coordinated execution.
Finally, I don't want my organization to have pockets that are too deep.
While I don't want my people to feel pressure to generate significant profit for the mainstream company (this would force us into a fruitless search for an instant large market), I want them to feel constant pressure to find some w a y — s o m e set of customers somewhere—to make our small organization cash-positive as fast as possible. We need a strong motivation to accelerate through the trials and errors inherent in cultivating a new market.
Of course, the danger in making this unequivocal call for spinning out an independent company is that some managers might apply this remedy indiscriminately, viewing skunkworks and spinoffs as a blanket solution—an industrial-strength aspirin that cures all sorts of problems. In reality, spinning out is an appropriate step only when confronting disruptive innovation. The evidence is very strong that large, mainstream organizations can be extremely creative in developing and implementing sustaining innovations.21 In other words, the degree of disruptiveness inherent in an innovation provides a fairly clear indication of when a mainstream organization might be capable of succeeding with it and when it might be expected to fail.
In terms of the framework presented in Figure 5 . 6 , the electric vehicle
202 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
is not only a disruptive innovation, but it involves massive architectural reconfiguration as well, a reconfiguration that must occur not only within the product itself but across the entire value chain. From procurement through distribution, functional groups will have to interface differently than they have ever before. Hence, my project would need to be managed as a heavyweight team in an organization independent of the mainstream company. This organizational structure cannot guarantee the success of our electric vehicle program, but it would at least allow my team to work in an environment that accounts for, rather than fights, the principles of disruptive innovation.
N O T E S
1. In 1996, the state government delayed implementation of this requirement until the year 2002, in response to motor vehicle manufacturers' protests that, given the performance and cost of the vehicles they had been able to design, there was no demand for electric vehicles.
2. An excellent study on this subject is summarized in Dorothy Leonard-Barton, Wellsprings of Knowledge (Boston: Harvard Business School Press, 1995).
3. This information was taken from an October 1994 survey conducted by The Dohring Company and quoted by the Toyota Motor Sales Company at the CARB (California Air Resources Board) Workshop on Electric Vehicle /
Consumer Marketability held in El Monte, California, on June 28, 1995. /
4. This information was provided by Dr. Paul J. Miller, Senior Energy Felk(w, W. Alton Jones Foundation, Inc., Charlottesville, Virginia. It was augmented with information from the following sources: Frank Keith, Paul Norton, and Dana Sue Potestio, Electric Vehicles: Promise and Reality (California State Legislative Report [19], No. 10, July, 1994); W. P. Egan, Electric Cars (Can-berra, Australia: Bureau of Transport Economics, 1974); Daniel Sperling, Future Drive: Electric Vehicles and Sustainable Transportation (Washington, D.C.: Island Press, 1995); and William Hamilton, Electric Automobiles (New York: McGraw Hill Company, 1980).
5. Based on the graphs in Figure 9.1, it will take a long time for disruptive electric vehicle technology to become competitive in mainstream markets if future rates of improvement resemble those of the past. The historical rate of performance improvement is, of course, no guarantee that the future rate can be maintained. Technologists very well might run into insurmountable technological barriers. What we can say for sure, however, is that the incentive of disruptive technologists to find some way to engineer around such barriers will be just as strong as the disincentive that established car makers will feel to move down-market. If present rates of improvement continue, however,
Managing Disruptive Technological Change: A Case Study | 2 0 3
we would expect the cruising range of electric cars, for example, to intersect with the average range demanded in the mainstream market by 2015, and electric vehicle acceleration to intersect with mainstream demands by 2020.
Clearly, as will be discussed below, it will be crucial for electric vehicle innovators to find markets that value the attributes of the technology as it currently is capable, rather than waiting until the technology improves to the point that it can be used in the mainstream market.
6. This statement was made by John R. Wallace, Director of Electric Vehicle Programs, Ford Motor Company, at the CARB Workshop on Electric Vehicle Consumer Marketability held at El Monte, California, on June 28, 1995.
7. It is remarkable how instinctively and consistently good companies try to force innovations toward their existing base of customers, regardless of whether they are sustaining or disruptive in character. We have seen this several times in this book: for example, in mechanical excavators, where Bucyrus Erie tried with its "Hydrohoe" to make hydraulic excavation technology work for mainstream excavation contractors; in motorcycles, where Harley-Davidson tried to launch low-end brand name bikes through its dealer network; and in the electric vehicle case described here, in which Chrysler packed nearly a ton of batteries into a minivan. Charles Ferguson and Charles Morris, in their book Computer Wars, recount a similar story about IBM's efforts to commercialize Reduced Instruction Set Computing (RISC) microprocessor technology. RISC was invented at IBM, and its inventors built computers with RISC chips that were "screamingly fast." IBM subsequently spent massive amounts of time, money, and manpower trying to make the RISC chip work in its main line of minicomputers. This required so many design compromises, however, that the program was never successful. Several key members of IBM's RISC team left in frustration, subsequently playing key roles in establishing the RISC chipmaker MIPS and Hewlett-Packard's RISC chip business. These efforts were successful because, having accepted the attributes of the product for what they were, they found a market, in engineering workstations, that valued those attributes. IBM failed because it tried to force the technology into a market it had already found. Interestingly, IBM ultimately built a successful business around a RISC-architecture chip when it launched its own engineering workstation. See Charles Ferguson and Charles Morris, Computer Wars (New York: Time Books, 1994).
8. The notion that non-existent markets are best researched through action, rather than through passive observation, is explored in Gary Hamel and C. K. Prahalad, "Corporate Imagination and Expeditionary Marketing,"
Harvard Business Review, July-August, 1991, 81-92.
9. The concept that business plans dealing with disruptive innovations should be plans for learning rather than plans for executing a preconceived strategy is taught clearly by Rita G. McGrath and Ian MacMillan in "Discovery-Driven Planning," Harvard Business Review, July-August, 1995, 44-54.
204 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
10. Jeffrey Thoresen Severts, "Managing Innovation: Electric Vehicle Development at Chrysler," Harvard Business School MBA student paper, 1996. A copy of this paper is available on request from Clayton Christensen, Harvard Business School.
11. Glaub's remarks were made in the context of the California Air Resources Board mandate that by 1998 all companies selling gasoline-powered vehicles in the state must, in order to sell any cars at all, sell enough electric-powered vehicles to constitute 2 percent of their total vehicle unit sales in the state.
As already noted, the state government, in 1996, delayed implementation of that requirement until 2002.
12. This statement was made by William Glaub, General Sales Manager, Field Sales Operations, Chrysler Corporation, at the CARB Workshop on Electric Vehicle Consumer Marketability held in El Monte, California, on June 28, 1995; see p. 5 of the company's press release about the workshop.
13. Ibid.
14. It is important to note that these statistics for Chrysler's offering were determined by Chrysler's efforts to commercialize the disruptive technology; they are not intrinsic to electrically powered vehicles per se. Electric vehicles designed for different, lighter-duty applications, such as one by General Motors, have driving ranges of up to 100 miles. (See Jeffrey Thoresen Severts,
"Managing Innovation: Electric Vehicle Development at Chrysler," Harvard Business School student paper, 1996.) )
15. See, for example, Gabriella Stern and Rebecca Blumenstein, "GM Is Expected to Back Proposal for Midsize Version of Saturn Car," The Wall Street Journal, May 24, 1996, B4.
16. This list of smaller, simpler, more convenient disruptive technologies could be extended to include a host of others whose histories could not be squeezed into this book: tabletop photocopiers; surgical staplers; portable, transistorized radios and televisions; helican scan VCRs; microwave ovens; bubble jet printers. Each of these disruptive technologies has grown to dominate both its initial and its mainstream markets, having begun with simplicity and convenience as their primary value propositions.
17. The notion that it takes time, experimentation, and trial and error to achieve a dominant product design, a very common pattern with disruptive technologies, is discussed later in this chapter.
18. This statement was made by John R. Wallace, of Ford, at the CARB Workshop on Electric Vehicle Consumer Marketability held in El Monte, California, on June 28, 1995; see p. 5 of the company's press release.
19. Glaub, statement made at the CARB Workshop.
20. Two excellent articles in which the relative roles of product development and incremental versus radical technology development are researched and discussed are Ralph E. Gomory, "From the 'Ladder of Science' to the Product
Managing Disruptive Technological Change: A Case Study | 2 0 5
Development Cycle," Harvard Business Review, November-December, 1989, 99-105, and Lowell Steele, "Managers' Misconceptions About Technology,"
Harvard Business Review, 1983, 733-740.
21. In addition to the findings from the disk drive study summarized in chapters 1 and 2 that established firms were able to muster the wherewithal to lead in extraordinarily complex and risky sustaining innovations, there is similar evidence from other industries; see, for example, Marco Iansiti, "Technology Integration: Managing Technological Evolution in a Complex Environment,"
Research Policy 24, 1995, 521-542.
C H A P T E R T E N
The Dilemmas of Innovation:
A Summary
One of the most gratifying outcomes of the research reported in this book is the finding that managing better, working harder, and not making so many dumb mistakes is not the answer to the innovator's dilemma. This discovery is gratifying because I have never met a group of people who are smarter or work harder or are as right so often as the managers I know. If finding better people than these were the answer to the problems posed by disruptive technologies, the dilemma would indeed be intractable.
We have learned in this book that in their straightforward search for profit and growth, some very capable executives in some extraordinarily successful companies, using the best managerial techniques, have led their firms toward failure. Yet companies must not throw out the capabilities, organizational structures, and decision-making processes that.have made them successful in their mainstream markets just because they don't work in the face of disruptive technological change. The vast majority of the innovation challenges they will face are sustaining in character, and these are just the sorts of innovations that these capabilities are designed to tackle. Managers of these companies simply need to recognize that these capabilities, cultures, and practices are valuable only in certain conditions.
I have found that many of life's most useful insights are often quite
208 I MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
simple. In retrospect, many of the findings of this book fit that mold: Initially they seemed somewhat counterintuitive, but as I came to understand them, the insights were revealed as simple and sensible. I review them here, in the hope that they will prove useful to those readers who may be wrestling with the innovator's dilemmas.
First, the pace of progress that markets demand or can absorb may be different from the progress offered by technology. This means that products that do not appear to be useful to our customers today (that is, disruptive technologies) may squarely address their needs tomorrow. Recognizing this possibility, we cannot expect our customers to lead us toward innovations that they do not now need. Therefore, while keeping close to our customers is an important management paradigm for handling sustaining innovations, it may provide misleading data for handling disruptive ones. Trajectory maps can help to analyze conditions and to reveal which situation a company faces.
Second, managing innovation mirrors the resource allocation process: Innovation proposals that get the funding and manpower they require may succeed; those given lower priority, whether formally or de facto, will starve for lack of resources and have little chance of success. One major reason for the difficulty of managing innovation is the complexity of managing the resource allocation process. A company's executives may seem to make resource allocation decisions, but the implementation of those decisions is in the hands of a staff whose wisdom and intuition have been forged in the company's mainstream value network: They understand what the company should do to improve profitability. Keeping a company successful requires that employees continue to hone and exercise that wisdom and intuition. This means, however, that until other alternatives that appear to be financially more attractive have disappeared or been eliminated, managers will find it extraordinarily difficult to keep resources focused on the pursuit of a disruptive technology.
Third, just as there is a resource allocation side to every innovation problem, matching the market to the technology is another. Successful companies have a practiced capability in taking sustaining technologies to market, routinely giving their customers more and better versions of what they say they want. This is a valued capability for handling sustaining innovation, but it will not serve the purpose when handling disruptive technologies. If, as most successful companies try to do, a company stretches or forces a disruptive technology to fit the needs of current,
The Dilemmas of Innovation: A Summary | 2 0 9
mainstream customers—as we saw happen in the disk drive, excavator, and electric vehicle industries—it is almost sure to fail. Historically, the more successful approach has been to find a new market that values the current characteristics of the disruptive technology. Disruptive technology should be framed as a marketing challenge, not a technological one.
Fourth, the capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. Hence, organizations have capabilities to take certain new technologies into certain markets. They have disabilities in taking technology to market in other ways.
Organizations have the capability to tolerate failure along some dimensions, and an incapacity to tolerate other types of failure. They have the capability to make money when gross margins are at one level, and an inability to make money when margins are at another. They may have the capability to manufacture profitably at particular ranges of volume and order size, and be unable to make money with different volumes or sizes of customers. Typically, their product development cycle times and the steepness of the ramp to production that they can negotiate are set in the context of their value network.
All of these capabilities—of organizations and of individuals—are defined and refined by the types of problems tackled in the past, the nature of which has also been shaped by the characteristics of the value networks in which the organizations and individuals have historically competed.
Very often, the new markets enabled by disruptive technologies require very different capabilities along each of these dimensions.
Fifth, in many instances, the information required to make large and decisive investments in the face of disruptive technology simply does not exist. It needs to be created through fast, inexpensive, and flexible forays into the market and the product. The risk is very high that any particular idea about the product attributes or market applications of a disruptive technology may not prove to be viable. Failure and interative learning are, therefore, intrinsic to the search for success with a disruptive technology.
Successful organizations, which ought not and cannot tolerate failure in sustaining innovations, find it difficult simultaneously to tolerate failure in disruptive ones.
Although the mortality rate for ideas about disruptive technologies is high, the overall business of creating new markets for disruptive technologies need not be inordinately risky. Managers who don't bet the farm on
2 1 0 | MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
their first idea, who leave room to try, fail, learn quickly, and try again, can succeed at developing the understanding of customers, markets, and technology needed to commercialize disruptive innovations.
Sixth, it is not wise to adopt a blanket technology strategy to be always a leader or always a follower. Companies need to take distinctly different postures depending on whether they are addressing a disruptive or a sustaining technology. Disruptive innovations entail significant first-mover advantages: Leadership is important. Sustaining situations, however, very often do not. The evidence is quite strong that companies whose strategy is to extend the performance of conventional technologies through consistent incremental improvements do about as well as companies whose strategy is to take big, industry-leading technological leaps.
Seventh, and last, the research summarized in this book suggests that there are powerful barriers to entry and mobility that differ significantly from the types defined and historically focused on by economists. Economists have extensively described barriers to entry and mobility and how they work. A characteristic of almost all of these formulations, however, is that they relate to things, such as assets or resources, that are difficult to obtain or replicate.1 Perhaps the most powerful protection that small entrant firms enjoy as they build the emerging markets for disruptive technologies is that they are doing something that it simply does not make sense for the established leaders to do. Despite their endowments in technology, brand names, manufacturing prowess, management experience, distribution muscle, and just plain cash, successful companies populated by good managers have a genuinely hard time doing what does not fit their model for how to make money. Because disruptive technologies rarely make sense during the years when investing in them is most important, conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on. It is powerful and pervasive.
Established companies can surmount this barrier, however. The dilemmas posed to innovators by the conflicting demands of sustaining and disruptive technologies can be resolved. Managers must first understand what these intrinsic conflicts are. They then need to create a context in which each organization's market position, economic structure, developmental capabilities, and values are sufficiently aligned with the power of their customers that they assist, rather than impede, the very different work of sustaining and disruptive innovators. I hope this book helps them in this effort.
The Dilemmas of Innovation: A Summary | 2 1 1
N O T E S
1. By things I mean barriers such as proprietary technology; ownership of expensive manufacturing plants with large minimum efficient manufacturing scales; pre-emption of the most powerful distributors in major markets; exclusive control of key raw materials or unique human resources; the credibility and reputation that comes from strong brand names; cumulative production experience and/or the presence of steep economies of scale; and so on. The seminal work on entry barriers from an economist's perspective is Joseph Bain, Barriers to New Competition (Cambridge, MA: Harvard University Press, 1956); see also Richard Caves and Michael Porter, "From Entry Barriers to Mobility Barriers," Quarterly Journal of Economics (91), May, 1977, 241-261.
A & P , 9 4 n . 1, 1 2 3 n . 1 6
A T & T , 3 2 , 1 5 1 , 1 8 3 n . 4
Abernathy, William J . , 1 2 3 n . 1 7
Attacker's advantage, 2 8 n . 1 6 , 5 5
Accounting software, 1 7 5 - 1 7 6 , 1 8 4 n n . 5 - 7
Automobile industry. See Electric vehicles; Acquisitions
names of specific auto companies
as a mechanism for addressing disruptive
technology, 1 3 9 - 1 4 1
Backhoes, 6 5 - 6 8 , 7 5 n . 7
rare in disk drive industry, 1 4 4 n . 5
Bahram, Nik, 1 4 4 n . 8
Afuah, Allan N., 1 4 4 n . 8
Bain, Joseph, 21 I n . 1
Agnostic marketing, 1 6 1 - 1 6 2
Barnard, Chester, 1 0 3 , 1 2 2 n . 4
Alexander, C , 5 7 n . 8
Barriers to markets, 2 1 0 , 2 1 1 n . 1. See also
Allen Bradley Company, 1 3 9 - 1 4 1 ,
Market(s)
1 4 5 n . 1 8 , 1 9 9
Basis of competition
Allhands, J . L . , 7 4 n . 2
managing changes in, 1 7 9 - 1 8 3
Amdahl, 3 5 , 8 7
triggers of changes in, 1 6 6 - 1 7 2
Ampex, 7 , 1 2 , 1 2 9
Bernoulli's Principle, xvii, 1 0 8
Anderson, Philip, 2 7 n . 7, 3 1 , 4 9 , 5 7 n . 5
Bethlehem Steel, 8 8 , 9 1 , 9 3
Apple Computer, 1 5 1
Block, Zenas, 1 2 4 n . 2 0
in creating personal computer market,
Blumenstein, Rebecca, 2 0 4 n . 1 5
x - x i , 4 8 , 1 0 5 , 1 0 9
B M W motorcycles, xv, 1 5 4 , 1 5 6
in developing personal digital assistant
Bobcat hydraulic backhoe, 6 7 - 6 8
market, 1 3 4 - 1 3 6 , 1 4 5 n . 1 1 , 1 9 3
Boston Consulting G r o u p , 1 6 2 n . 2
Applied Magnetics, 35
Bower, Joseph L . , 2 8 n . 1 3 , 8 2 , 9 4 n . 2 , Apollo, xi
1 2 2 n . 3 , 1 6 0 , 1 6 3 n . 1 0
Arched boom shovel, 64
British Steel, 89
Architecture, nested system of product,
Bruneri Brothers, 7 5 n . 9
3 2 - 3 4
Bubble-jet printing technology, 1 1 5 ,
ASIC (application specific integrated cir-
1 1 6 - 1 1 7 , 2 0 4 n . 1 6 . See also Ink-jet cuit), 4 9
printing technology
Bucyrus Erie, xii, 6 3 , 7 4 n n . 4 , 5 , 7 6 n . 1 3
Competition
i n developing Hydrohoe, 6 8 - 7 0 , 7 5 n . 1 1 , characteristics of disruptive technology
1 0 7 - 1 0 8 , 1 7 3 , 2 0 3 n . 7
affecting, 1 7 2 - 1 7 6
Bunker R a m o , 1 4 1
evolution o f product, 1 7 1 - 1 7 2 , 1 9 5
Burgleman, Robert, 2 8 n . 1 5 , 5 8 n . 1 6 , controlling, 1 7 9 - 1 8 2
lOOn. 1 , 1 2 2 n . 5 , 1 2 4 n n . 1 9 - 2 0 , in making product a commodity,
1 6 6 n n . 5 - 7
1 6 9 - 1 7 1
Burroughs, 6, 13
Computer industry
Buying hierarchy, 1 7 1 - 1 7 2
disk drives in, 3 - 4 , 2 3 - 2 4 , 2 5 n . 1
competition between 3 . 5 - and
5 . 2 5 - i n c h drives in, 1 6 6 - 1 6 9 , 1 7 0
Cable shovels, xv
components of, 4 - 5
choice between hydraulic and, 7 2 - 7 3 ,
controlling competition in, 1 8 0 - 1 8 2
7 5 n . 1 0
effects of disruptive technology on,
company failures with, 7 1 - 7 2
1 4 - 2 3 , 2 7 n n . 8 - 1 3 , 2 8 n n . 1 4 - 1 6 , technology and history of, 6 1 - 6 4 ,
1 0 4 - 1 0 7 , 1 2 2 n n . 6, 7
7 4 n n . 2 - 5 , 7 5 n . 7
emergence of, 5 - 7
California Air Resources Board ( C A R B ) ,
identifying and creating markets for,
x x i , 1 8 8 , 2 0 2 n n . 1 , 3 ,
1 5 0 - 1 5 3 , 1 5 9 , 1 6 1 , 1 6 2 n . 1 , 1 7 3 , 2 0 4 n n . 1 1 , 1 2 , 1 8 , 1 9
1 7 4 - 1 7 5 , 1 8 2
Campbell Soup, 91
impact of technological change on,
Cannibalism of existing products, 21
7 - 1 0 , 2 6 n n . 2 - 4
Canon, 1 1 7
sustaining technology in, 1 0 - 1 4 ,
Capabilities
2 4 - 2 5 , 2 6 n n . 5 - 7
as explanation for failure of leading c o m -
personal computers in, 1 0 8 - 1 1 0 , 1 2 2 n . 8
panies, 31
successes and failures in, x - x i , xv, xvi,
forged in value networks, 3 1 - 3 2 , 54
2 0 3 n . 7
required to compete in emerging disrup-
value networks in, 3 1 - 3 2 , 5 7 n n . 6 , 7 , 9
tive markets 1 3 6 - 1 3 8
cost structures a n d , 3 7 - 3 9 , 5 9 n n . 2 3 , as rigidities, 1 4 5 n . 15
2 4
Case, J o h n , 1 8 4 n . 5
implications for using, 5 3 - 5 6
Caterpillar, 6 4 , 7 6 n . 1 4
managing disruptive technology with,
Caves, Richard, 21 In. 1
4 2 - 4 8 , 5 8 n n . 1 5 - 2 1 , 5 9 n . 2 2
Century D a t a , 1 4 4 n . 5
for managing product architecture,
Chaparral Steel, 8 9 , 9 0
3 2 - 3 4 , 5 7 n . 8
Christiansen, E. Tatum, 1 6 2 n . 3
measuring, 3 4 - 3 7 , 5 7 n n . 1 0 , 1 1
Chrysler Corporation, 1 9 4 , 1 9 7 , 2 0 3 n . 7 , S-curves a n d , 3 9 - 4 2 , 5 8 n . 1 4
2 0 4 n n . 1 1 - 1 4 , 1 9
upmarket movement of leading firms,
Citizen Watch Company, 1 6 1
7 7 - 8 1 , 8 4 - 8 7
Clark, Kim B . , xiv, 3 0 , 3 1 , 4 9 , 5 0 , Computer Memories, 19
5 6 n n . 1 , 4 , 6 2 , 1 2 4 n . 1 8 , 1 4 2 n . 1
Conner Peripherals, 1 7 3
Cogan, George W., 1 6 2 n . 6
in creating markets for disk drives, 3 5 ,
Commoditization, 1 6 9 - 1 7 2
4 5 , 4 6 , 4 7 , 1 3 7 - 1 3 8 , 1 4 5 n n . 1 4 , 1 6
C o m m o d o r e , x , 1 0 9
in developing disk drives, 2 0 , 2 1 , 2 2 ,
Companies. See Management; Organiza-1 2 8 n . 1 4
tions
Control D a t a Corporation ( C D C ) , 1 2 , 1 9 9
C o m p a q Computer, 2 0 , 4 6 , 1 8 0 , 1 8 2
in creating markets for disk drives, 3 5 ,
Competencies, 1 3 , 3 1
4 3 , 4 4 , 4 7 , 1 2 7 , 1 2 8
in developing disk drives, 1 0 5 - 1 0 6 , 1 0 8 , impact of disk drive sizes on, 1 5 , 1 6 , 1 9 , 1 2 0 , 1 2 2 n . 8, 1 3 9
2 0 - 2 2 , 1 9 2
Cook, Scott, 1 7 5 - 1 7 6 , 1 8 4 n n . 6 , 7
upward mobility of disk drives in, 7 8 - 7 9 ,
Cooper, Arnold, 5 8 n . 18