Field Notes on Innovation and Intrapreneurship (issue #2) — On disruption
Field Notes on Innovation and Intrapreneurship is a series of posts written for Intrapreneurship World. Issue #2 was published on September 18th, 2016.
On disruption
Joshua Gans isn’t new to the debate on disruption. Earlier this year, he wrote an excellent article in MIT Sloan Management Review, Keep Calm and Manage Disruption. It was his response to the debate that had started in 2014 with a devastating takedown of fellow Harvard professor Clayton Christensen’s disruption theory by Jill Lepore, a staff writer of The New Yorker and professor of history at Harvard. In The Disruption Machine: What the Gospel of Innovation Gets Wrong, Lepore argued that Christensen’s theory, which originally came about as a way to explain the failure of businesses, falls far short of explaining why and how businesses and innovations actually succeed. “Disruptive innovation is a theory about why businesses fail,” she wrote. “It’s not more than that. It doesn’t explain change. It’s not a law of nature. It’s an artifact of history, an idea, forged in time; it’s the manufacture of a moment of upsetting and edgy uncertainty. Transfixed by change, it’s blind to continuity. It makes a very poor prophet.” Since then, many commentaries have been written, both pro and con.
In Keep Calm and Manage Disruption, Gans argues that, simply because the hypothesized link between disruptive technologies and the failure of a company is weak, this doesn’t necessarily mean disruption cannot happen. “Many businesses find ways of managing through it, and this can weaken any relationship between a disruptive event and the actual disruption. To be sure, facing disruption is no picnic. But it also isn’t the existential threat that so many see it as,” says Gans.
One of the issues that arises in discussing disruption is that the word ‘disruption’ itself is overused. These days, everyone wants to be the disrupter, and somebody is constantly getting disrupted. But disruption isn’t new. It’s a phenomenon that management theorists and scholars have pondered for decades. Ever since the economist Joseph Schumpeter tantalized us with the notion of ‘creative destruction’ — the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Capitalism, Socialism and Democracy, 1942) — we have wondered about the mechanics of the process. Of course, it comes as no surprise to us when incompetent or complacent businesses go under (in fact, it can even be comforting). What really draws our attention is the failure of companies that seem to do everything right.
Also Christensen, who introduced his theory of disruptive innovation in his popular 1997 book The Innovator’s Dilemma, was primarily interested in understanding the failure of successful companies. Hence the book’s subtitle, When New Technologies Cause Great Firms to Fail. According to him, failure could arise when innovations that initially perform worse on some dimensions rapidly improve along many dimensions. When this happens, he argued, successful companies that stick to their guns are vulnerable to competition from those that adopt the innovations. This isn’t an unconscious blind spot. Also ‘soon to be disrupted’ companies make conscious decisions to deemphasize or seemingly ignore those innovations until it is too late. Their leaders are stuck in an unenviable dilemma that prevents them from moving toward the new for fear of losing the old.
Successful businesses fail in the face of technological change because they continue to make the choices that made them successful in the first place.
A key ingredient of disruption is technological change or discontinuity. The notion of ‘technological paradigms,’ first introduced by the Italian researcher Giovanni Dosi, was later reinforced by McKinsey Director Richard Foster. Foster observed that many broad technologies exhibited an ‘S-curve’ relationship between effort devoted to improvements and the rate of improvement in the performance of those technologies on any given metric. Combining the S-curve with the idea of technological discontinuity raised serious questions for leaders of established firms as the new technology path, or S-curve, often showed a lower performance than the existing. What sound minded leader would trade in his proven, successful technology for an unproven, underperforming one? But as Gans explains in his most recent article, The Disruption Dilemma, published in the Fall 2016 edition of Rotman Management, technological change isn’t always a decisive factor.
Take Blockbuster, which was built on the wave of the home video revolution in the 1970s, and progressed through the 80s and 90s to become the most important home movie rental service in the U.S. When people talk about Blockbuster’s failure, their story usually begins with a technological trigger: the DVD. But reality is more interesting. In the late 1990s, a startup, Netflix, entered the market off the back of the new DVD standard that was just taking off. Other than Blockbuster, which owned 9,000 brick and mortar stores, Netflix decided to use postal delivery, which had, which now had become a viable option for distributing movies. Netflix wasn’t an instant success though, as people had to order their DVD’s well in advance. A trip to the Blockbuster store could be a nuisance, but at least you would be able to bring home a movie and watch it the same night. What tipped the balance in favor of Netflix wasn’t the introduction of a new ‘disruptive’ technology, the DVD, nor its postal delivery service. It was the introduction of a subscription model that allowed people to rent DVDs for as long as they wanted, its long-tail offering, and, in the end, the introduction of on-demand video streaming.
A similar story can be told about Eastman Kodak. “An easy explanation is myopia. Kodak was so blinded by its success that it completely missed the rise of digital technologies,” says Scott Anthony, the managing partner of Innosight, in a recent article on Harvard Business Review, called Kodak’s Downfall Wasn’t About Technology. Willy Shih has a similar message. In The Real Lessons From Kodak’s Decline in MIT Sloan Management Review’s Summer 2016 Issue, he writes: “Eastman Kodak is often mischaracterized as a company whose managers didn’t recognize soon enough that digital technology would decimate its traditional business. However, what really happened at Kodak is much more complicated — and instructive.”
According to Gans, Christensen’s theory of disruptive innovation provides us with some, but certainly not all the answers. We should, he says, look at an alternative perspective that was developed, also at Harvard, at the same time Christensen was working on his PhD. At the time, Rebecca Henderson, now the John and Natty McArthur University Professor at Harvard University, was, just like Christensen, concerned with the difficulties incumbent firms had in responding to new entrants. But while Christensen was focussing his attention on why those firms at critical points chose not to respond, Henderson was more interested in the question whether they could respond to new technologies and innovations. She argued that most successful firms were organized for ‘component innovation,’ while some new technologies and innovations required them to think about their business’ architecture. Hence the term ‘architectural innovation.’ According to her, incumbent firms are often unable to change their existing architecture — Blockbuster’s architecture had been built around managing the inventory of over 9,000 stores — while new entrants can build from scratch.
Successful firms that er disrupted are not complacent or poorly managed. Instead, they choose to continue on th epath that brought them success. And it is precisely because of this that they are disrupted.
“Seen in this light,” Gans notes, “what Netflix brought to the industry was an innovation that was both disruptive and architectural. For Blockbuster to respond, it had to be convinced (a) that its current customers wanted what Netflix had to offer; and (b) that it should re-organize its entire business to respond to the threat. Suffice to say, at the time, it wasn’t clear to anyone at Blockbuster that those conditions had been met.”
There are important lessons to learn for established firms. One of these lessons is that adopting new technology isn’t enough. What sets successful startups apart is their ability to create an entirely new infrastructure, or architecture, around these new technologies. I wonder how many corporate accelerators and innovation labs are allowed to do just that? Not many, I suppose …
We return to Christensen once more for a final note — a more down to earth perspective on disruption. Back in 2007, Christensen stated that the iPhone wouldn’t succeed because it wasn’t sufficiently ‘disruptive’ to fit his theory, and more recently, in an interview with Steve Denning for Forbes, Fresh Insights From Clayton Christensen On Disruptive Innovation, that also Uber isn’t truly disruptive. But according to Clifton Lemon in Disrupt No More: Connect!, “most humans think of these two amazing emergences (what do we call them really?) as the ultimate in ‘disruption,’ for better and for worse, because they’ve basically turned our world upside down — like so many other things, some technology, some social responses to or surprising uses of technology. […] Missing the boat on things like iPhone and Uber pretty much discredits the utility of this theory for me, and a heck of a lot of other people too, right?”
Indeed, it’s sometimes hard to ignore the disconnect between academic theory and how most of us experience the ‘real’ world.
Some further reading on disruption and the recent ‘disruption debate’:
Clayton Christensen Responds to New Yorker Takedown of Disruptive Innovation, Bloomberg.
On Disruption: Jill Lepore’s Timely Rebuttal of Clay Christensen, H-Diplo Essay.
What Jill Lepore Gets Wrong About Clayton Christensen and Disruptive Innovation, Forbes.
Pardon our Disruption, Mr. Christensen, Medium.
When Giants Fail. What business has learned from Clayton Christensen, The New Yorker.
A bit more …
“Most organizations know that those who work in their lab and those who work in their headquarters represent two separate talent profiles. Yet, they expect each group to share the management of the most difficult phase of any new technology or business model: Scale. Think about it. Most new businesses fail to scale. Most new technologies […] take several attempts to reach a mass audience. Time after time, in every organization we consult, we find that you cannot scale a new product, service, or innovation without a dedicated team specific to that phase of development.” — Bud Cadell in What Every Institutional Innovation Program Gets Wrong, Medium.
“You cannot guarantee the success of an innovation (unless you choose a market niche so small as to be insignificant). But you can load the dice by ensuring that your business model links market needs with emerging technologies. The more such links you can make, the more likely you are to transform your industry.” — Stelios Kavadias, Kostas Ladas, and Christoph Loch in The Transformative Business Model, Harvard Business Review.
“So how can companies encourage people to ask more questions? There are simple ways to train people to become more comfortable and proficient at it. For example, question formulation exercises can be used as a substitute for conventional brainstorming sessions. The idea is to put a problem or challenge in front of a group of people and instead of asking for ideas, instruct participants to generate as many relevant questions as they can. Kristi Schaffner, an executive at Microsoft, regularly conducts such exercises there and says they sharpen analytical skills.” — Warren Berger in The Power of ‘Why?’ and ‘What If?’, The New York Times.
“It takes 30 years for a new idea to seep into the culture. Technology does not drive change. It is our collective response to the options and opportunities presented by technology that drives change.” — Paul Saffo, quoted by Morgan Housel in When You Change the World and No One Notices, Medium.
“Surveying the landscape of recent attempts at business model innovation, one could be forgiven for believing that success is essentially random. For example, conventional wisdom would suggest that Google Inc., with its Midas touch for innovation, might be more likely to succeed in its business model innovation efforts than a traditional, older, industrial company like the automaker Daimler AG. But that’s not always the case. Google+, which Google launched in 2011, has failed to gain traction as a social network, while at this writing Daimler is building a promising new venture, car2go, which has become one of the world’s leading car-sharing businesses. Are those surprising outcomes simply anomalies, or could they have been predicted?” — Clayton M. Christensen (yet, again…), Thomas Bartman, and Derek van Bever in The Hard Truth About Business Model Innovation, MIT Sloan Management Review.
