Anticipating disruptive innovation (1 of many…)

Many companies are investing heavily in innovation. I was just reading an article recently mentioning that Apple had invested billions of dollars innovation, the same is true about Google and Microsoft. However, none of these companies are immune to disruptive innovation.

Indeed:

• Google fears that Facebook will be capturing a higher share of online advertisement budget thereby disrupting its business model
• Microsoft fears that Google will be successful with its cloud-based software such as Android and Google apps both in the enterprise segment and in the small business segment to the expense of Microsoft Office, which accounts for approximately a quarter of its overall revenues.
• Apple, a company that has earned of reputation for disruptive innovation with the iPod, the iPad, the MacBook Air, the iPhone, seems to have lost its ability to innovate disruptively, leading The Economist believe that it has “peaked”
• Established editors in the US and in Europe fear Amazon’s new edition business which could disrupt their own.

So, clearly disruptive innovation plays a critical role in business, even when you’re investing billions of dollars in R&D. But what if we could predict disruptive innovation? What if there was a pattern of disruptive innovation that could give you some sense of when and how disruptive innovation may arise in your most profitable markets? Surely, this ought to prevent a large company like Nokia, once the leading cell phone company, from losing its business to Apple, a new entrant in the cell phone business in 2006. The same is true of Kodak, Blackberry, Borders and more. Bottom line: if you fail to face disruptive innovation, you’re out of business.
In this post I want to introduce a pattern of disruptive innovation. This will be instrumental in helping leading companies predict when disruptive innovation may occur and what form it will take. And to illustrate this pattern specific to disruptive innovation, I’ll use a very basic example, something that we have all experienced individually or may experience in the near future.

I’m a huge fan of Microsoft Office. I’ve been using Excel, Word, Outlook, PowerPoint and Outlook almost every single day for the past 15 years. I have been updating to the newer versions of Microsoft Office as they were released. I’m quite happy with the changes in the product: they have become more visual and more user-friendly. However, despite all of Microsoft’s marketing, I don’t really use most of the newer features that were added onto the product. I’m basically still using the same features that existed in the first version of the product.

The truth is that I can’t keep up with improvements that Microsoft is bringing to its products; Microsoft has been improving its Microsoft Office product too fast. In other words, the technological pace of product improvement exceeds what I can handle. I guess that’s too bad for me: maybe I ought to follow some sort of training to learn about the latest tricks. But, it’s also bad news for Microsoft: their customers are not benefiting from product improvements that cost billions of dollars in R&D to develop. You could argue that that’s not a real problem, because, I’ve still purchased each version when it came out, right?

Well, here’s the rub. I got an iPad. It’s very handy and I bring it around everywhere. I’ve even started using it to do word processing. I certainly don’t have as much power as I do on my PC, but, guess what? I’m using the iPad and its word processing application, Quickoffice, right now to write this post. Microsoft Word is not the only word processing product I use anymore. Surely, when I write a complex Word document, I would rather have my PC and Microsoft Word. But for a lot of the word processing I do every day, iPad’s Quickoffice does the job, just fine. To put it differently, Microsoft Word has lost its monopoly on word processing in my daily work, when in the past I was only using Microsoft Word. Today, I alternate between

• iPad’s Quickoffice. I use it when I’m traveling because it’s convenient
• PC-bound Microsoft Word. I use when I’m home or at work; I like its greater power and abundance of features.

So the point I’m trying to make is that Microsoft created an overly sophisticated product, boasting features I don’t use. And this is a general rule that applies to many other companies. As Harvard University Professor, Clayton Christensen says, most companies “overshoot” what their customers want; they develop too many features and bring too much sophistication to their products – features that aren’t used by their clients. Most companies keep improving their products beyond the point where customers can keep up with improvements. I guess you’ll reply: “okay, but so what? Does anybody care that customers don’t use the newer features?”

Well the problem is that product improvements come at a price. They require high R&D investments. And while established companies are improving their products, new players are developing lower performing products at a lower relative price boasting features that are good enough for most customers. iPad’s Quickoffice is just find to create document, change font and paragraph setting, create tables of content and so on. Surely, it lacks “word art” and other Microsoft Word features. But I rarely use those features, anyway. Plus, just think that iPad’s Quickoffice costs 6 Euros, when Microsoft Office costs 99 Euros.

Now, as I said, I’m still using Microsoft Word every day and I’ll probably buy the next version. But, let’s imagine that the lower performing product (in this case iPad’s Quickoffice) is improving at a faster rate than the established product, in this case Microsoft Word. What happens when both product become equally efficient? I’ll switch to iPad’s Quickoffice 100% of my time.

In other words, as companies keep improving their products and keep moving upmarket, they are creating a void at the lower end of the market. That’s where new players come in with a lower performing product at a lower relative price. If the new player’s product is improving to the point of meeting all of mainstream customer needs, then, mainstream customers switch from established company’s products to new the player’s products. And that’s when the new player’s product kills the established company’s product. And that’s the pattern of disruptive innovation.

So, to sum it up:

• Companies develop products and find customers that buy them. They become established companies.
• Established companies keep improving their products, beyond the point where their customers can keep up with products improvements.
• New players develop lower performing products at a lower relative price. These lower performing products appeal to the mainstream customers in new ways. For a time, mainstream customers use both the established company’s products and the new player’s products.
• Then, these new players keep improving their products to the point where, one day, they offer a performance competitive product, while, at the same time, offering other features that the established company fails to offer. At that time, mainstream customers buying their products from established companies switch to the new players’ products. And that’s how established companies get disrupted. So, that’s the pattern of disruptive innovation.

Next week, I’ll provide a graph depicting patterns of disruptive innovation.

What are your thoughts? Are you seeing similar trends in your industry? Do you anticipate disruptive innovation?

Further readings

• For an introduction to the patterns in disruptive innovation in the disk drive industry, please refer to Clayton Christensen’s video at BoxWorks; for a summary of his presentation, please refer here
• For a comprehensive discussion of disruptive innovation and why disruptive innovation puts leading companies out of business, please refer to Clayton Christensen’s Innovator’s Dilemma, chapter 11
• For a discussion on when to innovate and when to refrain from innovating, please refer to Michael Porter’s Competitive Advantage, chapter 15; Chapter 5 talks about how disruptive innovation can fundamentally alter industry profitability
• For a discussion on the limits of the stage-gate innovation process, please refer here