Disruption Management for Beginners

I was reading this on Hutch Carpenter's blog:

The main reason “disruptive” causes confusion is that it sounds like “major upset,” which suggests that the technological cause should be major as well. This leads us to falsely conflate disruptive innovation with technically radical innovation. So we end up confusing disruptive with radical and sustaining with incremental. The two are orthogonal axes.

My inital reaction was Aha! (or FTW in 2.0-speak). It was originally from Ribbonfarm (see here) so off I duly clicked. Turns out that Venkatesh Rao has similar views to me (ie we are in dire danger of rejecting some of the Christensen Innovators Doctrine). But First, Why and how does disruption happen? In Christensondom its that:

Major breakthroughs, which are called ‘radical’ in Christenson’s model, may or may not be disruptive, while minor, or ‘incremental’ innovations can be massively disruptive. The opposite of disruptive is sustaining.

- A disruptive innovation usually starts as a low-quality differentiated product in a low-volume marginal segment of a much larger mature market, which demands attributes that the mainstream market does not, and which is willing to give up performance attributes the mainstream market is not (example, Wii customers willing to give up sheer processing horsepower for 3d input capability).
- A marginal player occupies this segment and starts growing rapidly, solving initial quality problems while retaining a cost advantage.
- The incumbent mature market leader, no matter how visionary, is forced to ignore the opportunity because it does not meet the growth needs dictated by its larger size, and also because the disruptive product is not yet good enough for its mainstream customers.
- The marginal player goes through a learning curve, solves its quality problems and suddenly starts threatening the market leader in its main markets
- The incumbent scrambles to put together a response, nearly always fails because of the disruptor’s head start and optimized culture, and retreats to a higher-end market

Why this happens is as straightforward as it is inevitable. It is an economic analog to the tyranny of majority rule.

Our studies of disruption and innovation in the media and communications industries over the last 10 years leads to similar conclusions (see here for example as a precis of TV, and I've posted our (now clearly iconic ) chart of Disruption above) to the extent that a lot of our research in the last 6 months has been focussing on the problems of managing such disruption.

One of the major issues is how to combat it. As Rao notes:

Christenson concludes that the only way for an incumbent to pursue a disruptive idea is to separate the new business completely from the culture, processes and market pressures of its old one. This was what worked for the IBM PC. I haven’t yet seen a counter-example to this principle yet.

I'd agree - any others know of any? One of the interesting arguments is whether to set it up as an independent entity, set it up within the old entity but protect it from grasping Stovepipe Barons, set it up as a Joint Venture, or just buy it when you want it (pay more, but at least you've bought something that has been winnowed by the market).

The options, from my research (and fairly ample experience, I must add) are:


Totally Independent Entity

Good News - best chance of an Internal Venture being free of Parental Control
Bad News - best chance of an Internal Venture being culled sooner rather than later as no one cares about it.

Internal but Protected

Good News - best chance of an Internal Venture avoiding the fate of the Independent Entity, with strong charter can still be relatively independent. BT's settup of its Cellnet (now O2 and Internet operations used this model, for example)
Bad News - best chance of an Internal Venture being grabbed sooner rather than later by Stovepipe Barons

I'd still favour Protected over Independent as in my view the entity is more likely to get to adolescence. The next option is:


Joint Venture

Good News - good risk sharing, best chance of potentially getting required skills from a reputable supplier, and potentially two major players as channels and/or suppliers
Bad News - thats two cooks, broth may be spoiled as the squabble

Hulu is a good example of the above, but it has required a strong charter and a tough stance by the Hulu CEO to achieve this. Another corollary example is the spinout, using the companies IP, where the company retains a stake and potentially re-sells the goods as an early customer.

Acquisition when Required

The other option is to watch the Darwinian market and acquire.

Good News - best chance of any Venture of being throigh the learning curve of market survival
Bad News - you will pay over the odds (the Build vs Buy case will look awful) and its hard to integrate.

Google, for example, has acquired a lot of companies which have withered on the vine, and they are not the only ones. Most studies of M&A deals reckon that 2/3 and up go sour.

Overall - on evidence we have to date anyway - is that the well protected Internal Venture or Joint Venture are the most likely to live long and well.

The other thing (and the reason for the original Aha!) is the difference between Radical and Disruptive Innovation. Rao notes:

The principles of disruptive competition work best to explain direct substitute competitions, like CDs for tapes. When innovations change consumer behaviors and force a redrawing of market boundaries, the explanation provided by the model is incomplete. Changes that come from much larger forces, like the Internet, are not well explained by Christenson’s model. Overloading the term by talking of ‘meta disruption’ as some people like to do, seems to me not very useful.

I agree here, and this is where I think the term "Radical Innovation" really applies. Radical are things that shift the game radically (ie a lot) but there is usually a gap between that and shifting the market, as other things come to bear. For example, the 'Net came alive in 1969, I'd argue that it was 1999 before it was Disruptive. In my models a Radical Innovation, to be Disruptive, has to shift the main factors by two orders of magnitude - which is typically enough to kick a totally new Darwinian niche of Innovation into being. Big ones I have studied in the communications field are:

- Invention of Aircraft - from Gliders to Bleriot in 10 years
- Telegraph and Telephone over c 40 years
- Pharmaceutical and Medical technology in the early 20th century
- World War 2 - pushed so many things so far in 6 years
- the Internet
- The emergence of behavioural analysis so we understand how we communicate so much better

I would argue that Disruptive Innovation tends to follow behind Radical innovation in any one field - first comes the radical new technology, then comes the parallel innovations, recombinations, tinkering etc that makes it disruptive.

At any rate, we believe that this management of disruption will be one of the core issues of the next 20 years or so as a number of technologies - not just the 'Net - are coming out the gate. (DNA and the resulting BioTech industry and its many offshoots, Robotics, and whatever emerges in 10 - 20 years time from Nanotechnology are the next major "Radical" technologies in my view - never mind their combinations like living robots - Androids, living structures and the Internet of Very Small Self Propelled Things - "intelligent dust")

(By the way, this was posted about 18 hours later as I forgot to change the button to "Publish" and didn't notice till now)