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Disruptive Innovation and the Innovator’s Dilemma. D isruptive innovation. An innovation that helps create a new market and value network , and eventually goes on to disrupt an existing market and value, displacing an earlier technology.
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Disruptive innovation • An innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value, displacing an earlier technology. • Innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market.
Sustaining innovation • Does not create new markets or value networks but rather only evolves existing ones with better value, allowing the firms within to compete against each other's sustaining improvements.
Market disruption has been found to be a function not of technology itself but rather of its changing application. • Sustaining innovations are typically innovations in technology, whereas disruptive innovations change entire markets
Automobile • Early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained intact • Ford Model Tmass-produced automobile was a disruptive innovation, because it changed the transportation market. The automobile, by itself, was not.
Unique Dynamics in the Economics of Innovation • The activities of idea-focused firms differ from other businesses, due to: • network effects; • brand and reputation effects; • technology acceleration; • disruptive innovation; • labor substitution and organizational scaling; • geographical substitution and scaling (‘the world is flat’ effect); and • Open source alliances.
Technology Acceleration • Many if not most science and technology advances through the work of communities of scholars who organize into social networks • When areas of research show promise of being marketable, these networks, and performance will grow with the network and its research output • Research in many different arenas has shown that performance-to-price of commercially viable technologies tends to grow in a constant proportion annually over long periods of time • This growth is called technology acceleration, • and is the basis of industry rules of thumb such as Moores’ Law, which predicts a doubling of semiconductor chip performance to price every 18 months
Technology and ProductivityExtending Moore’s Law Multi-platform Moore’s Law Technological change is exponential In the past sixty years, life has changed almost beyond recognition This pattern will culminate in unimaginable technological progress in the 21st century, leading to a singularity Raymond Kurzweil, The Age of Spiritual Machines Exponential Growth
Exponential Increase in Technology Creation Patents Granted Technology PenetrationYears until used by ¼ of population
Even agricultural technology accelerates • Since 1980, global food production has increased more than 69 percent, • with only a slight increase in total crop acreage, thanks to new strains of crops. • nearly 500 patents related to cloning of biological material have been awarded in the US alone over the past few years.
Technology Acceleration across Platforms • The Rate of Acceleration tends to Remain Constant as new Technologies substitute for Old
Disruptive Innovations • Disruptive innovations are • new products, services, or business models • that initially target small, seemingly unprofitable customer segments, • but eventually evolve to take over the marketplace • For example • Digital cameras like the Sony Mavica in the late 1990s
Look for ‘Disruptive’ Innovations Memory and the Music Market Bandwidth and the Media Market
Example of Disruptive Innovation in Disk Drives5 MB of Storage in 1952
Example of Disruptive Innovation in Disk Drives5-10 Megabytes in 1973 (14”)
Example of Disruptive Innovation in Disk DrivesShrink …shrink …shrink • 20MB Seagate (5.25”) c. 1986 • 100MB Conner (3.5”) c. 1990 • 1000MB IBM (1”) c. 2000
Example of Disruptive Innovation in Disk DrivesEntrance and Exit of Disk Drive Manufacturers • Between 1976 and 1995 • 129 Disk drive manufacturers entered the market • 109 Disk drive manufacturers existed • 1970s (after DL/1) • Plug Compatible and OEM • IBM,Diablo, CDC, DEC, Storage Tech, Ampex • 2/3rds never introduced 8” drives • 1980s (8” Winchester) • Shugart Assoc., Micropolis, Priam, Quantum • 1985+ (5.25” Winchester) • Seagate, Miniscribe, Computer Memories, Intl. Memories • 1987+ (3.5” Winchester) • Conner, etc. • 1989+ (2.5” Winchester) • Prarietek, etc. • 1992+ (1.8” Winchester) • … and so forth
Example of Disruptive Innovation in Disk DrivesInnovators Dilemma • This is what is called ‘the innovator’s dilemma’ • Technology acceleration reduces the price/performance of a product market so rapidly • That incumbents get locked into a higher gross margin (a variation of ‘shipping the good apples out’) • And cannot develop cheaper, better performing products
Example of Disruptive Innovation in Disk DrivesThe Industry Dynamics of ‘Attack from Below’ • Technology Cost-to-Performance accelerates • At an exponential rate • With a constant year-on-year growth • Substitute products accelerate on new performance parameters • Creating a sneak attack • At the low profitability end of an established firm’s market • As substitute technologies accelerate, they consume all of the market of established firms • Driving previously successful firms out of business
Example of Disruptive Innovation in Disk DrivesSuccessful Transition through Creative Disruption • Control Data • 60% of 14” market from 1965-82 • Missed the 8” market • Set up 8” production in Oklahoma city, for successful entry • Conner for 5.25” • Spin-off from Seagate and Miniscribe • Compaq pushed their market • Quantum retains 80% of spin-off Plus Development Corp (for 3.5” drives) • Plus consumes Quantum • 1994 largest producer in world • Micropolis: Transition by Managerial Force • Founded in 1978 by Stuart Mabon for 8” drives • 1982, Mabon read the trajectories, and retooled for 5.25” • They walked away from existing customers and nearly broke the firm
Disruption • Steam shovels (mechanical excavators) were invented in the early 1800s, • cable operated arms powered by portable steam engines. • The first general design change occurred in the 1920s, when the new gasoline engines replaced steam as a power source. • For most manufacturers, this did not constitute a disruptive innovation, as they could merely swap out the steam engine for a gasoline engine, and keep the rest of the mechanics intact. • Diesel and electric power followed, again with no disruption of the industry. • These machines where huge, and designed for general contracting such as road building, sewer excavation and building site preparation – these required large bucket sizes, and the ability to move huge amounts of soil quickly.
Disruption • Disruptive change in the excavator came from an unlikely quarter – aircraft technology developed for fighters in World War II • Hydraulics activators were developed both for retraction of landing gear, as well as control of wing shape and attitude. • Early hydraulic actuators were not very powerful, limited by the sealing material that was used; but their power was increasing at a 23% annual rate. • The first hydraulics to the arm and shovel of an excavator was developed in 1947, but was too small for commercially viable tasks. • Caterpillar devised a new business model, and targeted a new market. Caterpillar‘s small excavator arm was built as an attachment for the back of small industrial and farm tractors. • They called them ̳backhoes,‘ • and identified residential jobs for contractors, farmers and so forth to dig narrow ditches for sewer, cable, flower beds, and other jobs done by hand in the past
Disruption • Limited by the power and strength of available hydraulic pumps‘ seals, • he capacity of Caterpillar‘s early machines was minuscule and of no use in the more lucrative general contracting markets. • Caterpillar developed new metrics to advertise their products. • Rather than measuring the quantity of earth that could be moved as the cable-driven manufacturers advertised; they emphasized: • shovel width (narrow being better for contractors); and • speed and maneuverability of the tractor. • To bigger companies like Link Belt, they were not even a competitor, because the spoke an entirely different language to a different clientele. • Steady acceptance by the residential market sustained, and eventually grew Caterpillar‘s business, as there excavators grew as well. • They introduces steadily larger diesel-tractor excavators until they could handle general contracting jobs as well.
Disruption • By 1974, the hydraulic excavators had the muscle to lift 10 cubic yards of dirt, a rate of improvement that outstripped demand in any of the excavator markets. • In contrast, the largest makers of cable-driven excavators, Bucyrus Erie and Northwest Engineering, concentrated on building better cable-driven machines, • for their most profitable customers • to do otherwise was not profit-maximizing and • They logged record profits until 1966. • But after that, their business plummeted as hydraulic excavators reached competitive capacities. • Much of the shift was driven by labor unions and operators; • hydraulics where significantly safer than cable-driven excavators • when a cable snapped due to an overloaded bucket, operators could be killed. And hydraulic excavators were less prone to breakdown. • The shift to hydraulic excavators occurred quickly in the early 1970s. Only 4 of the top 30 excavator manufacturers in the 1950s survived this transition into the 1970s.
Organizational Scaling • Automation, global transportation and communication networks have brought about fundamental changes in the structure of organizations • by substituting existing jobs • with machines or outsourced labor • Technology acceleration plays a major role in organizational scaling • technologies that were once too expensive for organizational processes • eventually improve their performance, • and drop their price sufficiently to replace human labor
Organizational Scaling • Technology Acceleration influences work in three ways. • Flattens the hierarchy or firms, • Eliminates vertical ‘stovepipes’ by enabling communication across and around organizational lines • Firms have become inured to the speed and efficiency of horizontal communications
Example of Organizational ScalingDisk Drives become to Small for Human Production • Before the early 1980s, • most hard disks had 8-inch or 14-inch platters, • required an equipment rack and lots of floor space • the reason they were large was that tolerances were not very tight • The advent of minicomputers and then PCs brought a demand for smaller 3.5 inch disk drives; • at the same time, rising factory costs forced firms to move production off-shore to lower cost Asian countries – especially Malaysia and Thailand • In the early 1990s, Asian disk drive industry employed around 50,000 people assembling these drives • But as technologies advanced, and 2.5 inch, then 1.3 inch drives, the drives themselves became too small for human hands • and factories were forced to automate, even if costs of production went up • By 2000, factory employment in the disk drive industry had dropped to around 5000 people, with almost no human hand ever touching a disk drive
Geographical Scaling • Each new technology has the potential to remap the ‘distances’ between people and places • this in turn demands that firms restructure the tasks they perform to remain competitive • Distances should be thought of here as any impediment that makes a particular business model infeasible • it could be cost, geographical distance, or risk • In general, the remapping enabled by new information and communications technologies makes the world smaller and flatter
‘Jobs’The Changing Nature of Corporate Work • The “job” is a recent social artifact • It emerged about the same time as the pendulum clock, and widespread consumption of coffee – both requisites for the synchronicity required of complex economies • It packaged the work that needed doing in the factories of the industrial revolution • Power was not portable, and factories were set up next to the streams or woods that fueled their production • People were expected to show up for their “jobs” when the machines required it • By changing the cost of managing people, information and geography, • work is gradually becoming unstructured and asynchronous,
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