What are disruptive innovations?
They’ve got to be bad, right?
Right!? Well, not if they’re yours.
When Clayton M. Christensen released his seminal book “The Innovators’ Dilemma” in 1997, he hatched a term that would fuel the fervour of dotcom mania and send the world’s leading corporations into a spin. Christensen exposed a crushing paradox behind the failure of many industry leaders. By doing what good companies were supposed to do – focus on pleasing their most profitable customers – leaders were paving the way for their own demise. How? By ignoring “disruptive technologies” – new, cheaper innovations that initially target small customer segments but evolve to displace the reigning product.
So what’s the solution?
Michael E. Raynor, Deloitte director and co-author of Christensen’s sequel, “The Innovator’s Solution”, spoke to James C. Tuckerman while in Australia recently about Christensen’s landmark book nine years on and gave his views on how Australians can manage their companies to create truly disruptive growth.
When Clayton wrote the first book “The Innovator’s Dilemma”, did he have a solution in mind?
I don’t think so. But certainly, given the title “The Innovator’s Dilemma”, the title for the follow up wrote itself. “The Innovator’s Dilemma” was a bit of an odd bird in publishing circles, especially among business books, because it described a problem, rather than a bona fide solution to a problem. So that’s what really created the impetus for “The Innovator’s Solution”. It’s not as though Clayton had all the answers in 1997 and just decided to keep them to himself. That certainly wasn’t the case. It was more about learning precisely how disruptive threats can be converted into disruptive opportunities.
For the uninitiated, what exactly is a disruptive technology?
We now speak more in terms of disruptive innovations, rather than disruptive technologies, even though the original book speaks almost exclusively of technologies. Disruptive innovations are innovations that initially find a foothold among consumers that are far less demanding and far less profitable than the mainstream customers of successful organisations. And it’s from these foothold markets that new entrants who have created a new business model are able to contest for established markets from a position of structural advantage.
What’s a very clear example of disruptive innovation in practice?
Think about the evolution of computer hardware — from mainframes through to minicomputers through to personal computers through to handheld devices. Each of those waves of innovation has constituted disruptions to the previous generation. The mainframes were the dominant computer technology through the sixties and seventies. Minicomputers came along in the late seventies and appealed, not to mainframe consumers, but to an entirely new market. People who couldn’t previously afford computers, all of a sudden, found themselves in a position to deploy computer technology to solve a whole set of problems. The minicomputer became so good it actually disrupted, that is to say displaced mainframe computers. Personal computers then did the same thing to minis. Handheld devices are doing the same again.
So, we’ve seen each generation disrupt and displace the previous technology?
Yes. Another good example is mobile telephony. The first mobile phones, in the early 1980s, were very expensive and they offered very poor quality. Today, of course, mobile telephony is ubiquitous, offers comparatively high quality and comparatively low cost. In fact, mobile telephony is beginning to displace landline telephony services and I would consider that a disruption of landline telephony.
The solution, tell me if I’m right, is to create a consistent flow of disruptive innovations. It sounds like a simple answer. Can you elaborate?
The hope is to find a way for organisations to, as you put it, deliver a continuous stream of disruptive innovations so that it is possible to grow profitably for a longer period of time. No one company will ever grow faster than the economy forever. Because it wouldn’t take too long before that company was the entire economy, so that won’t happen. However, our belief is that it is possible for companies to grow and grow profitably far longer and for more successfully than they have so far. And that they can do this by harnessing the power of disruptive innovation — rather than disruption being a mechanism for the demise of large successful companies, which has been the case historically. Disruption can, in fact, become an engine for growth.
Is this being done?
One example of a company that has done this deliberately, I’ll say one and a half times, is Intel. But it’s hard to generalise from their experience. You can’t study successful disruptions by incumbents using a best practise approach because it’s so rare. And so we’ve taken a very different approach, which is to try and understand the common mechanisms of successful disruptive innovations and then attempt to understand those forces in ways that allow companies to apply them deliberately and repeatedly. And we’ve had to do it this way because, as nearly as we can tell, there are no companies that have done this deliberately and repeatedly.
What do you think makes it difficult for incumbents to disrupt successfully?
Well those are all the forces that Clayton described in “The Innovator’s Dilemma”. All the principals of good management are what make it nearly impossible for established firms to pursue disruptive innovation. That’s what makes it an innovator’s dilemma. It’s not somehow a story of incumbent companies being stupid at all. This is a story of the forces that drive companies to innovate in very particular ways, mainly to focus on delivering better products for lower costs to their most important customers. That has been the hallmark of good management and continues to be the hallmark of good management in the realm of sustaining innovation. But those very same characteristics that drive growth in the short term, ultimately, make it impossible for those companies to pursue disruptive innovations and succeed in the long term. “The Innovator’s Solution” is an attempt to help companies overcome those forces.
How do you create a less bureaucratic more creative culture where innovation flourishes?
Well, I don’t know if that’s what is required. I don’t know that companies have a shortage of good ideas. I don’t know that there is necessarily stultifying bureaucracies in most well run company. It’s easy to wave our hands and say that all we need to do is de-layer and get more creative. I’m not convinced that that’s the answer. The issue is not good ideas. The issue is not smart people. The issue is not motivated people. Those are important things that have to be in place. They are necessary but not sufficient conditions. The missing ingredient, based on our research, is an ability to truly understand what are the hallmarks of successful disruptive innovations and how can one make sure that established processes, that are so crucial to the success and survival of an organisation, don’t actually get in the way of what needs to be done in order to launch successful disruptions.
Is the creation of skunk works a solution?
By and large, I would say no. Typically, skunk works are about hiving off a group of folks, giving them a few bucks to play with and say, do what’s interesting. You hope that by leaving them alone and they will come home wagging their profits behind them. And we don’t think that is a particularly deliberate or repeatable way to develop successful disruptions.
When you work with a client do you focus on the company’s existing processes and attempt to improve them or do you hope to create idea generation?
What we’ve done so far has largely been about the substance of innovation. So, an organisation will have a growth challenge and they’ll have certain ideas that they’re looking to commercialise. Disruption is not so much a function of any innovation of technology. Disruption is a strategic choice about how to commercialise and profit from a particular innovation.
So the solution is not about idea generation?
Every company that I’ve ever had the privilege to work with has always got a surplus of potentially attractive ideas. But the challenge is to sort the wheat from the chaff. How do they decide where to allocate that incremental dollar of investment in new growth businesses? And so disruption theory is a way to triage those opportunities in a way that maximizes the long term success of a company.
And is Deloitte leading by example?
I guess that one other thing that I’ve learnt, from collaborating with my Australian colleagues, is that the Australian firm offers fertile ground — where it’s possible to eat our own cooking. The challenge and the opportunity for a professional services firm is to find a way to serve the needs of client organisations that are perhaps smaller, have smaller budgets and, as a consequence, are structurally less attractive than large multinational corporations. Part of the reason why a practice like Australia is potentially fertile ground is that it is less structurally distracted by large Fortune 500 companies. If you’re the New York practice of Deloitte, guess what, you have very big fi sh to fry and all of them are a subway ride away.
In smaller markets, where there are a large number of vibrant, but smaller companies, there is an opportunity to develop services that meet their needs in a viable way — at structurally lower costs. On one level, that is simply a segmentation strategy. The disruption comes from a finding a way to take those services developed for small organisations and scale them so you can service the global 2000 companies in a way that is structurally superior to our competitors.
Does that mean that we’ll see Deloitte in the spare bedroom of every SOHO in Australia?
You’ll have to talk to my Australian colleagues about that. (laughs)