“The Incumbent's Dilemma: Which Disruptions Matter?” Charles Fine ( Charles Fine (charley@mit.edu charley@mit.edu) ) Excerpts from Chrysler LGO Professor of Management and Engineering Systems, MIT Sloan School and Engineering Systems Division In collaboration with Chintain Vaishnav MIT Communications Futures Program October 2010 http://cfp.mit.edu 1
Telecom Incumbent’s Lament: “Almost every day, someone comes into my office and tells me that some new innovation in the market is going to disrupt our business model and destroy us unless we react immediately and forcefully.” “We know that most of these putative disruptors will harmlessly self-destruct. However, we also believe that any given day could bring the arrival of a truly threatening force that we must counter at all costs or risk annihilation.” “How do we tell the difference? Can you give us a model or framework to help?”
“Disruptive Technology” announcements by The New York Times , 1999-2008 1999 Organic LED 2003 WiFi Mesh Networks Nano Science in AlternaEve Energy Chip Manufacturing 2004 P2P Service Providers 2000 Open Source So;ware Online Book Stores P2P File Sharing 2005 Online Shopping Internet AdverEsing Online Book Content 2006 Digital Photography Online Commodity Futures Exchange Gigabit Ethernet YouTube (PoliEcal AdverEsing) Online Investment Firms You Tube (Video Content DistribuEon) 2001 Online Journals 2007 Paint Films 2002 WiFi Mesh Networks AdverEsing using Social Networks 2008 Segway Scooter Christensen’s Conditions for Disruptive Technology Firm Price Primary Ancillary 3 Performance Performance Incumbent High High Low Entrant Low Low High
Innovation Dynamics can be RADICAL (disruptive) or INCREMENTAL (sustaining) Performance How to measure performance? How to know where you are on the “S”? Where in the value chain? Worse before better? Time
ALL COMPETITIVE ADVANTAGE IS TEMPORARY Autos: Ford in 1920, GM in 1955, Toyota in 2000 Computing: IBM in 1970, Wintel in 1990, Apple in 2010, World Dominion: Greece in 500 BC, Rome in 100AD, G.B. in 1800 Sports: Red Sox in 2007, Celtics in 2008, Yankees in 2009 The faster the clockspeed, the shorter the reign 5
What makes an innovation disruptive? Performance Push an overwhelmingly superior technology/process (penicillin, mass production) Customer Pull new customers care about different measures of performance (wireless phones, personal computers) Organizational Competencies incumbents cannot do what the innovators can (Dell supply chain, Southwest Air) 6
Disruptive Product or Technology Innovation vs. Disruptive Process Innovation : s e i g o l y o h n s p h ’ a c C r y e g n I T o o o / s t s h t o ’ t s p C c h e e u P P b l Lean Production d e u l Performance o a T o t r t t s m i P s g s e u i n e D m u l I e c o a r a t r i W V f l n a i c o a i t M m e e n h i l C - e r Mass Production i W Process Innovators Automotive Automotive --Ford --Dell --Wal-mart Craft Production --Southwest Air --Toyota --Li & Fung Time
Apple’s Disruptive Products & Value Chain Design Creative Applications Networks Content Artists Closed to non- Closed to all Closed to Apple apps; but one non-MP3, Content then explosive non-Apple carrier per Publishers App Store region; slowly music Growth opening Content iTunes homepage App Marketing Stores Content iTunes Sales Retail iTunes Stores Content Listening Distrib. accessories Content & HW iPod/ Open, then Consumption iPhone 8 license
Li & Fung as a Two-Sided Platform: 9 A Value Chain for Make-to-Order Supply Chains Sourcing, Production Orchestration, Design, Marketing, Sales Logistics Materials Factories Suppliers Brands Retailers Li & Fung
Model to Assess Disruptive Power (ex: Skype vs. Verizon; Tesla vs. Toyota) 1. Consumers care about price, primary performance 1. Consumers care about price, primary performance (transport or communication) and ancillary (transport or communication) and ancillary performance (carbon footprint, extra features) of a performance (carbon footprint, extra features) of a product/service. product/service. 2. Incumbent has integral value chain, good at product 2. Incumbent has integral value chain, good at product quality and primary performance. quality and primary performance. Rich in complementary assets. Rich in complementary assets. 3. Entrant has modular value chain, good at innovative 3. Entrant has modular value chain, good at innovative services/features and ancillary performance. Quick at Quick at services/features and ancillary performance. adding features. adding features. 4. Each firm’ ’s product/service has some degree of s product/service has some degree of 4. Each firm positive network externalities (e.g., the larger the user positive network externalities (e.g., the larger the user base for Skype or electric vehicles, the more attractive base for Skype or electric vehicles, the more attractive to new users). to new users). 5. Each firm’ ’s product/service has some degree of s product/service has some degree of 5. Each firm switching costs. switching costs.
11 Integrated Value Chain: Good at Quality Incumbent . Customers (care about quality, innovation) Entrant Modular Value Chain: Good at Innovation, Speed
Technology and Industry Disruptions Industry No Industry DisrupEon DisrupEon • Weak Incumbent • Incumbents can affect Digital Network Effect switching behavior • Incumbents innovate • Strong Entrant music Electric while maintaining quality Network Effect Technology • Consumer highly price • Incumbents control vehicles DisrupEon sensiEve and willing to complementary assets risk adopEng innovaEve • Entrants struggle to service with low quality offer quality due to lack and compaEbility of funcEonal control or market power Linux vs. Quadrant Not Relevant • Strong Incumbent No Network Effect Windows Technology • Consumers value quality DisrupEon and compaEbility over innovaEon and low price 12
DisrupEon ? DISRUPTION IN COMPUTING: THE COMPUTER IS PERSONAL PERSONAL COMPUTERS DISRUPT MAINFRAMES & MINICOMPUTERS Industry No Industry DisrupEon • Weak Incumbent • Incumbents can affect Network Effect switching behavior • Incumbents innovate • Strong Entrant Technology while maintaining quality Network Effect DisrupEon • Consumer highly price • Incumbents control sensiEve and willing to complementary assets • Entrants struggle to risk adopEng innovaEve offer quality due to lack service with low quality of funcEonal control and compaEbility or market power • Strong Network Effect No Technology • Consumers value quality DisrupEon and compaEbility over innovaEon and low price
DISRUPTION IN COMPUTING: THE COMPUTER IS PERSONAL PERSONAL COMPUTERS DISRUPT MAINFRAMES & MINICOMPUTERS Industry No Industry DisrupEon DisrupEon IBM PC’s beat • Weak Incumbent • Incumbents can affect Network Effect switching behavior back Apple & • Incumbents innovate • Strong Entrant Technology while maintaining quality Network Effect Tandy. DisrupEon • Consumer highly price • Incumbents control sensiEve and willing to complementary assets • Entrants struggle to risk adopEng innovaEve offer quality due to lack service with low quality of funcEonal control and compaEbility or market power • Strong Network Effect No Technology • Consumers value quality DisrupEon and compaEbility over innovaEon and low price
DISRUPTION IN COMPUTER DISTRIBUTION: CAN PERSONALIZED DESIGN & DELIVERY OF PC’S DISRUPT TRADITIONAL CHANNELS? Industry No Industry DisrupEon DisrupEon • Weak Incumbent • Incumbents can affect Network Effect switching behavior • Incumbents innovate • Strong Entrant while maintaining quality Network Effect • Consumer highly price • Incumbents control sensiEve and willing to complementary assets • Entrants struggle to risk adopEng innovaEve offer quality due to lack service with low quality of funcEonal control and compaEbility Technology or market power DisrupEon • Strong Network Effect No Technology • Consumers value quality DisrupEon and compaEbility over innovaEon and low price
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