In 1997 Clayton Christensen published The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. The book (which we highly recommend) proposed an intriguing explanation as to why large companies with seemingly unlimited resources can fail to see their own demise in the emergence of disruptive technologies. One oft cited example of this phenomenon is the demise of Kodak who not only failed to see the importance of digital photography on their core film business but in fact were the ones who invented digital photography in the first place. The purpose of this post is not to discuss Christensen’s work however but instead to cast our eyes over some industries and see if we can spot companies who might well be in the midst of an innovators dilemma as we type.
In order to identify where an innovators dilemma might lie we need to quickly describe the required conditions for its occurrence. A very common approach, and one used by Christensen, is to describe the situation using innovation S-curves as below.
A: A new technology in its infancy. Performance improvements are hard to generate as the innovation is becoming understood. Generally, innovations at this point are only used by very early adopters and the value of the product offering may be limited. B: Rates of performance advances are peaking, rapidly catching up to incumbent technology. The technology becomes commonplace and even the industry standard. New competitor technologies look hobbyist or misaligned. C: The technology matures, performance advances are harder to generate as the limitations of the technology are found. Most people who might use the technology are doing so. New competitor technologies seem to have higher potential and are gaining acceptance. D: The technology fades. People stop using the technology and choose others. A new technology becomes the industry standard. The Dilemma Zone: Technology A is well understood, the industry standard and an integral part of the business model of those employing it. The profitability of the technology is peaking. Technology B looks very promising even to the point where it is the odds on favorite to be the future of the industry; the only question is exactly when.
So, with this set of conditions in mind we will go hunting for some modern dilemmas in the businesses of today. Kodak followed the red S curve to their well-publicized regret, who might be next?
Dilemma #1, HBO: HBO are having a great run at the moment, their internally created content such as Game of Thrones and Boardwalk Empire have generated huge returns for their parent company Time Warner. HBO is one of the most well known and entrenched premium cable channels in the world and its exclusive offerings are an important part of the business model of cable providers such as Verizon and DirecTV. So where is the dilemma? Well, Game of Thrones Season II has been downloaded illegally about 25 million times over the year1 and HBO know why; there is no other way to get it apart from subscribing to a full cable service. HBO could provide downloads through their own site or through iTunes or another vendor but (at least for season 2) chose to take the money i.e. maintained the high premiums from the cable providers at the expense of the pirated copies. Financially this makes sense today but long term HBO may not always have such a gem as Game of Thrones with which to negotiate (or even define) the process of streaming its content on demand.
Dilemma #2, Big Pharma: Big Pharma is REALLY big and is based primarily on a model that is around as old as your granny. Two pillars, small molecule chemistry and blockbuster “one size fits all” treatments are what has driven the growth of this industry since the early 20th century but that is coming to an end. Biotechnology in its many forms is most definitely the future of medicine in the 21st century. A scan of where the breakthrough patents are being generated in the field and you can see the majority are coming out of small Biotechs and Universities not the massive health laboratories of the S&P 500. The problem is that small molecule chemistry (what Big Pharma is great at) is not Biotechnology any more than plumbing is interpretive dance. The initiative needed to transition the capabilities of say, a Pfizer (100,000+ employees2), to a new science is immense, perhaps too immense. Coupled with this is a reality that Biotechnology tends to make very targeted drugs, limiting the opportunity for another “everyone gets a pill” Lipitor or Prosac, a model that Big Pharma now relies on. So the dilemma is set, Big Pharma must re-skill, and possibly re-size, but to do it now or to hold on for just one more blockbuster?
Dilemma #3, Microsoft Office: Microsoft itself is arguably in the middle of an innovators dilemma but I thought I would pose the case for one of its most profitable jewels, Office being very much in the middle of a technology revolution itself. Office is everywhere, you can’t do business without the ability to open and edit Word, Excel and PowerPoint documents and this has ensured that the Office suite has remained the standard install for companies worldwide for many years. The knock-on effect of Office being the choice of your company is that you are far more likely to install it on your home PC as well, and why learn two different systems? So where is the dilemma? Well, Microsoft knows that it won’t be long before the idea of having to boot up a desktop or notebook to balance the household budget or write your resume will be gone. People will expect to run their households from their tablets and phones while sitting on their sofa not hiding away in the home office. So, Office for tablets? Where is it? The problem is that fully functioning office products are complex, far more complex that we are used to dealing with on tablets and phones. Microsoft’s choices seem to be a) cut back on the functionality (losing their technical advantage), b) teach us a new way of interacting (losing the synergy with the company office) or c) lose the home space all together. You might be thinking that you would still be tied into the Office suite simply because even if you change your home tablet away from Office, other people will still send you Word documents. The simple fact however, is that file type is almost irrelevant these days. Download a free service like Open Office and you will see it is quite capable of opening Word docs and even saving them in Word format so on Monday morning your company PC will be compatible with your weekends endeavor.
Nothing like a super-storm to slow down innovation. Here at Osmotic Innovation we’re doing our best to catch-up and will be back with you shortly. In the meantime, you should spend some time learning about Jugaad Innovation and its principle of frugal innovation.