Monday, June 19, 2017

Telcos and the Innovator's Dilemma

The Telecommunications industry is one of the sectors that has been greatly impacted by the advent of the Internet. As Clayton Christensen described in the Innovator's Dilemma case, "the Internet looms as an infrastructural technology that is enabling the disruption of many industries". This disruption has started with text messaging, but it is already progressing into voice communications being disrupted by VoIP (Voice over Internet Protocol).

For many years, Telecommunication Companies (Telcos) dominated the field and took advantage of the Oligopoly that they have created in many markets around the world. The barriers to entry were particularly strong in this industry, as time and investment required to setup an infrastructure to compete with the established giants was almost non-viable. Two revenue streams that have been particularly successful for Telcos over the years, have been the text messaging or SMS (Short Message Service) service and roaming services. SMS was introduced in mid 1990s and allows users to send text messages from one phone to another. Roaming allows users to continue to use voice and other services when traveling outside their area of coverage. 

The advent of the Internet, and the appearance of new OTT (over-the-top) players, as for example Whatsapp, revolutionized the Telecom industry. Whatsapp was born in 2009 by former Yahoo employees that wanted to create a product that would allow people to communicate anywhere in the world without barriers ( Whatsapp first disrupted the text messaging business of Telcos, and is now in the process of disrupting the voice and roaming services as a consequence of having introduced voice calls through VoIP technology.

Whatsapp fits within the perfect definition of a disruptive technology as described in Christensen’s article: “disruptive technologies are typically cheaper, simpler, smaller, and frequently more convenient to use”. In the case of Whatsapp all of these are true. In its origin, Whatsapp was a small startup providing a very simple free texting service, based on a simple interface with no adds, using the phone’s data channel. This was at a time when Telcos were charging per message and making a lot of money with SMS services. In a similar fashion, Skype introduced a disruptive VoIP technology threatening the Telcos voice services. Whatsapp is now taking advantage of this technology to offer voice calls over the Internet to their huge user base.

In line with the behavior described in the case, the incumbent Telcos first ignored the new players and their services that were deemed inferior products. However, as the new players gained traction and started to erode revenue from text messaging and roaming services, Telcos realized this was a real threat. Telecommunication companies considered and implemented various strategies in response to this threat, including: switching to unlimited voice and text plans, international plans with more favorable international roaming agreements, and in some cases the elimination of the roaming altogether (as it is the case in the European Union and between US and Mexico). Some Telcos tried copying the OTT Apps but it was too late. Players as Whatsapp got the so called "First Mover Advantage".

In my opinion, incumbent Telcos will not die as a result of the new entrants. In contrast with other industries, Telcos still own the network infrastructure, the transport layer required for all the valued added / OTT services to operate and run. However, if they cannot re-invent themselves and find ways, services, offerings to provide added value, they will be condemned to become only bandwidth providers, a commodity business.

Should "disruptive innovation" always be encouraged?

This week’s readings focus on the importance of “disruptive innovations” that do not stem from market analysis, tracking sales growth, and catering to existing customers. Instead, Christensen argues that innovating follows a line of thinking that requires companies to identify and develop a product or technology before there is evidence of a need or desire for it. In essence, companies have to curate the demand for the product.
                However, similar to what Reeves, Love, and Tillmanns discuss in “Your Strategy Needs a Strategy,” it seems that it would be important to consider a company’s strategy before placing an emphasis on disruptive innovations. Does the malleability of an industry and whether it falls within the classical, adaptive, shaping, or visionary framework matter when it comes to innovating? It seems that companies that fall within the shaping and visionary fields would have a greater chance of generating success from an innovative concept, because their markets are malleable. However, companies operating under the adaptive and classical structures would be spinning their wheels because they are in fields that cannot be changed. Perhaps Christensen’s recommendation for companies to create an independent division that focuses on innovation while keeping the established products and customer base separate would be appropriate in this situation. But it still appears that suggesting that all companies should focus on innovation seems inappropriate. Just as strategies that work for the fast-paced software industry cannot be adopted by the slower-paced oil industry, not all companies should be focusing on innovation.
                As Leinwand and Mainardi argue in their comparison of Kmart to Wal-Mart and Target, a company’s success relies on its ability to identify its unique contribution to the market.[1] They even go as far as to claim that companies should “avoid markets, products or services that require new or disparate capabilities, and thus threaten the company’s focus.”[1] It seems that innovation should only be encouraged to companies that can afford the risk. Similar to investing, individuals who only have emergency money in their savings account would not be encouraged to play the stock market. When looking at today’s company’s toying with disruptive innovations, we see Google, Netflix, Amazon, and Tesla presenting concepts such as independent film-making studios, purchasing grocery chains such as Whole Foods , and focusing on space exploration independent of their primary businesses and after they have established such a presence that they have money to “play with.”
                Thus, I disagree with Christensen’s argument. I believe he is correct when it comes to the notion that companies cannot always play it safe and just track their quarterly and annual growth. Some innovation (beyond sustainable product improvements) is necessary. However, not all businesses are successful enough to experiment with “disruptive” concepts and, perhaps if they fall in the adaptive and classical industries, this should not be their concern at all.

[1] Paul Leinwand and Cesare Mainardi, “Why Can’t Kmart Be Successful While Target and Walmart Thrive?,” Harvard Business Review, Dec 2010, 

Technology Shifts

I think the article “Cisco’s CEO on Staying Ahead of Technology Shifts” was my favorite article to date that I have read for Strategy Development.  It was amazing to read about how John Chambers grew to be in the position he is currently in and what it took for him to get there.  During his first couple of jobs, Chambers learned that if even amazing companies missed a market transition, this would lead to their ultimate demise.  At IBM, their missed opportunity was their slowness in identifying and adapting to the shift of mainframe computers to minicomputers.  This was because IBM stopped listening to their customers which is a huge “no-no” in this industry and resulted in the layoff of many employees.  At Wang, Chambers watched five rounds of layoffs that lasted for about a year and a half.  These company’s failures led to his start at Cisco.  Within four years of being there, Chambers became the CEO.
During his time with Cisco, Chambers has overseen many shifts and transitions within the technology world.  One could say that this is the reason why Cisco is still thriving as a company today.  Others could say that their main reason for survival is their ability to listen to their customers and help them achieve what they want and need.  Chambers approach to new trends is also quite unique but seems to work for the company.  When Cisco senses a shift early, they will spend time with their research and development team to develop new technology.  They also may use the option of making an acquisition.  The most interesting way they approach new shifts is what they call a spin-in.  They have a group of workers work on a project and have them work as if they were working in a start-up.  They also receive financial bonuses as they hit a milestone.  This helps them acquire new talent and they are provided with fresh ideas.  This type of mentality could help many companies achieve their goals and provide new talent even for old companies.

Reading this article made me think about my old company.  There, we manufactured hummus and were required to keep up with our competitors.  Though we dominated the hummus category by being 63% of the consumer’s choice within the market, we still had to figure out new and innovative ways to get our hummus out there because the risk for completion was always apparent.  The change I want to touch on was the inability to have an organic product.  When the company first started, there was not a huge rush to become organic because the company and the market was so new to America.  Hummus was always a big food category in Israel, but up until recently, not as big in America.  Eventually, as the years went on and as the demand for hummus grew, organic food because super trendy.  The company I worked for did not really care until we tried selling our product to Whole Foods.  This would have been a huge sale, but Whole Foods did not want to sell my company’s products because the hummus was not organic enough.  This was a huge blow to my company and this was when they really started to listen to what consumers wanted.  What they wanted was a food that was healthy and organic.  Because my company decided to listen to their base, they were able to come up with technology and ingredients to create a non-GMO, organic product that could be put on the shelves.  Sometimes, like in Cisco’s case, the best thing a company can do is to listen.

Combatting Complacency in Strategy Development

When businesses enjoy a high level of success, it can become tempting to rest on those laurels and allow a degree of complacency to set in. To combat this, good strategy must be forward thinking and innovative enough to ensure that past success does not blind leaders to new trends or markets that will be necessary to continue thriving in their industry. The strategy development process is further complicated when cutting-edge or disruptive technologies are involved because, as seen in Why Good Companies Fail to Thrive in Fast-Moving Industries, disruptive technologies are inherently unpredictable and unable to be planned for whenever a company is enjoying success with an existing set of strategies or markets. This uncertainty means that companies need to embrace uncomfortable or counterintuitive ideas in order to exploit new markets or technologies as they reveal themselves.

            Adopting or pursuing those ideas that run counter to the company’s core strengths can be uncomfortable to the point that leaders within the firm decide to avoid the idea altogether until they start to feel the negative pressures of new entrants to their market. However, as seen in the Honda motorbike case, sometimes the best way for a company to overcome complacency with their strategy is to be receptive to employees who are most clued in to the changing landscape or new developments that may not have seemed obvious given the historical market that the company operated in. With Honda, customers started using their low-end motorcycle in unique hobbyist dirt biking ways that ran against the initial idea to break into on-the-road highway use. Fortunately, some keen marketers noticed the fun free-spirited nature these customers were using the bikes in and decided to encourage leadership to pivot the strategy away from the underachieving market they were trying to operate in.

            In conclusion, the only way to offset the blindness that sets in when a company is used to operating in a certain market or with a specific use of their product is to be as receptive as possible to different technologies and product uses that may seem counterintuitive to their existing strategy. In effective, this flexibility will allow the company and its strategists to evolve with their market, rather than trying to fight strong forces that are outside of their control. Of course, this assumes a level of discipline to create avenues where new ideas are discussed and proposed and an environment where the status quo is not elevated to a sort of untouchable level.

--Dave DeBor

Why Good Companies Fail

The article “Why Good Companies Fail to Thrive in Fast-Moving Industries” was very interesting.  It was surprising to read that good management was the reason why good companies failed to stay atop of their industry.  This is contrary to everything I have read in the past and an interesting perspective.  Usually everything we learn in classes or read in articles is about how management is the key to success regardless of what industry the company is in. 

The principles of disruptive innovation are important to follow for managers when disruptive forces are present.  It is important to alter one’s strategy for the situation and not rely only on a set of well-established management principles.  It’s the rise of disruptive technologies that creates a dilemma for successful companies.  In today’s world of technological innovation, it seems that the first one to create a new innovation can capture the market and increase their chances of success in the beginning at least.  The article talks about how companies sometimes invest too much in technology and actually overshoot the market.  A great example of this was Motorola and satellite phones.  Sure the technology was cutting edge at the time and better than cell phones, but Motorola overshot the market.  They invested heavily in satellite phones and with a several thousand dollar sale price, there was very little market for them to make a profit.  The cell phones at the time were unreliable and unsophisticated, but this type of phone was the one people could actually afford to buy.  At that time, cell phones were the disruptive technology that were simpler and cheaper.  Now in 2017 we see that cell phones were indeed the future. 

The first principle, companies depend on customers and investors for resources, can be tied to Motorola as well.  The article states that “companies with investment patterns that don’t satisfy their customers and investors don’t survive.”  While Motorola did survive the satellite phone failure, it never became the dominant player in the cell phone market that it could have.  Motorola was spending millions of dollars on technology that the average customer couldn’t use because of price alone.  However, their average customer could use cell phones.  Had Motorola listened to their customers they potentially could be the Apple of the cell phone market today with the success of the iPhone.  

Disruptive Innovation and Organizational Culture

One of the key takeaways for me after reading the excerpts The Innovators Dilemma by Clayton M. Christensen and “Cisco’s CEO On Staying Ahead of Technology Shifts,” by John Chambers was the intersection of organizational culture and the ability to respond to market disruptions.  The reasons Christensen outlines for why top firms lose their leading position when disruptive technologies and innovations change the market – in their early stages it is too small of a market share, low margins, doesn’t yield the profitability growth necessary to satisfy shareholders, etc—can in some ways be mitigated by having a strong organizational culture that supports innovation (in action, not just name) and gives employees the freedom to be flexible. 

Two of the examples discussed demonstrate this idea well—Honda and their small motorbikes and the Kitty-Hawk disc drive.  With both examples, they thought they knew who their market was and created an entire project around that audience.  However, they did not build flexibility into that project if the results did not line up with the preconceived objectives and forecasts for both of these efforts.  They were not able to respond to real-world occurrences as they should have been able to, such as is with adjusting the functionality to meet another market segment than they had originally identified.  Additionally, because of the focus on profitability rather than innovation and product development, both projects were not able to fully engage in the development phase on the front end.
While these are technical aspects of the individual products, for me they speak to a broader idea regarding how organizational culture can either support or hinder a firm’s ability to deal with disruptive innovations.  Culture is rooted in an organization’s leadership, and for disruptive innovation to grow a company rather than shutter it, it is necessary for leadership to a) acknowledge that disruptive innovation  is a thing that can occur and b) foster an organizational culture that allows to staff to innovate and, if necessary, be afraid to fail.

So how can this be applied to my work moving forward?  In my line of work, we do not develop products for consumers; rather, we respond to economic factors and the housing market that have the opportunity to positively impact residents we serve through homeownership or, as noted in the Great Recession, the need to shift our services to focus almost exclusively on foreclosure mitigation services.  So I struggle to find immediate application.  The best I can say is to try and not fall into the framework that prevents organizations from responding to disruptive innovations. 

The Four Principles of Disruptive Innovation

Lest there be any doubt, Clayton Christensen has an enviable brain. I first encountered him last year, reading Disrupting Class for another course, and some of themes overlap with his piece on why good companies fail. He wrote about, in education, how disruptive innovation occurs in areas of non-consumption: where the alternative to a disruptive innovation, which is often not great in its 1.0 (or even 4.0 version), is non-consumption - so, the innovation is welcomed no matter how it looks.

In "Why Good Companies Fail to Thrive in Fast-Moving Industries," he offers a framework for failure, which includes four principles of disruptive innovation. The entire premise is enchanting - both intuitive and complex. Christensen seems to document what in business should be obvious, but isn't. On top of these four principles is the theory of resource dependence, which "states that while managers may think they control the flow of resources in their firms, in the end it is really customers and investors who dictate how money will be spend because companies with investment patterns that don't satisfy their customers and investors don't survive." But, as Christensen shows, disruptive innovation is not on the minds of - or within the set of demands from - customers, so pursuing disruptive innovations requires managers to buck existing KPIs and experiment in a way that is insulated from the larger organization - within a sub-organization whose "size and interest are carefully aligned" with the needs of customers within the sub-market.

Principle #1: Companies Depend on Customers and Investors for Resources
This first principle echoes the discussion above about resource dependence. Managers are necessarily entirely reactive, but their proactiveness is only within the framework set by customers and investors. I saw this when first launching an accelerator for craft businesses, here in Pittsburgh. Our focus in the first stretch was on real estate development professionals - alongside the businesses themselves, those were the "customers" we served, and who were most responsive to our services. We were proactive, but only on behalf of - or in search of more of - those customers. Only by changing our resource dependence (through grant funding, in this case) were we mentally and financially freed to explore other customer types and, really, just try things out.

Principle #2: Small Markets Don’t Solve the Growth Needs of Large Companies
Here, Christensen notes that large companies can sometimes spot emerging markets or innovations, but they wait until the market for that innovation is "large enough" to pay real attention to, and begin competing in. But the first innovator often has a significant advantage over later ones in the same space. Disruptive innovation should be considered R&D, but with a less predictable and longer-term potential ROI (versus sustaining innovation). We're betting on things that may never come to fruition, and we have to be okay with that. Perhaps even establish a way to learn from our failures.

Principle #3: Markets that Don’t Exist Can’t Be Analyzed
Companies "whose investment processes demand quantificaitn of market sizes and financial returns before they can enter a market" are highly unlikely to pursue disruptive technologies, or go about it in a problematic way, given that disruptive innovation first occurs in areas of non-consumption. It's a risky bet. It's one that you'd not necessarily make, given a standard market analysis. This underscores the risk and imagination factors needed for successful entrepreneurship. While sustaining innovation is rounding up the wood and dividing the work to build the show, disruptive innovation is yearning for the vast and endless sea.

Principle #4: An Organization’s Capabilities Define Its Disabilities
This last principle was my favorite, again in the sense that it is both intuitive and revolutionary. Christensen argues that "organizations have capabilities that exist independently of the people who work within them." These capabilities play out through values and processes, which determine what we prioritize and how we go about tackling that which is a priority. New markets often require new definitions of value. But, can we change our processes and values to better align with the disruptive innovation? Of course, but principles 1-3 say that we won't - not until its too late.