Tuesday, April 7, 2015

How Does the Theory of Disruptive Technologies Apply to the Siren of “Staying the Course”?

Big companies can fail, especially in this competitive market with rapidly-developing technologies. One of the “Seven Sirens” mentioned in the article is “Stubbornly Staying the Course” – “sticking to your current strategy despite market changes”. This brought me to reflect upon the theory of “Disruptive Technologies” proposed by Joseph L. Bower and Clayton M. Christensen in their HBR article “Disruptive Technologies: Catching the Wave”.

The theory of Disruptive Technologies points out that well-managed companies that serve the rapidly growing needs of their current market can be highly vulnerable to market-changing technologies, especially given the existing cost structure and a stable market. Once other new entrants, without those concerns, adopt the new technology and open up a new market which then proves to be served very well, it’s unfortunately too late for well-established ones to compete. That’s why Eastman Kodak lost the game. Its hesitation and slowness to transition to digital photography drove itself into bankruptcy in 2012.

The author of “Seven Ways to Fail Big” gives a fair reason for that common failure: “The economics of the new model don’t measure up to the economics of the old.” This reason aligns well with Christensen’s theory, which points out, for instance, that a company’s revenue and cost structures will significantly impact its evaluation of the new technological innovation, while the potential revenues from the discernible markets are usually small. Big companies are conservative about making a bold step out of their comfort zone, because they are simply too big to risk and manage big changes. It’s no wonder that many companies were driven out of their businesses in the end along with waves of technological innovations.

The question is… how can established companies survive through disruptive technological innovations?

Christensen gives a four-step guide in his article: (1) Determine whether the technology is disruptive or sustaining; (2) Define the strategic significance of the disruptive technology; (3) Locate the initial market for the disruptive technology (i.e. Find it if it exists. Create it if not.); (4) House the disruptive technology in an independent entity.

Whether Christensen’s strategy is feasible can be controversial, though. Netflix would be a good example for its successful transition from “DVD-by-mail only” to an online platform which offers both streaming content and DVD rental service, as a result of identifying disruptive technology (on-demand streaming), defining its strategic significance and locating the initial market. However, Netflix is also a bad example of “housing the disruptive technology in an independent entity” for its dumb plan of initiating Qwikster, which was abandoned by Netflix soon after strong opposition from vexed customers and investors, a customer exodus and a fall of company’s stock price.

It’s important for established companies to adapt to changes. But what is more important is to balance that pace of change. Going forward too slowly (like Kodak) or too quickly (like Netflix) can both drive businesses into unexpected failures.


References:

Joseph L. Bower and Clayton M. Christensen, “Disruptive Technologies: Catching the Wave”, Harvard Business Review, Jan 1, 1995

Stu Woo, “Under Fire, Netflix Rewinds DVD Plan: Company Backs Off Plan to Split Mailed-DVD, Streaming Service”, The Wall Street Journal, Oct 11, 2011

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