Wednesday, April 19, 2017

The Innovator's Dilemma and Facebook's New Technology

Bloomberg Technology is reporting Facebook is working to make it possible to type using only brain waves. They hired former Google engineers to research and develop the effort.  The service being worked on will let you send texts or post online without getting out your mobile phone. This is an effort to pioneer disruptive technology that will free people from their devices. The social media giant is investing significant resources into a service which customers are not currently demanding, that lacks an attractive profit margin.  This stood out as a clear example of how a great firm is engaging in what Christensen calls, the innovators dilemma.

The Bloomberg article briefly explains Facebook’s (FB) goal of being able to type using brain signals at a rate of 100 words per minute. This would be useful for people who are deaf or disabled as well as simply being able to send an email at a social function. Other than this vision, market applications for the service are still unknown and won’t be identified until commercialized. Facebook’s strategy is to learn and discover rather than execute commercialization.

The company’s mission is to give people the power to share and make the world more open and connected. By separating the device from the social network, FB is creating a more open application. This move signals that Facebook recognizes the uncertainties of this market but is managing innovation to continue to be the industry leader. Hands-free typing applications are not high performing in today’s market but FB is applying resources to discover how the disruptive technology will be performance-competitive tomorrow.

This CNN Money article explains that at the time (2 years ago), Facebook had 1.4 billion users and 1.2 billion were mobile users. Additionally, 69% of advertisement sales were from mobile ads. This shows the mobile market as an attractive target that goes against the new service being developed.  By this I mean, reducing the need to open the Facebook app on a mobile phone will negatively impact advertisement revenue in its current form.

With that said, the move to explore a new service market is the correct move to make. This is because Facebook is investing in a purely disruptive technology. Investing heavily in technology is not necessarily a recipe for future success. Sustaining technologies foster improved product performance and are the primary focus of managers. The dilemma is that many competent managers worry about short term competition and invest in sustaining technologies to maintain competitive leadership. FB is using the more effective strategy of managing the forefront of its market, working to understand and harness potential disruptive technology. This strategic move may allow FB to continue to thrive in the fast-moving social media market.

Applying Disruption to the Education and Lobbying Industries

 Christensen defines disruptive technologies as those that bring to market a different value proposition than previously available.  Executives usually do not invest in disruptive technologies for three main reasons: 1) They are simpler and cheaper, resulting in lower profit margins.  2) Disruptive technologies are first commercialized in emerging and often insignificant markets.  3) Big companies’ most profitable customers usually do not want and initially cannot even use disruptive technologies.
      The Christensen article reminds me of another book of his, “Disrupting Class,” which I read for a Heinz course in education policy.  The book discusses how an entity, such as a school, is rarely able to disrupt itself.  As a solution to the dilemma of disrupting education with technological innovation, he proposes that a new, prominent administrative role be introduced to the school system: Technology Implementation Specialist. 
      The Specialist should be responsive primarily to an outside body, such as the school district, in order to avoid conflicts of interest between the school and the Specialist.  For example, if a Specialist were hired directly by the principal, relationships may form in which the Specialist feels obligated to be less harsh on teachers who are not properly implementing technology.  Whereas a third-party Specialist might more objectively assess proper implementation, an in-house Specialist might worry that a negative assessment will result in their colleague being fired.
      Similarly, John Chambers of Cisco describes how “spin-ins” are projects initially moved out of the company to help them operate more like start-ups.  Once the desired technology is innovated, they are spun back into the company to apply the innovation.  In other words, Chambers developed a mechanism that mimics the method discussed by Christensen in both the education policy example and this week’s excerpts.

      I have found that bringing in a third-party observer is useful in even smaller systems than corporate companies or school districts.  I used to work at a lobby firm in Tokyo.  Some of our clients were large pharmaceutical corporations, while others were smaller service companies. I found that often what a client needed was not necessarily lobbying services, but a third-party observer that could generate fresh strategies for penetrating the Japanese government and/or market.  In some cases, this meant serving as an arbiter between two competing strategies within the company.  In other cases, it meant innovating new strategies that the company had trouble devising, perhaps due to the cultural biases of their home country.

Disruptive innovation in the construction industry

The construction industry has not seen any major technological innovation in the past few decades. A major factor for that is the fragmentation in the industry creating islands of information and tedious processes of exchange. This has reduced the overall construction output.

BIM or Building Information Modeling is a major development in the construction project delivery process. BIM models are digital, easily managed and shared representations of physical and functional data that define buildings throughout their life cycle. From the pattern and definition of disruptive innovation explained by Professor Christensen in “The Innovator’s Dilemma”, it is safe to conclude that the growth of BIM in the construction industry is truly a disruptive innovation.

We can compare BIM to CAD for a better understanding of this. CAD or Computer Aided Drawing was a software that was developed to simply computerize the production of drawings. Before the availability of CAD, architects and engineers still produced drawings but on paper. CAD gave them more flexibility and was thus a “sustaining technology” as it improved the already existing market.

In a similar fashion, BIM also started as a sustaining technology with the idea that 3D models would be an easier way to produce 2D drawings, thus being the next logical evolution to CAD. With the collaboration of more stakeholders such as the owner, contractor and specialty contractor, BIM now has advanced features such as clash detection, quantity take-offs, cost estimation, energy analysis, etc. Although it does not reduce the total amount of work in the design process, it shifts the effort to an earlier stage where decisions have higher impact and lower cost of implication. It facilitates consistent data transfer between project participants and quick evaluation via simulation and analytics.

However, what makes BIM a disruptive technology is the fact that it caters to only a certain segment of the market that can afford it. The high initial cost that includes buying the software and training people to use it, is a major obstacle that people face in implementing BIM in their work structure. To truly achieve all the expectations of BIM, two things must change. Prices must come down and technology should be easier to use. Lower cost will enable usage by a larger number of customers. Easier technology will improve performance and accessibility.

BIM is now moving towards a cloud based system. It will enable AEC companies to rent computing infrastructure, software and systems through the Internet on an as-needed basis. This innovation will to some extent solve the issue of access.  Companies would no longer face the problem of limited storage on computers to handle heavy models. Although moving towards a cloud system would increase efficiency and productivity benefits across the life cycle of a building, this change can be said to be ahead of its time. While BIM is still being adopted by AEC companies globally, moving to cloud can be considered disruptive, but an eventuality. 

Cisco Lessons for the Mobile War; the case of Nokia

“Our success at Cisco has been defined by how we anticipate, capture, and lead through market transitions”. This is how John Chambers -CEO of Cisco Systems- referred to their strategy for leading a large corporation when new technologies threaten to change the industry projections.

The success in navigating unchartered waters might not be the norm for most big corporations; as described by Christensen in his book “The Innovator’s Dilemma”, big, well managed companies are more vulnerable to fail at adapting to market changes, especially when those changes comes from disruptive innovation -technological advances that not only offer better products at better prices, but offer alternative solutions that are unexpected and seen as risky and less profitable.

According to Chambers, besides fostering a culture of listening their customers and having a start-up mentality (Cisco allocates around 15% of their revenue in R&D), his company have three main ways of adaptation; early R&D development of the technology, acquisition of new companies, and internal start-up generation -companies that are born inside Cisco but are fully independent in its strategical operations. Even though not always these actions have proved to be successful, in general have allowed the company to keep up with the industry changes and to stay ahead of technological advances.

A different situation has been experienced by Nokia, the company that became internationally known in the 1990’s when it took the mobile industry by storm after deciding to focus only in telecommunication products and sell its other units of television, tires, data and power.
Only ten years later, the prospects for Nokia seemed completely different. The development of wireless technology saw the rapid improvement of mobile devices and the introduction of the Iphone by Apple in 2007 changed the industry to present. Regardless of Nokia’s R&D expenditure which reached 13% during 2003 and 2004 and again almost 16% in 2012; the company ended up selling its mobile device division in 2014.

According to the article “5 reasons why Nokia lost its handset sales lead and got downgraded to junk” an important factor that would explained the company’s failure was its slow reaction to the industry changes, taking them almost 4 years to launch a windows phone after giving up with the launching of upgraded versions of its once successful Symbian Series. By then, Samsung was already a strong competitor that would battle over Apple for each new customer and Huawei was at the lower end marketing cheaper smartphone alternatives.

Even though Nokia fought back with more research and several mobile releases that would incorporate gaming as the main feature, they failed to listen to their consumers, and more importantly failed to seize the dimension of the technological shift their market was going through. Smartphones launched by Apple and Samsung were simply superior and conceptually they were changing the way consumers would use their phones as per the introduction of applications that were far beyond just gaming features. Personally I think it was such a sudden shift that Nokia had little opportunities to react; the chance for them to bring their own innovation to the market was minimal, so the only alternative left  was to become a  “follower” by partnering with leaner companies that could react faster like Huawei. I assume that was not an option for Nokia, but at the end, the result seemed to be much more harmful to the company than having to swallow the pride and adopt a foreign technology.

Why Good Companies Fail to Thrive - Do the Same Reasons Still Apply?

In the introduction to his book Why Good Companies Fail to Thrive in Fast-Moving Industries, Clayton M. Christensen lays out five principles detailing why large, well-run companies can struggle even as their respective industries grow. While Christensen offers strong, well-reasoned arguments to support his points, some of these seemed rather dated, particularly as they relate to the startup world and the rapidity of scalability in 2017. Christensen's article is a decade old at this point, having been written in 2006, and the evolution of then-small tech firms into giants,  has profoundly changed the landscape when it comes to innovation and growth.

In 2017, leading innovators like Apple, Alphabet (Google), and Amazon are all in the Fortune 100; Uber would be there as well if it was a publicly traded company. In 2006, Uber didn't exist, there was still a question of whether Google and Amazon would ever make any money, and Apple was ranked 159 (currently ranked third). Today, we see these companies - large companies - as leading innovators, and they have all been exceptionally successful at developing new technologies in-house, taking risks to develop those new technologies, and using innovation to solve internal growth needs. According to Christensen, this flies in the face of how large companies - which these companies undoubtedly are at this point - should be operating.

This is where there is something of a new paradigm with certain large companies, particularly in technology: these are all companies that have innovation in their DNA. Christensen writes, "organizations have capabilities that exist independently of the people who work within them." For the technology companies discussed above, innovation is one of their core abilities. Within this, however, they do function the way Christensen prescribes large companies to do, at least to a degree. Uber's Pittsburgh Advanced Technologies Group is a great example of this, as its express purpose is autonomous vehicle research, thus allowing it to break out from the mainstream of the company (note that this by no means guarantees that Uber's adventure into autonomous vehicles will be successful).

Christensen states that large companies do not engage with emerging markets because those markets cannot be analyzed. This is where we see the DNA of today's large technology companies - those that have emerged or dramatically evolved over the last decade - comes into play. In 2006, we were still hailing taxis on the side of the street, or, in smaller markets, calling them. A click wheel device that stored 1,000 songs was still at the cutting edge of innovation. If you wanted to take a vacation, you were almost definitely staying in a hotel. Amazon was a company that sold books.

Today, you can go on Amazon to order the iPhone that will allow you to schedule an Uber to take your to the airport where you will fly to your destination to stay in an Airbnb (projected to be a Fortune 100 company by 2020). The technological landscape has changed, and it stands to reason that the rules of the game have changed along with it. It makes perfect sense that these companies that innovated their own markets out of thin air will stay in the innovation game, and attempt to lead it. None of this is to say that Christensen's paradigm is without merit today - it's not - but instead that it perhaps needs to be updated to reflect the ways in which the innovation marketplace has changed since it was written.

Netflix in the face of emerging disruptive trends

In "The Innovator's Dilemma", Christensen describes how companies can suffer from failed ventures by not properly learning their market and/or sticking to faulty predictions. He recommends using an adaptive strategy that incorporates customer feedback when foraying into disruptive technology or trends: learn a plan based on customer and market discovery, instead of implementing a set course of action [1]. In this post, I examine how Netflix can take advantage of the disruptive trend of accelerating technological changes in the developing world.C

Reports published by McKinsey suggest that technological change is accelerating at an incredible pace in developing countries [2] [3]. Based on the 2015 Mobility Report from Ericsson, there are 2.6 billion smartphone users globally; however, this number is predicted to increase to 6.1 billion globally by 2020 (representing 70% of the global population), with emerging markets such as Asia Pacific, the Middle East, and Africa accounting for 80% of all growth. This means that video streaming/downloading services will be accessible by 3.5 billion more people in the next half decade. Moreover, the report suggests that by 2020, 80% of mobile data traffic will be from smartphones, with video accounting for 60% of that traffic [4]. Currently, Netflix is already aware that more than half of its users globally stream media using their smartphone apps. Smartphone media streaming is increasing rapidly due to the decreased cost and increased accessibility of 4G data in developing countries (especially India), and Netflix should address this quickly.

Despite its competition with Amazon Prime Video, Netflix is still has the majority market share by a wide margin at 51.8% versus Prime's 24.8%, according to a Digitalsmiths study [5]. Interestingly 36% of internet-media-streaming users choose a streaming service based on its original content, and Netflix has addressed this trend by investing $6 billion this year in new original content, compared Prime Video's investment of $4 billion, based on a 451 Research Survey [6]. A 2015 study by ConsumerReports found that of the 130 streaming devices tested, Netflix was embedded and optimized on 88% of them, while Prime Video was only available on 68% of them [7]. In fact, Prime Video still does not have a functioning app for Windows Phone OS. Netflix is therefore still the market leader in developing original content and it is currently easier to use across multiple platforms compared to Prime Video.

Given these facts, I feel that Netflix can position itself advantageously in emerging markets by partnering with manufacturers of smartphones and tablets that are popular in developing countries (Chinese-manufactured phones and tablets are getting increasingly popular for their affordability). Netflix can use its expertise in software and its popular reputation to target new smartphone customers by creating easy-to-use and data-efficient video-streaming apps to be pre-installed into those devices. Additionally, Netflix can partner with Indian telecommunication companies to allow unlimited mobile streaming, as they have done with T-Mobile in the US (non-exclusively). Lastly, Netflix could use its expertise in media development to create appealing local content. While all of these strategies are clever based on the facts above, we can only know how well these plans might work once Netflix does more consumer testing. To stay ahead, Netflix will have to be flexible with its plans and implementations for the developing world.

[1] Christensen, C., The Innovator's Dilemma (1997), ISBN 0-87584-585-1
[2] National Intelligence Council, Global Trends 2030: Alternative Worlds (2012)
[3] McKinsey Global Institute, Ten IT-enabled business trends for the decade ahead (2013)
[4] TechCrunch, 6.1B Smartphone Users Globally By 2020 (2015)
[5] Cord Cutters News, Netflix is Losing Market Share as Amazon Prime Video Continues to Grow (2016)
[6] Investors Business Daily, Netflix International Growth Numbers Likely to Surprise (2017)
[7] ConsumerReports, Video streaming face-off: Amazon Prime Instant Video vs. Netflix (2015)

Internet Conglomerates - Too Big to Fail?

The world’s foremost authority on disruptive innovation, Professor Clayton M. Christensen talks about unforeseen, unaccountable failures that face companies that are at the very top of their game. I believe Prof. Christensen’s ideas are slightly outdated in the 21st century as the world economy progresses with internet conglomerates firmly in the driver’s seat, viz. Google, Amazon, Apple, Microsoft, Facebook etc. For starters, ‘The Innovator’s Dilemma’ was published in 1997, at the very cusp of this revolution
But why does this theory not apply to the internet giants of today?

In a strict sense, I think the people running these companies embraced the ideas in The Innovator’s Dilemma by being innately, perpetually disruptive instead of succumbing to oncoming disruption. This can be evidenced by invalidating the principles of disruptive innovation that Prof. Christensen talks about, referring to one these companies (Google)-

Companies depend on Customers and Investors for Resources
‘Google is on every neighborhood on the internet, in many ways it is the neighborhood’ says Dietrich Vollrath, in his NYTimes article on Google’s market power. He goes on to say that Google is so pervasive in our lives through the internet, that they do not need to exercise caution in terms of Customer/Investor whims, which Christensen says is detrimental to being disruption ready.

Small Markets Don’t Solve the Growth Needs of Large Companies
Christensen talks about big companies needing to match growth numbers proportionate to their size. But I believe Christensen was talking about an era where Mergers and Acquisitions weren’t a common business feature. Google lives by M&As, acquiring scores of small companies being disruptive in their fields invalidating this cause of worry and adding to Google’s disruptive steamroller brand image.

Markets that Don’t exist Can’t be Analyzed
Market research and planning, Christensen says, are hallmarks of good management. Again, I believe this applies to legacy firms which functioned very differently from Google. Google creates new markets, and is more growth and innovation oriented than on quarterly profits, making market analysis less important than it is for regular companies.

An Organizations Capabilities Define its Disabilities
Google has grown from being a search engine running on a university server to a global behemoth generating ~66bn annually (as of 2015), constantly dabbling into uncharted territory. This has happened with values that are unorthodox, to say the least. When the company incentivizes disruption primarily, very little in terms of capabilities can have adverse effects on the company.

Technology Supply May Not Equal Market Demand
Market demand follows supply in the economics involving this company, as opposed to the other way around. The vacuums at the lower price points are annulled by M&As and extensive spin-off research. There is no requirement of trend capturing to gauge demand when a market leader insists on disruption.

To conclude, Christensen’s ideas do not necessarily apply to present day internet biggies that are ‘Too Big to Fail’. In other words, is there any disruption too big to make these companies fail?

Time will tell.

The New York Times Company -
Google is the Internet, Too Big to Fail - Frugaling -Dogotek Says-Bette says-Sam says-Syed says-Rajkumar says -

Google, Alphabet and the Era of Internet Conglomerates » Skarpline -

Disruptive Innovation and Uber

Christensen’s theory on disruptive technologies has impacted many in the business field, and is still prominent in strategy development today. Disruptive technologies are introduced into smaller or unknown markets and usually underperform against established products at the start. These disruptive technologies are usually cheaper, smaller, simpler, and easier to use for the consumer. A firm’s most profitable and loyal customers avoid disruptive technologies when they are introduced, but they do appeal to some fringe customers. Additionally, in the readings given, Christensen’s drives home the point that in these disruptive markets those who do research or create forecasts are almost always wrong. Because the disruptive technology is new and has not been introduced to the consumer, the market is unknown and cannot be studied in depth.  As was the case with HP’s Kittyhawk product, whose forecast estimates lead managers to failure.

In an updated article on the Harvard Business Review, Christensen along with other Harvard Business school professors look back at the innovation dilemma and decide if it can it apply to Uber. Before reading the article, I assumed that Uber would be considered a disruptive technology. The ride-sharing service has created great anxiety and disruption in the taxi business. Leaving many to wonder if the taxi is the product of the past.  

However, they decide that Uber is not a disruptive technology. They give two reasons. The first is that Uber did not originate in a new-market or low-end foothold. Meaning that disruptive technologies usually are created to appeal to low-end or under-represented customers, or are created in a market that did not exist before. Uber had gone in the opposite direction, and built a position in a mainstream market that already exists and services those who were already receiving the exact service from taxi companies. 

The second reason given was that disruptive technologies are initially inferior to their sustaining counterparts.  Usually, customers are not immediately willing to move to the new product until the quality rises, even if it is at a lower price.  Once the quality rises to their standards, customers will move to the disruptive technology. Uber, however, does not seem to fit this mold. Their cars and services are rarely described as inferior to taxicabs, and today most would describe Uber as being the better product. Uber’s cars are usually clean, calling one can be done on your phone, and payment is easy with the use of a credit card.  The quality of Uber’s services and product did not start as inferior to the taxicab, but were on the same level from the start.

The example of Uber can be confusing because most would view it as a disruptive technology in the market of transportation. Recognizing what is a true disruptive technology can be quite hard. Disruptive technologies can seem to be obvious to most, but the article finds that there is some nuance being used in identifying disruptive technologies.  

Entrepreneurship Spirit for Market Transition

The two readings for this week discuss the strategies for large companies to always stay growth and lead the industry frontier. The key point is to embrace the disruptive technologies and adapt to the market transitions in this fast-moving environment. This point may seem to be a cliché as the industry talks about “disruptive technologies” so often, but personally I still find the alignment with entrepreneurship in this statement very fascinating.

How to Embrace the Market Transition?
According to the article “Why Good Companies Fail to Thrive in Fast-Moving Industries”, the common theme to all failures is the decision made from good management. In other words, embracing the market transition means not to use the normal good management toolkit, but to “invest in developing lower-performance products that promise lower margins and aggressively pursue small markets. It needs the courage to break normal rule and make the leap based on a forward-thinking vision.

Sometimes customers may help to provide indications for possible market transitions, but sometime even customers do not have a sense for the revolutionary transitions. In Cisco’s examples, they got the idea of which start-up company to buy from customers, such as Crescendo Communications and Meraki which had the desired technologies their customers wanted. However, when revolutionary market transitions happen, it would be right for companies not to listen to their customers. Companies like Tesla know where the next generation want and they lead the customers as they move to embrace those transitions. Tesla made the decision to acquire Solar Energy Company SolarCity in late 2016 to expand their business lines by a cheaper solar roof, and at first the market didn’t favor this deal.[1]

Alignment with Entrepreneurship

In this way, the adaption to the market transitions aligns with entrepreneurship in term of mindset, skills and the decision-making process. It is also interesting to see the discussion of “a start-up mentality” in Cisco’s example interacts with several discussed principles in another one. “Small market do not serve the growth needs of large companies”, so it is better for large companies to use the spin-off model to let a small group start the new business independently.
“Market that don’t exist can’t be analyzed”, so it is necessary to invest heavily (but still reasonably) in R&D if the large companies intend to capture the new opportunities.

I recall my experience in a fund of funds capital called Yimei Capital. When the partners listened to the business model road shows (the start-ups came to make presentations and ask for investment), they employed the entrepreneurship spirit to every investment opportunity. Is there an inelastic need in the market? Is that the customers want most? Is this company driven by cutting-edge technologies? Does the company founder have a forward-thinking vision of the future? The management team’s background and related experience still matter, but they would just evaluate it last as they can always sit on board and improve the management quality afterwards.