Sunday, June 18, 2017

Disruptive Innovation and Encyclopedia Britannica

There are many companies in history which have not managed disruptive innovation in their industry well and have perished. A particular case study[1] which I found interesting is about Encyclopedia Britannica. Encyclopedia Britannica is the world’s oldest continuously published encyclopedia. First published in 1768, its latest version was printed in 2010. 1990 and 1991 was when its annual revenues were at its peak of $650 million. The advent of personal computers in 1980 and digital content technology like CD-ROMs was the disruptive innovation which Britannica did not manage properly. The story of how the management of Encyclopedia Britannica rejected the offer of Bill Gates’s Microsoft to collaborate to produce content of Windows PC’s in 1985 is now folklore. Clay Christensen in his book Innovator’s Dilemma explains how disruption is not something which happens suddenly and overnight, in “Principle#5: Technology Supply May Not Equal Demand” he elaborates on how disruptive technologies can only be used initially by a very small market segment remote from the mainstream. This is exactly what happened with Encyclopedia Britannica and PC revolution, who knew in 1985 when PC household penetration was just 4-5% that Microsoft would grow to be the behemoth it is today. I do not accuse the management of Britannica for being short sighted back then in rejecting the Microsoft’s offer. Britannica in fact took a strategic decisions in response and introduced CD-ROM version of its Compton’s Encyclopedia, well before Microsoft’s Encarta emergence in 1993.  

Figure 1 Excerpt from "The Crisis at Encyclopedia Britannica" KEL251 28, July2009

Looking at the timeline it is clear that Britannica did anticipate a shift towards digital content, they might have underestimated the pace of this shift but they did start early and had an advantage with its superior content and record sales. Inspite of the early realization of a possible disruption in the industry, Britannica lost out on the opportunities to transform itself because of its organization structure. It is a classic case of Christensen’s “Principle#4: An Organization’s Capabilities Define its Disabilities”. The very sales organization at Britannica which brought home record sales was to become its Achilles heel when it came to digital transformation. Sales organization which was pivotal to Britannica’s book sales had no incentive to promote the new CD-ROM encyclopedia format as they enjoyed commissions as high as $600 on single traditional sale. The sales force was highly skilled in door-to-door book sales but they hardly had any computer knowledge to even show a good demo of their digital product which could possibly justify its steep $895 price tag. Britannica did not create a sales organization structure conducive to promote the sales of digital content. It reminded me of Cisco’s CEO’s approach of “spin-in”, a group of individuals who would operate on a specific project as a start-up separate from the parent organization but with the resources of the parent organization. “spin-in “would have been a good approach for Britannica to take - have a different organization which focused on creating high quality digital content products with its own sales organization separate from the door-to-door sales force.

[1] “The Crisis at Encyclopedia Britannica” by Shane Greenstein and Michelle Devereux, Kellog School of Management, July 28, 2009.

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