Tuesday, June 06, 2006

Disruptive Innovation-II

16. One sees that in the 60s, 70s and 80s Japan grew rapidly by following this strategy. In every industry they entered at the low end and then moved up the value chain. By the 90s they had done this in every industry. And therefore by the 90s in every industry they were at the high end. And there is relatively no growth in the high end and therefore for 15 years they have experienced stagnation. In the U.S. one has the facility of venture capital which encourages one to go back to the low end of the market and create market disruption all over again. But in Japan they don’t have a culture of venture capital.

17. In Innovation the creation of new products or services will give one a temporary benefit. But the creation of a new process will give one more staying power.

18. Within the same business it is difficult to find the leader in the sustaining wave as well as in the emergent wave. In order to capitalize on the emergent wave the leader usually creates another business.

19. IBM was able to remain atop its industry when minicomputers disrupted mainframes because it competed in the minicomputer market with a different business unit. And when the personal computer emerged, IBM addressed that disruption by creating an autonomous business unit in Florida.

20. Originally Department Stores were more involved with selling Hardware. As Discount stores entered the Hardware segment, Department stores moved into Clothing and relinquished the Hardware segment. Soon Discount stores moved into clothing and other segments and gradually the Department stores started shutting down. Today only 9 Department Stores remain out of an original number of 315 Department stores.

21. At the highest end of the market there is too much capacity and therefore mergers take place.

22. IBM had a better operating system than Microsoft and a better processor than Intel. IBM could easily have entered the PC market but still continued in the mainframe business and outsourced the operating systems and processors. We need to question whether it is always good to outsource.

23. Integrated firms compete on the basis of functionality and reliability. But as the market needs change to desiring improved speed, responsiveness and customization, the structure moves from being Integrated to being Modular.

24. Interdependent or integrated architectures optimize performance, in terms of functionality and reliability. These architectures are proprietary because each company will develop its own interdependent design to optimize performance in a different way. A modular interface is a clean one. Modular components fit and work together in well-understood and highly defined ways. A modular architecture specifies the fit and function of all elements so completely that it doesn’t matter who makes the components or subsystems, as long as they meet the specifications.

25. IBM as the most integrated competitor in the mainframe computer industry, held a 70 per cent market share but made 95% of the industry’s profits: It had proprietary products, strong cost advantages, and high entry barriers. For the same reasons, from the 50s through t he 70s, General Motors with about 55% of the U.S. automobile market, garnered 80% of the industry’s profits. Most of the firms which were suppliers to IBM and General Motors, in contrast had to make do with subsistence profits year after year. These firms’ experiences are typical. Making highly differentiable products with strong cost advantages creates these circumstances of dominance.

26. When this circumstance changes - when the dominant profitable companies overshoot what their mainstream customers can use - then this game can no longer be played, and the tables begin to turn. Customers will not pay still- higher prices for products they already deem too good. Before long modularity rules, and commoditization sets in. When the relevant dimensions of your product’s performance are determined not by you but by the subsystems that you procure from your suppliers, it becomes difficult to earn anything more than subsistence returns in a product category that used to make a lot of money. When your world becomes modular, you’ll need to look elsewhere in the value chain to make any serious money.

27. When one looks at IBM and Intel one finds that because the architecture of IBM was integrated it did not enter the components segment even though it had the capability of doing so. There was less profit in that segment. But when the market expectations shifted to more speed, customization and responsiveness then Intel opened up its architecture and entered every computer and thus created a modular structure. Intel now solved problems that absorbed IBM’s engineers. And thus commoditized IBM’s engineers. A similar scene was witnessed in the case of Compaq outsourcing to Flextronics and ultimately Flextronics the circuit board manufacturer commoditizing Compaq. The irony is that if Compaq had not outsourced it would have been killed earlier. But because it outsourced it was killed later.

28. As the low cost entrants move forward up the value chain, they trivialize what is left behind so that very little value can be added after disruption.

29. Implant makers have commoditized doctors who are surgeons for, say, ‘hip and knee’. The implant makers have created ‘fool proof and idiot simple’ solutions. Diagnostics have commoditized physicians. Once one has been diagnosed precisely one can then be given standardized therapy. Bloomberg has commoditized Wall Street analysts.

30. Low end disruption or low end businesses address over served customers. That is when existing products and services are ‘too good’ and hence overpriced relative to the value existing customers seek. Wal-Mart is a low end disruptive innovation. It began by offering customers a low-priced, relatively straight-forward product. These customers were over-served.


Post a Comment

<< Home