Monday, July 30, 2007

Disruptive Technologies

I have been wanting to write a blog post about this topic for some time. I think it is one of the greatest concepts in technology marketing strategy, and yet I think it is one of the most misunderstood. When I use the term Disruptive Technology, I am referring to the phemonenon discussed by Professor Clay Christensen in his book, The Innovator's Dilemma. I highly recommend this book, and it's follow-up, The Innovator's Solution, for anyone devising a marketing strategy for a technology company. These books show how certain types of technologies, as they mature, can displant Sustaining Technologies, even though they originally may be inferior to these technologies.

Let me begin by describing what does not constitute a disruptive technology. Many people assume that a disruptive technology is one that is "really different"; specifically something that is technologically impressive, the "next generation", and generally a lot better than what it is replacing. As I will discuss, this is generally an incorrect way to look at these technologies. For example, some people mistakenly say that the CD was a disruptive technology over the audiotape, because, CDs are "really different" from audiotapes. By the same logic, it is argued that the Internet itself is a disruptive technology (in this case, it isn't even mentioned what technology the Internet "disrupts"), solely because, well, the Internet is really different, isn't it? I mean, it's a pretty big thing, so it's got to be disruptive, right? The same argument is used for iPods, GPS navigation, and DVRs. In some cases these are disruptive technologies, in most cases they are not.

A marketing manager at one of the companies I worked with in the past used to say to me, "Selling disruptive technologies into conservative markets is really hard." This company made a lot of extremely cool technological products, however, few of them could be argued to be disruptive technologies, and there were many other reasons that it was difficult for the firm to sell its products. The key thing to understand is that a disruptive technology will almost certainly be hard to sell into a conservative market - that's why you shouldn't try. The beauty of a disruptive technology is that it should be sold into the market that values the product. Most disruptive technologies, when tried to be sold head-to-head against traditional sustaining technologies will often lose.

The reason that the definition above is often incorrect is that a disruptive technology is often one which is inferior to a current technology on the metrics valued by the incumbant organization and market. However, the technology addresses market needs by a different market - often one without competition, and (here's the best part) often unattractive to the incumbant firm. This allows the startup to grow its product without competition.

The reason that the incumbant firm cannot compete effectively against the startup in these situations, is that the incumbant firm either cannot recognize the value of the inferior product, or it is making good margins selling a premium product, and the sales the incumbant loses to the startup (if any) are the low-margin unattractive customers. When this happens, the incumbant sees its gross margins increase - it actually feels good to lose its business to the startup, and thus it does not recognize the threat.

Because of this, the CD is not a disruptive technology to the audio tape. The metrics that the incumbant manufacturers and the market value about traditional audio tapes - recording quality, recording time, compactness - are the same metrics which are improved by the CD. It was very easy for cassette tape manufacturers to realize that the CD was a potential threat. Likewise, the iPod was a sustaining technology to the Walkman, GPS navigation was a sustaining technology to the map, and the DVR was a sustaining technology to the VCR.

No, a true disruptive technology might be something closer to a comparison between Virgin Blue and Qantas. Virgin Blue (like Southwest Airlines, Easyjet, and others) is a discount airline. These types of airlines are great for value concious consumers. Qantas (and BA, United, and others) offer services for Business Class travel and enjoy fantastic margins on their premium business. Now, from this point of view, Qantas might say they have nothing to fear from Virgin Blue - all the low price rabble that fly on Virgin Blue lower Qantas' margins anyway. They may convince themselves that they are a premium product who cater to a more valuable customer. However, as has been shown many times already, as the discount airlines begin to succeed and offer better service, more frequent service, and become the airlines of choice for millions, it becomes harder and harder for the full service airlines to compete. In fact, faced with declining revenues, a full service airline will likely move upmarket in an effort to extract even more money from their premium customers. Virgin Blue is able to grow their market, with little competition from Qantas - not because Virgin Blue is better, but because Qantas has a harder time competing with Virgin Blue when Qantas' most valuable customers, the ones that Qantas will work the hardest to keep happy, are not demanding the discounts that Virgin Blue can apply. The metrics valued by the Qantas business class traveller are not the same as those valued by the Virgin Blue traveller.

So, if you can set up your business strategy to allow you to compete in a market niche along a different set of value metrics to an incumbant, you will likely not face immediate competitive threat. In fact, if you can position your business to attract a market untapped by the existing incumbants, that also is unattractive to the existing incumbants because of their current commitments to their current best customers, then you will be well positioned to grow your company, improve your product, and prepare to compete before your competitors even see you coming. It is that type of disruption which earns the title Disruptive Technology.


CA said...

Great post. I was once in a discussion with someone argueing that active restraint seat belts were a disruptive technology to passive restraing seat belts, which is just silly. The same companies make both; active restraint is just the next generation of passive.

It could be argued that iPods (and mobile phones) are disruptive technologies to wrist watches, I think. They are not as convenient (you have to pull them out), but they have effectively replaced wrist watches - most people I know don't wear watches any more because the time is on their phone or iPod.

Aaron Fyke said...

Interesting thought. I find this unlikely, but to continue the thought experiment - currently iPods and cell phones meet the customer's needs on one metric (playing music or making calls). If iPods and cell phones slowly improve on the metrics more traditionally valued by watch makers (telling the time), then eventually the iPods and phones would get good enough for the market and everyone would switch - disrupting the watch makers. Yet, all the while, before this happened, watch makers would be scoffing at the notion that iPods or cell phones were any threat. Possibly an extreme example, but competition from cheap digital watchs explains why watch makers are positioning themselves along metrics other than the ability to tell the time (Rolex and others are "jewelry", Ironman and Timex are "rugged", etc).

CA said...

Continuing. Watchmakers seem to have almost given up on the lower end of the market (I can't remember when I last saw a Timex commercial, although 10 years ago they were everywhere) and are focusing on the higher end (Rolex and Omega and others are now heavily marketing when before they had an exclusive market - note the effective product placement in the new James Bond movie). I think this is classic Christensen - as watchmakers move to higher and higher end where the high margins are, and they give up the lower end to iPods and mobiles, they are in danger of being fully disrupted and effectively losing their market altogether (perhaps to upscale mobile phones!).