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Disruptive Technology
From the late Dr Petr Beckmann
The Innovator's Dilemma - When New Technologies Cause Great Firms to Fail by Clayton M. Christensen, Harvard Business School Press (1997), is a very perceptive analysis of the dynamics of technological advance - especially the introduction of radically new products. Christensen defines two types of technology - "sustaining technology'' and "disruptive technology.'' Sustaining technology is that with a developed market. In well-managed companies which supply this technology, the products advance as rapidly as improvements in science and engineering permit -along the lines desired by the customers of the company. Managers carefully determine the desires of their customers and plan engineering development projects to satisfy those customers as quickly and cost-effectively as possible. These companies develop and infuse their work force with ethics, procedures, and goals consistent with this process in their respective industries. Disruptive technologies, on the other hand, are usually simpler and cheaper than the sustaining technology, but also offer less capability. They do not fit the sustaining market and, typically, provide lower profit margins. For this reason, they are usually shunned by well-managed companies - which are often later destroyed by them. Christensen illustrates these ideas with real examples from different industries including those producing computer disk drives, earth excavators, motor bikes, insulin for diabetics, and (as an illustration of a possible future case) automobiles - conventional vs. electric cars. Figures 1, 2 and 3 (adapted from numerous excellent figures with which his book is illustrated) show some of his primary ideas. In Figure 1, the dotted lines represent the range of performance required by consumers. For example, in disk drives this could be drive capacity, where the sustaining technology was, at the time, the 5.25 inch disk, while the new disruptive technology was the 3.5 inch disk. During the first part of the illustrated time interval, performance of the 5.25 disk satisfies the market, while the capacity of the 3.5 disk is too low. In the course of time, however, improvements in the 5.25 move its capacity beyond that desired in the market, while the 3.5 gradually achieves capacity sufficient to enter the large market. The critical time is before this happens - when the disruptive technological innovation cannot yet satisfy the requirements of the mainstream market. During this time, those who are developing the new technology obtain a great advantage, so that late entering competitors cannot catch up. At the same time, the new technology must be marketed for alternative applications (that may not even be known at the time of its introduction), at low profit margins, and in relatively minor markets. This makes it unattractive to the mainstream companies whose customers are not asking for it and whose profits are so large that the emerging technology would be a nuisance without economic advantage. Moreover, the mainstream companies are continually striving for innovations that will increase the capabilities of their product and, thereby, allow them to enter markets above them where profit margins are greater - not below them where margins are less. The result of this phenomenon is that most mainstream companies - even though they are very well managed, increasing in profits, and very responsive to their customer's wishes - are unable to adopt disruptive technologies which eventually drive them out of business. Christensen, by means of real examples, shows that the most effective strategy is for large companies to start small, independent companies which they control financially - but not otherwise - to establish bases in disruptive technologies. Figure 2, illustrating some of the same points, also shows (illustrating with computer disk drives) the evolution of a product from a high-margin item to a commodity. When the disruptive technology (a smaller disk drive) improves to the point that its capacity is adequate, competition then shifts to size and then to reliability. Ultimately, when both technologies have outrun the technological needs of the market, competition shifts to price alone - a commodity market. Notice that throughout these steps, the established company must keep engineering its products downward and competing in markets with decreasing profit margins - while the disruptive company engineers upward and finds higher margin markets. This and the lead from early entry assures the demise of the established company. The understanding of these phenomena can affect the actual emergence of new technologies. Science and engineering are not enough. Many wonderful technological products are not available to us because industrial managers have not effectively brought them to market. In a final chapter, Christensen applies these lessons to the electric automobile. Clearly, as has been discussed in previous issues of Access to Energy, electric car technology cannot now produce a product that competes with the internal combustion engine. Is the electric automobile, however, a disruptive technology? Perhaps. The answer to this question depends upon whether or not electric cars can reach consumer standards. Figure 3, giving Christensen's estimates for these standards and the rate of development, suggests that they will. Meanwhile, as a beginning disruptive technology, the electric car must seek alternative markets that will value its disadvantages, and it must enter (and develop) those markets with a cheap, simple product. These markets will sustain its development. One such market suggested by Christensen is the potential for runabouts for teenagers. Parents might like the idea that their teenagers are driving cars with low range, poor acceleration, and low maximum speeds. If these cars were also much cheaper than conventional cars, this market might develop. As far as government forcing (with reference to California's rule that car companies must sell 2% electric cars in that state) and subsidies are concerned, Christensen observes that these merely distort the market and delay technological development. What cannot be accomplished is premature entry of the disruptive technology into the sustaining market. Therefore, for good reasons, automobile companies are resisting electric cars. Those auto companies that are wise, however, should set up small autonomous companies to deliver electric car technology to whoever will buy it for whatever use arises. Then they will be well-positioned if electric cars do eventually start to disrupt their market. If instead, the only market entries are forced upon the large auto companies by government regulation and subsidy, these entrenched malinvestments could prevent the advance of electric car technology and deprive consumers of a product that would eventually prove beneficial to them. |
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