Week5 Q&a Group2 03nov09

Week 5 Questions & Answers Creative Destruction & Disruptive Innovation

Group 2 BlueSky Samurai 3 November 2009

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Contents 1. Creative Destruction 1-1. What are the key features of Schumpeter‟s approach to innovation? .............................3 1-2. What are the main sources of discontinuities in his model?............................................4 1-3. What is the role of new combinations of knowledge?......................................................7 1-4. What do you understand by path dependency?..............................................................8 1-5. Why might disruptive technologies creep up on established companies? .......................9 1-6. What are the main characteristics of disruptive technologies?......................................10 1-7. What is the relationship between Schumpeter‟s discontinuities and Christensen‟s theory of disruptive technologies?..................................................................................11

2. Disruptive Innovations 2-1. What are disruptive innovations?...................................................................................12 2-2. Why disruptive innovations are usually developed outside established companies and outside established sectors?....................................................................................13 2-3. Identify some examples of disruptive innovations......................................................... 14 2-4. Why were they ignored by established players?........................................................... 14 2-5. In what sense can Sony be identified as a market disruptor?........................................14 2-6. How do you account for the slowing down of performance of Japanese companies in the last 20 years?......................................................... ..............................................15 2-7. How is the development of small new companies important to the economic prosperity of nations?..................................................................................................... 16

References ...............................................................................................................................17

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1-1. What are the key features of Schumpeter’s approach to innovation?  What – Technological innovation

Schumpeter adopted innovation concept to explain capitalism and economic cycle in association to the development of technology through creative destruction. Especially, technological innovation is a key element which stimulates capitalism and 50 years growth cycle. From the two tables below, we can see that scientific development and long term economic growth cycles (i.e. Kondratieff wave) have similar steps.

Table 1: The process of scientific development (Source: ScienceDirect.com, 2004)

Table 2. Kondratieff wave (S ource: Wikipedia, 2009)

 Who - Entrepreneurs/large corporations

He focused on entrepreneurs and corporations (in his late works) as „risk-takers‟ who lead creative destruction. They experiment with new technologies to achieve strategic

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advantages and benefit from „monopoly profits‟3 until the market is reached to equilibrium by imitators.  Why - Profit

It is the underlying motive of technology innovation that gives entrepreneurs (or corporations) „strategic competitiveness.‟ If economic profit goes to „zero‟, original entrepreneurs/corporations or someone else would emerge with new innovation to achieve monopolistic profit in a new market. But, thinking about monopoly or oligopoly cases of Korea, for example telecom industry, it seems that innovation is not the only driving force to let them position for exclusive profit. To keep the profit, companies also do cartel other than focusing on technological improvement.  How – Creative destruction

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The process of creative destruction is done by searching something new product, services, or process. It is from new combinations of production requisites, old and new and also a driving force of economic growth in capitalism. The Forbes survey shows that only 18% of the top 100 U.S. companies in 1971 survived in 1987. It means the only companies that kept changing for something new could benefit their economic profit in return. In terms of Korean definition of innovation (renewing skin), it seems that the definition implies the concept of creative destruction. Cancer vaccine could be an example in this case. From Ji-young's experience in a pharmaceutical industry, the cancer vaccine is considered as one of the innovative results from creative destruction. By breaking the viewpoint of cancers (from treatment to prevention), the company could develop new vaccine and get into the new market as an 'early mover.'

1-2. What are the main sources of discontinuities in his model? In general, Tidd & Bessant (2009) discussed several sources of discontinuities as follows.  New market emerges: In general any market is said to evolve over a period of time.

But at certain times there a some specific markets which just come out from nowhere and evolution of such markets can not be analysed or predicted using the conventional market techniques. Most of the time big conventional payers may not see these new markets as a potential, as they are focused on their exciting market and also might think the new market is for a small segment of the society. One the

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best example to highlight this point is to look at the emergence of Mobile phones and relative use of SMS.  New technology emerges: For example, the upcoming refrigeration technology

between 1750 and 1850 caused discontinuity for the massive market of ice harvesting.Adding further to this one can look at the trends in the Music industry. The industry has come a long way from people buying huge gram-phones to dowloading songs to listen to music. With internet becoming a dominat technology, people would prefer to down load the songs directly and legally from the net rather than go to stores and buy cassettes or CD's.  New political rules emerge: To explain this point one can look at the changes that

happened in Russia or the former U.S.S.R. With fall of communism and rise of capitalism in Russia brought out a lot of changes and many established business could not take into these changes and collapsed. The economy is Russia changed from centrally planned to that of open market economy. Also one can think of Apartheid and post apartheid South Africa and observe the changes.  Running out of road: At times established business leaders might have to make

radical re-orientation of their business in order to prevent their exciting products from getting wiped out from the market. Kodak example better explains the concept over here. With the advent of digital camera's Kodak which was a market leader then took a bit hit and had to re orient itself to become the market leader again.  Sea change in market sentiment of behaviour: At times the public opinion or

behaviour changes suddenly with a certain new innovation. For example with the advent of mp3 players and i-Pod, people quickly gave up using walkman's which was very popular mode of listening music and shifted to i-Pods or MP3 players. With this sudden change in the public sentiment, some market leaders like Sony and others had to changes their strategy and a have a new plan to tackle the shift in the market.  Deregulation: Whenever there is a change in the political set up of a place, there is

a possibility for the emergence of new markets. This is because there is a change in rules and regulations. One example is the transformation of the Indian economy in the late 90's. The Government of India, decided to change it policy from License Raj to more liberal economy. With globalization happening, Indian IT companies like Wipro, TCS, Infosys and many more took advantage of the setup and established a strong software outsourcing and BPO market.  Fractures along ‘fault lines’: At times there are certain issues which are of a

concern to a very small segment but its not of a issue for the general public on the

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whole.But with progress in time one sees the momentum picking up and there is sudden awareness in the general public on the whole and the business have to changes their strategy. At current there is a lot of debate happening on obesity and use of junk food. This has changed the way established players like McDonald's and other fast food joints are operating on. Also their is change in their marketing strategies and also one can see that the fast food joints are coming up with ads that highlight the calorie content and other health related stuff.  Unthinkable events: These refer to events which are not thought of before or the

ones which are not imagined or prepared for. The fall of the World trade centre and subsequent war on terror changed the whole world and set up new rules in trading and business. This was further changed with the attack on Iraq and the oil crisis hitting the world. Also the current recession seen around the world has had a major impact on how business all round the world are being run.  Business model innovation: In this case the established business models get

challenged by new entrants, who try to re define the solutions to problems faced and set up new rules. One of the best examples to highlight this point is to study the emergence of E-tailing brought out by Amazon. When Amazon started none of the brick and mortar companies thought it would be a threat to their exciting markets. But as time went by, one could see who e-tailing had redefined the retail markets. Traditional brick and Mortar companies like Tesco, Wal Mart and Home Depot too have come up with their own sites to retain their market share and also expand their share into the emerging segment.  Shifts in technoeconomic paradigm: The industrial revolution and subsequent

entry of Steam engines and other innovations and also certain inventions brought about changes in the market and technology used. In recent timers one can look at the usage of internet and learn how this has brought about a change in the technical and economical structure around the world. One can clearly see a paradigm shift in trends with the advent of internet and also observe how older order got completely replaced.  Architectural innovation: Changes happening in the system architecture and other

related changes result in rewriting the rules of the game for those involved at the component level. Introduction of Photolithography in chip manufacture changed the entire set up of the chip manufacturing industry. And now with the advent of Nano technology and other improvements in the VLSI designs, one can see that changes in chips manufacturing is happening at a rapid space and this is affecting the

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hardware electronic industry as well. The shelf lives of electronic items are shrinking day by day. In a perspective of Schumpeter's innovation, technological innovation is emerged by reorganizing such as process, market, resources, system for production. And this innovation would impact the way to the new market, new supply system and it eventually leads to discontinuity of economic cycle by repeating emergence/disappearance of market-leading companies. From this point of view, the following would be considered as a trigger of discontinuity towards economy growth.  New product which consumers didn't expect  New process system which other competitors didn't try  Opening up a new market  Conquest of new sources of supply  Carrying out a new organization

1-3. What is the role of new combinations of knowledge? At times innovation involved combining knowledge from the past with that of the present or future. It involved sharing of knowledge between different areas of expertise or sectors. Creativity also plays an important role in Innovation. Having a creative mind allows one to imagine the past ideas into future innovations. The extent to which spread of knowledge happens across different sectors depends on the networks and how people collaborate with each other. When people of a community share and collaborate with each other, sharing of knowledge happens, it results in a good understanding and result can lead to a potential innovation. Idea of combining knowledge from the past to the present or across different sectors prevents lock in and this results in better technologies and better products. But if there is some misunderstandings or if the network is not proper then problems might arise and it results in lock in of ideas and differing objectives, finally in the end innovation gets blocked. As an example to highlight role of combination of knowledge, one can look at the worlds cheapest car, i.e. Tata Nano. Tata Nano was ultimately product of Tata Motors, but other Tata companies like Tata Consultancy services, Tata Steel and other Tata firms put in a lot of effort. There was sharing of knowledge between expertise from different companies and

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the end result of the worlds cheapest car, which has all the necessary components of a regular car. Also one can look at the launch of satellites by different countries. It takes a lot of sharing of knowledge and expert opinions from people coming from diverse sectors. If there are some miscommunications somewhere the end result will prove to be an unsuccessful launch.

1-4. What do you understand by path dependency? Path dependence (in economy and social sciences) describes that any decision that an individual or organisation faces in the present is dependent on decisions that were made in the past, even if the external conditions of these decisions no longer apply. It describes consecutive processes whose chronological sequence resembles a path, instead of being independent from each other. Brian Arthur describes two approaches: "conventional economics," which attempts to avoid path dependence, and "positive feedback economics," which makes use of it. When a process is dependent on initial conditions, e.g. when a discontinuity is faced while taking into account the steady-state, there are three possible outcomes: 1. The path dependency is not harmful to the innovation process. Although the organisation is still bound to the previous path, the initial conditions prove to be optimal (first-degree path dependence). 2. The given information and conditions lead to a choice that is not optimal, but it is not visible at the time of decision-making. Retrospectively, a different decision would have been better. The outcome might be costly to correct, but at the time the decision seemed right (second-degree path dependence). 3. The given information and conditions lead to a choice that is not optimal, but it is visible and therefore possible to achieve the desired outcome. But the opportunity is not pursued. This scenario offers the highest availability of a feasible, successful alternative and conscious denial at the same time (third-degree path dependence). While these three possible outcomes might suggest that one scenario is better than another one, it is important to recognize the importance of failures in discontinuity. As outlined below in more detail (see 1-6.), disruptive technologies introduce a higher rate of failure and a higher failure-tolerance at the same time. This is important because failures accelerate the evolutionary process that eventually leads to a dominant design. This pragmatic "learning by doing" approach contributes to the discontinuous market, even if individual organisations fail.

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The knowledge that is being generated, possibly even more in failures than in success, will be utilised by other players. This also shows that failure is absolutely vital for innovat ion. The more organisations with different path dependencies take part in disruptive innovation, the more elements contribute to the evolutionary process.

1-5. Why might disruptive technologies creep up on established companies? The disruptive innovations are never taken seriously by established businesses and most of the times the technologies are not judged to be disruptive. Most of the times these technologies slowly creep into the established fold and completely change the picture of the current usage of a particular product. Tidd & Bessant describe the weight and inflexibility of established players as one of the main reasons for not being prepared for disruptive technologies. This weight includes existing processes, best practices and "tricks of the trade" in every day operation. Not being able to let these habits go can be a threat to quick adoption of discontinuous innovation. The duration to introduce a new innovation increases proportionally with the size of a company. Furthermore, the more focused on an existing trajectory a company is, the harder it is to change the company's direction without facing financial problems. In the worst case, a company faces a 180° turn in strategy to keep up with a disruptive technology, which ultimately alienates existing customers and eventually drives the company out of business. All this of course assumes that a company recognizes a discontinuous innovation and takes it seriously. It is common for established "thought leaders" of an industry to deny upcom ing trends because of their currently superior position. Something that questions "how business is done" or "the rules of the game" (Tidd & Bessant 2007, p. 231) is oftentimes not taken seriously. Most of the times, as seen in the past, established companies cater to the needs of the large majority or the core customers and don‟t satisfy the needs of the „lead users‟. Lead users represent a niche market and they are the ones working at the frontiers of activity or at the cutting edge. Usually the needs of a lead user are much more sophisticated compared to a normal user of the same product. As the needs of the lead user are not met by exciting technologies they may develop or look at disruptive technologies to cater to their needs. Thus disruptive technologies come into the picture. They are usually costly compared to the current exciting product and also at most times they are not developed perfectly. When a

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disruptive technology comes in, it usually causes ripples only at very small end of the market. Most of the times disruptive technologies comes from outside the established sector and are never perceived to be a threat to the established set up. Disruptive innovations improve faster than average customer demand, meaning that after a certain amount of time disruptors are in the position to attack established firms, as the figure below illustrates.

Table 3: Disruptive Technology (Source: Christensen 2003) One of the best examples to summarize the characteristics of disruptive technologies would be to follow the evolutionary path of personal computers. Starting from mainframes, then moving on to desktop computers then to laptops and notebooks, at each stage one can see that the needs of small percentage of lead users results in a new product or technology and the new product in sue course of time completely sweeps the market and makes the established products redundant. In the coming future one might see projection mobiles and computers which might completely outcast notebooks and laptops. The improvements in the manufacture of micro-processors and chips helped at lot in improvements of PC technology. With new developments happening in VLSI technology and faster transistors being produced day by day, the future of PC is going to be highly sophisticated.

1-6. What are the main characteristics of disruptive technologies? Some of the characteristics of disruptive technologies are:  Never perceived to be disruptive at the very beginning.  Very costly compared to the exciting products.  At the very beginning stages of invention it caters to needs of the niche market. It‟s

never meant for the usage of the average customer, whose happy with the current product coming from an established business.

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 Its mainly meant for the lead users ,whose needs are much more than an average

user  Disruptive technologies are imperfectly developed and cater to a small percentage of

the market initially and for these reasons they are never perceived to be a threat to the exciting technology. In addition to these points, Tidd & Bessant define an archetype of discontinuous innovation. Generally speaking, disruptive technologies temporarily introduce chaos to established environments. There are no clear rules yet, they have to emerge over time. The tolerance for ambiguity is higher because it is hard to tell which information is valid or helpful. The whole process is path-independent, disruptive technologies introduce an ongoing "trial & error" to markets. The selection environment, e.g. the market of choices to be considered is blurry and early dismissal of options can lead to failure. This leads to the approach of taking multiple bets at the same time, as it is hard to critically evaluate individual options. There is a higher tolerance for failure in disruptive technologies, but keeping failures short is important. The operating patterns are unclear, which can be an advantage for new players in a market, as they do not have existing procedures to adhere to. Because a dominant design can emerge from a variety of combinations, there are few strong ties in a discontinuous market. As a result, it is necessary for players to keep a broad, peripheral vision, instead of focusing on few selected elements. Disruptive technologies require for pragmatic solutions and quick actions. The more flexible companies can switch between directions and experiment, the higher their chance to come up with a solution that proves successful.

1-7. What is the relationship between Schumpeter’s discontinuities and Christensen’s theory of disruptive technologies? Schumpeter sees regular, radical discontinuity as a major economical driver. He considers it a cyclical, regular process of entrepreneurs starting radical innovation and then moving on to the next challenge as soon as it settles down. Christensen's disruptive technologies are described more like an autonomous phenomenon. The disruption is not visible at first and eventually creeps up on organisations that are too focused on their establishment. Disruptive technologies have different drivers that are not necessarily, like Schumpeter's discontinuities, entrepreneurs or organisations. Disruptive technologies can emerge from outside a specific segment, which is why it is oftentimes not considered as a clear threat by organisations.

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Both concepts are not necessarily different, they just take a different perspective. In fact, they can cause each other. On the one hand, disruptive technologies are likely to cause discontinuities, because employing a new technology has severe influences on organisational and social aspects of a market. The disruption is never restricted to the technology, it is only the starting point. On the other hand, discontinuities can force a market towards disruptive technologies in order to keep up performance. For example, the concept of taking transactions and information channels to mobile phones has been around for a long time, but innovations did not diffuse because technology (e.g. devices, bandwidth) did not match the requirement of the processes. As soon as 3G and web technologies emerged as disruptive technologies, the innovations could diffuse. In such cases, the concept of discontinuous innovations are dependent on disruptive technologies that allow them to reach the performance required to diffuse in a mass market.

2-1. What are disruptive innovations? The disruptive innovation model from Clayton Christensen is a theory that can be used for describing the impact of new technologies (revolutionary change) on a firm‟s existence. Clayton Christensen first coined the phrase “disruptive technologies” and introduced in his 1995 article Disruptive Technologies: Catching the Wave (Bower and Christensen, 1995). He showed that time and again almost all the organizations that have “died” or been displaced from their industries (because of a new paradigm of customer offering) could see the disruption coming, and they had ignored because it did not seem relevant or important enough to worry about – and by the time they realize this it was too late.

Table: Disruptive Technology Graph (Source: Wikipedia, 2009)

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Companies have two basic options when they seek to build new-growth businesses. They can try to take an existing market from an entrenched competitor with sustaining innovations. Or they can try to take on a competitor with disruptive innovations that either create new markets or take root among an incumbent‟s worst customers. According to Wiki (2009), there are two distinct types of disruptive innovations: low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lowerend disruptive innovation is aimed at mainstream customers for whom price is more important than quality

2-2. Why disruptive innovations are usually developed outside established companies and outside established sectors? Based on background synthesic (2009), disruptive innovations creep up on established businesses and are not taken seriously because: 

They are often from outside the established sector and so not a clear competitive threat

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Initially may be developed to cater for a niche

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Imperfectly developed and often only initially disrupt at the low-end of market

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More costly than established products

Established producers are focused on the needs of existing core customers By doing what good companies are supposed to do – cater to their most profitable customers and focus investments where profit margins are most attractive – established industry leaders are on a path of sustaining innovations and leave themselves open for disruptive technologies to bury them. This happens because the resource allocation processes of established companies are designed to maximize profits through sustaining innovations, which essentially involve designing better and better mousetraps for existing customers of proven market segments. When disruptive innovations (typically cheaper, simpler to use versions of existing products that target low-end or entirely new customers) emerge, established companied are paralyzed. They are almost always motivated to go upmarket rather than to defend these new or low-end markets, and ultimately the disruptive innovation improves, steals more market share, and replaces the reigning product (The Great Disruption, 2009)

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2-3. Identify some examples of disruptive innovations. Amazon.com, low cost airlines are example of disruptive innovations, based on business model innovation. Established business models are challenged by a reframing, usually by a new entrant who redefines/reframes the problem and the consequent “rules of the game”. And new entrants see opportunity to deliver product/service via new business model and rewrite rules – existing players have at best to be fast followers Mass production, industrial revolution: change takes place at system level, involving technology and market shifts. This involves the convergence of a number of trends which result in a “paradigm shift” where the old order is replaced

2-4. Why were they ignored by established players? Unexpected directions: Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction. A disruptive technology can come to dominate an existing market by either filling a role in a new market that the older technology could not fill or by successively moving up-market through performance improvements until finally displacing the market incumbents, such as digital photography has largely replaced film photography (Wikipedia, 2009) Early stages: Often new companies emerge to exploit a disruptive innovation. Such innovations can seem unpromising in the early stages of their development. However if they go on to become successful they can form new markets in which established companies lose their market leadership. For example, Edison‟s electric light led to the creation of a whole new system for the generation and supply of electricity and its conversion into lighting. This in turn required a whole infrastructure of companies to supply raw materials and components for what became a new industry. It had a disruptive effect on the existing market for lighting.

2-5. In what sense can Sony be identified as a market disruptor? According to the Clayton Christensen, Thomas Craig, and Stuart Hart in the book The great disruption;” Sony has not created a single new growth market of this genre. The company has adopted a strategy that is very different from the one that led to the dynamic growth of its first 30 years. Even though it now offers technologically innovative products such as its

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Playstation and the Vaio line of notebook computers, they are sustaining innovations, not market creating disruptive ones”. As quoted by Rich Karlgaard; “In early 1955 when sony slipped a transistor into a cheap pocket radio and invented a market. even in 1955 the established giants, the vacuum-tube suppliers, felt un-threatened by the transistor. Tinny-sounding radios for teenagers, that was a sideshow, not a real business. Of course, over the ensuing years Sony grew into a mighty global brand. RCA faded into irrelevance”. with this product Sony was identified as a market disruptor.

2-6. How do you account for the slowing down of performance of Japanese companies in the last 20 years? For the Japan companies, they follow strict well-managed rules, but they are beat by disruptive technologies. For example, the Japanese companies has been repeating their success approach in the automobile and radio products, domains the high-end market. They soon grow up to big companies, but once they realize that there is not enough volume to support them further to face the cap of market, they have to deal with the difficult situation. Compare to American companies, the capital and employees of Japanese companies is not as liquid as their competitors. Most of the employees choose to stay in the same company for lifetime rather than set up their own business, thus the scale of company is difficult to reduce. The Japanese companies are stuck in the market, they also lacks the innovation support from the industry structure. The Japan government applied certain policies such as near zero interest rate, but the policy has been proved useless for the long term recession. Recently the change of Japan politics situation may be seen as a first step of recovery, but the dispute of factions still needs to be united. Financial Services Minister Shizuka Kamei arranged several plans about a moratorium on small business loan repayments which would cause negative effects on banks‟ profit and risk management. Not only the action would hurt the financial industry recover from the financial tsunami, but he also halted the initial public offering of Japan‟s postal system. The delay of IPO makes investors disappointed. Another responsibility for the government is the waste of public-works projects. To build unnecessary public structures such as dams and bridges, Japan has suffered from the biggest public debt in the developed world which almost the twice in size of its economy.

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2-7. How is the development of sma ll new companies important to the economic prosperity of nations? A small new company has many different points against a big company, some of the advantages are: Efficient: With simpler system and fewer levels inside the company. A Small company usually acts faster than a big company. Liability: A new company usually has limited past liabilities. For a big company, it has to consider the past promise to customers and other product lines. A new company owns more freedom to do whatever it wants. Sometimes a big company has to halt the research of new ideas because it would harm other products. Flexible: A small new company usually more open mind to accept new ideas and adopt innovations. Flexibility benefits to those rapid changing environment. The effect to the nation: During a crisis, government sometimes has to save the big company because it is too big to fall. The big company is involved with social relationship so deep, that the government has to spend unnecessary resource to save it. The small new company usually adopt new environment more efficient, and it offers the ideas to be true which may be impossible in the big company. From the investor‟s view, the potential return of small new company is more attractive.

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References 1. Tidd, Bessant, 2009, Managing Innovation, 4th ed. Wiley, p.15 2. Kwon, 2007 [Online], Available http://kennykwon.org/30017446896 accessed 31 Oct, 2009 3. Tidd, Bessant, 2009, Managing Innovation, 4th ed. Wiley, p.32-36 4. Technological Innovation, 2006 [Online], Available http://blog.naver.com/jisan1974?Redirect=Log&logNo=20022381059 accessed 2 Nov 2009 5. Tidd, Bessant, 2007, Innovation and Entrepreneurship, John Wiley, Chichester. 6. Christensen, C. M. 2003, The Innovator's Dilemma, Harper Paperbacks. 7. Arthur, W. Brian. 1990, Positive Feedbacks in the Economy. In Scientific American, vol. 262, p. 92-99. 8. Schumpeter, J. A. 1976, Capitalism, Socialism and Democracy, George Allen & Unwin Ltd. 9. Bower, Joseph & Christensen, 1995, Disruptive Technologies: Catching the Wave, Harvard Business Review, January-February 1995 10. Disruptive technology, 2009 [Online] Available http://en.wikipedia.org/wiki/Disruptive_technology#cite_note-Christensen2003-0 accessed 1 Nov 2009 11. Disruptive Technology, 2009 [Online] Available http://en.wikipedia.org/wiki/Disruptive_innovation accessed 1 Nov 2009 12. Inventionand and innovation – introduction, The Open University [Online] Available http://openlearn.open.ac.uk/mod/resource/view.php?id=254219 accessed 1 Nov 2009 13. William Pesek, `Japan's 20-year-long lost decade` available http://www.brisbanetimes.com.au/business/world-business/japans-20yearlonglost-decade-20091021-h7un.html , Brisbane Times, Last accessed 1 Nov 2009. 14. Clayton Christensen, Thomas Craig, Stuart Hart, „The Great Disruption‟ , Foreign Affairs, 2001 Vol. 80, Issue 2.

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