Billions of dollar risk capital are flowing to profit from the possibility of disruptive innovation. But do we have enough clarity about what it takes for succeeding with disruptive innovation? Fund managers are pumping a staggering amount after startups in the race of creating mega-success stories. Microsoft, Apple, Google, Facebook or Amazon are their goals. If college dropouts can make them, why cannot others do it?
Furthermore, none of them appears to have originated from organized R&D centers. Instead, they were born in garages or dormitory rooms. Such reality also raises a question: Why do you need R&D, publications, or patents to succeed with disruptive innovation?
Not so long ago, the disruptive innovation phrase appeared. In the 1990s and at the dawn of 2000, Prof. Clayton Christenson of Harvard Business School introduced this phrase through his two books—Innovator’s Dilemma (1997) and Innovator’s Solutions (2003). It spread like a big spark, making it a buzz word worldwide—from Boston to Dhaka. From business leaders, politicians, academics, media, bureaucrats, and startups, everybody appears to be very much conversant in using this phrase. What does it mean appear to be unclear. It’s about pursuing innovation in offering substitutions to disrupt the demand of existing products and businesses in producing those products. But there appears to be a lack of clarity in what takes to cause such effect. Why can readers not get enough clarity by reading those two books? Does it mean that Prof. Clayton himself left out something that it takes to succeed with disruptive innovation?
Creative destruction and disruptive innovation—underlying characteristics
If you look back, we notice several examples of creative destruction. For example, personal computer-based word processing has caused creative destruction to the typewriter. Similarly, CD ROM caused such effect to cassette tape and floppy diskette. Subsequently, flash drives destroyed the demand of CD ROM and hard drives. Furthermore, the electric vehicle has been progressing to cause destruction to the gasoline engine market. In the articulation of Prof. Schumpeter or Carl Marx, such creative destructive effect is at the core of offering us increasing prosperity. Hence, the market economy has adopted the principles for profiting from competing to pursue ideas for causing creative destruction to existing products.
Often, the uprising of the creative wave of the substitution is pursued by new entrants or startups. Sometimes, incumbent producers of existing products overlook the possibility of offering better substitutions—thereby, they fail to pay adequate attention to the uprising of the next wave. One of the reasons has been that such creative weaves originate in primitive form. Also, there is uncertainty; whether those waves will grow as a superior substitute is not clear.
However, some of them grow as a better substitute and reach the inflection point of causing destruction to existing products’ demand. Subsequently, they qualify as the creative destruction force. At this point, it’s too late for the incumbent to enter the new wave. Brand value, patents, supply chains, management approach, and others create a barrier to a timely entry. As a result, some of the incumbent producers of existing products sometimes suffer from the disruptive effect on their business. Prof. Clayton termed this effect of creative destruction of substitution as disruptive innovation.
Characteristics of the adopted technology core
Invariable, all these creative waves begin the journey by changing the technology core. Moreover, the adopted technology core should be at the early stage of development. The success of the rising of the creative wave depends on the amenability of the adopted technology core’s progression. To create the barrier of entry of imitators, initial innovators should also focus on developing creating intellectual properties in patents, copyrights, trademarks, and trade secrets. There is also a need of rapidly developing economies of scale and externality effects. However, the scale effect should focus on advancing technology and creating a high wiliness to pay instead of pursuing predatory pricing and subsidy.
The endless flow of digital ideas for creative destruction—is it not good enough?
The combination of smartphone, wireless connectivity, cloud platforms and ease of software development has formed a very powerful technology core. App-based ideas around this technology core for pursuing the substitution appears to be unbounded. Some examples are ridesharing, food delivery, face detection, disease diagnoses from the processing of x-ray images, and health status detection by processing data from wearable sensors, digital content delivery, and many more. Often, the integration of available technologies and the development of software applications by spending a few person-months leads to a viable demonstration of the potential of offering substitutions. Often, such demonstration leads to the formation of startups and raising the initial round of finance. Does it mean that developing a creative wave of destructions out such ideas is very much within reach?
However, although initial demonstrations create interest, many promising startups start facing the problem of selling the solution to a large number of customers. The general perception is that the information and experience gap should be addressed to overcome this barrier. Hence, startups pursue the strategy of deep subsidy to let the target customers enjoy the benefit of digitization. The thesis is that the sheer benefit of the digital interface is good enough to fuel the creative wave of destruction.
Are examples misguiding us for succeeding with disruptive innovation?
Among the notable examples, Microsoft is one of them. Microsoft’s success has been the scale effect of PC, and its software products like OS and Office suite. Despite the miracle effect, both PC HW and Software emerged in primitive form in the early 1980s.
To create a scale effect, two important factors played a very powerful role. On the one hand, HW was improving due to the rapid progression of silicon and magnetic disk drive. And it was happening due to significant R&D work. On the other hand, Microsoft was investing in improving both OS and Office Suite. This combined improvement was creating an increasing willingness to pay among growing customers.
On the one hand, there was zero cost of copying software. On the other hand, the intellectual asset developed out of R&D was leading to reducing material and labor costs in processing and storing every byte. As a result, the continued development of PC created an increasing scale advantage. Consequentially, Microsoft made a fortune by offering increasingly better software at a decreasing cost. Hence, Microsoft’s scale effect was not fueled by the subsidy in offering the same product.
Similarly, Apple, Google, Amazon, or Facebook created the sale effect. Particularly, the network externality effect and three-party business model created the scale effect for Google and Facebook. Mere time or subsidy did not create notable successes.
Did Prof. Clayton miss something to guide us for succeeding with disruptive innovation?
Let us appreciate Prof. Clayton’s contribution in articulating the patterns in interpreting the disruptive effects of creative waves on once very powerful companies. He made a good point that due to incumbent producers’ attention to the uprising of the next wave around emerging technology core, new entrants succeed in turning creative wave of destruction into disruptive innovation. He also highlighted the importance of the role of non-consumption. However, he did not pay enough emphasis on the role of R&D to be undertaken by the new entrants and/or partners on the progression of technology for improving the quality and reducing the cost of the substitution simultaneously.
The lack of emphasis on the compounding effect of the incremental progression over a prolonged period of time gives the impression that the offering around the new technology core, branding, and addressing experience as well as information gap—often through subsidy and advertisement—is good enough. He also overlooked the importance of the patent portfolio that the startup or new entrant should develop for creating a barrier to the incumbent for causing the disruptive effect. Hence, Prof. Clayton’s thesis of disruptive innovation appears to be incomplete. Such incompleteness appears to be the underlying cause of the subsidy driven startup success story creating approach pursued by the VC fund managers. By the way, many of the global VC fund managers are business graduates of Harvard, other Ive league schools, and Stanford University.
Are subsidy, predatory pricing, and technology integration not good enough?
There have two major strategies in place for creating the market for substitutions—created out of digital technology. Particularly, startups in developing countries are after them for causing disruptive effects. The first one is to sell the substitution at a discounted price. The logic of offering subsidies is to address information and experience gaps. Once it is addressed, the impression is that digital space’s sheer benefit is good enough for creating significant wiliness to pay among a very large customer.
Thereby, substitutions like e-learning, ridesharing or food delivery will grow as creative weaves of destructions to their respective products and industries. Furthermore, as startups are pursuing these ideas, incumbent producers of existing products will suffer from disruption. Hence, these ideas will lead to disruptive innovation. On the other hand, to monopolize this new market, startups with deep pockets have been practicing predatory pricing to drive out the weaker competing startups.
Let’s assume that through subsidy, startups pursuing ideas in the digital space succeed to let all their potential customers experience their products. And they also ensure possible best service and spend huge resources on advertisement for creating the brand image. Will it lead to switching from using your own car to ridesharing services, dining in to ordering food over the app, or closing down academic campuses to get an education over the e-learning platforms? The reality appears to be far from such an assumption.
Why does it require an organized R&D and patent strategy?
Irrespective of the greatness of the ideas and the strength of the underlying technology core, invariably, substitutions emerge in primitive form. These primitive substitutions create very little wiliness to pay among a small group of customers. The subsidy helps to sell such primitive products among a larger group. But products need to be on the track of continuous improvement and cost reduction out of the additional flow of ideas. Hence, R&D is vital for creating such a needed flow of ideas. On top of it, patenting strategy is crucial for creating barriers for imitators and incumbent producers to enter into the race. Otherwise, the chance of succeeding with disruptive innovation runs the risk of being eaten up by the followers.
Although the seed of progression matters, speed alone often is not sufficient for turning creative waves as a disruptive force in the absence of patents. It happens to be that Prof. Clayton did not provide enough clarity about these requirements in his writings on disruptive innovation. Such a lack of clarity could have been the cause of an unrealistic approach and expectation in startups in pursuing digital ideas.
Do startup boom run the risk of suffering from the burst in succeeding with disruptive innovation?
The IPO of Uber is already indicating that late-stage investors are not finding the option of getting their money back from the capital market. On the other hand, the failed IPO journey of WeWork is a cause of concern. Once investors get a very clear idea that certain startups have no chance to reach profitability, the share of those once high promising startups run the risk of being junk.
There might be an argument citing Tesla. Why are the shares of Tesla’s loss-making operation witnessing such a huge price hike in the capital market? The underlying cause is that R&D work done by Tesla and its partners, like Panasonic, is narrowing the loss and increasing the quality—like charging time. Hence, the belief that Tesla has been narrowing the gap of causing a disruptive effect to the conventional auto industry has been the underlying speculative behavior in the share price rise. In the absence of the continued technology progression, will subsidy alone make Tesla a success story? Perhaps, likely not.
Hence, it might not be unfair to conclude–there is a good possibility that subsidy and predatory pricing driven disruptive innovation agenda among the startup boom is likely to experience burst. Hence, the journey of succeeding with disruptive innovation requires to change our understanding.