The dangers of corporate success.

Smolowitz, Ira

Edgar A. Shoaff notes that, "The two leading recipes for successes are building a better mousetrap and finding a bigger loophole" (Qtd. in Peter, 1979, p. 481).

The above popular idea has, in my opinion, been rendered obsolete by the insightful observations of Dr. Clayton M. Christensen, professor of business administration at the Harvard Business School and author of The Innovator's Dilemma: When New Technologies Cause Great Firms to Fall.

What is a "disruptive technology"? Christensen coined the term in his best seller, The Innovator's Dilemma, published in 1997, and it has since become the hottest buzzword in business today as the Merrill Lynches react to the E-Trades. It's nothing new. Japanese automakers used disruptive technology in the 1970's to seize market share. A disruptive technology is often an inferior product or service, but one good enough to win wide swaths of market share" (Qtd. In Jones, 2000, p. 23).

Examples of disruptive technologies are as follows: The PC "TOY": The Minicomputer Makers' Global Killer

A March to Industry Dominance-Disrupted

"During the mid-80's, minicomputer companies were high-growth, high-margin companies regarded by investors, the business press, and academia as among the world's best-manages organizations. Indeed, Digital was one of the most prominently featured companies in the McKinsey study that led to the book In Search of Excellence"(The PC "Toy," 2002).

"As medium and large businesses demanded ever-increasing amounts of computing power, this dynamic industry supplied it at rapidly decreasing prices. DEC and others did so by aggressively investing large amounts of capital in small to large, radical, and risky technology projects. Not even IBM could impede their successful march to industry dominance" (The PC "Toy").

The Stealth Attack

"At the same time, a few startups had introduced very simple, low-power computers. 'Just a toy,' declared DEC's founder. And he seemed to be right: PCs were purchased by individuals, mainly for games. Should DEC invest money, time, and energy in low-margin products that their customers don't want? Or should the company stick to higher-performance initiatives that promised up-scale margins and growing volumes, such as DEC's super-fast Alpha microprocessor?" (The PC "Toy").

The Aftermath

"DEC had achieved its peak profits and some of its highest margins ever ... one year before the missile-like attach of the PC industry hit from below, severely wounding every minicomputer maker. Several minicomputer manufacturers failed and none established a viable position in the desktop personal computer value network" (The PC "Toy").

The Rise and Fall of Disk Drive Manufacturers

An Era of Sustaining Technologies

"In the late 70's, the market for disk drives consisted of large mainframe computer makers. These customers demanded an aggressive improvement in capacity of more than 20% a year, above the minimum required capacity of 300 MB. The leading and most innovative 14-inch drive makers (namely IBM, Memorex, EMM, and Ampex) competed vigorously, maintaining the industry's aggressive rate of R&D investment that had led to dramatic improvements in capacity and cost" (The Rise and Fall, 2002).

The Stealth Attack

"During those years, a few startups developed 8-inch drives with less than 50 MB capacity, but only minicomputer startup companies could use them. Because these drives were easy to make, and because mainframe customers did not want them, profits margins and sales volume were extremely low. New entrants struggled to find a viable market for these drives and mostly only minicomputer startups were interested in them. The decision for IBM and other established drive-makers is whether to divert scarce engineering and financial resources to this small new market and risk eroding their market share of the high margin, high-growth 14-inch market. Alternatively, they could wait until the market was big enough, and then invest aggressively to capture it" (The Rise and Fall).

The Aftermath

"Unexpectedly, 8-inch drive makers sustained a capacity increase of more than 40% a year. Their products soon met the needs of mainframe computer makers, while offering advantages intrinsic to a smaller disk, such as reduced vibration. Within four years, 8-inch drives had taken over the mainframe market. Although one-third of the 14-inch makers had introduced 8-inch models-with very competitive performance-every independent 14-inch drive maker had been driven out of the industry by the end of the '80s. And of the 17 disk drive companies existing in 1976, all but IBM had failed or had been acquired by 1995. The 8-inch manufacturers, however, were no wiser to the disruptive technology phenomena and found themselves fighting a losing battle several years later against the 5.25-inch drive (The Rise and Fall).

In "Am I Vulnerable" (2002), executives are asked the following six questions to determine whether their organizations are vulnerable to "stealth attacks" of new technology:

* Has your company lost relatively low-value customers in small market niches or low-end market segments?

* Does your organization wait to target new opportunities until they are "big enough to be interesting"?

* Does it appear that greater and greater improvements in your products or services seem to be valued less and less by your mainstream customers?

* Have innovations that you believe to be critical to the future of your business been shelved or discarded because of market shares or financial constraints?

* Does poor initial performance of a new product or service lead to its abandonment?

* Have new entrants exploited opportunities where uncertainty over market size and customer needs resulted in inaction by your company?

"If the answer to any one of these questions is yes, the company could be a prime target for disruption" (Qtd. in Jones, 2000). He cites how a fatal threat to market shares can begin as a low-quality, low-margin product that customers do not want or cannot use yet. But companies that ignore these disruptive technologies may find they grow in capability to meet mainstream needs.

Why do successful companies allow upstarts to steal their thunder? Consider the following:

RADICAL INNOVATION HAPPENS in big corporations, but it's the exception rather than the rule. Making it sustainable and routine requires visionary leadership, markedly different management techniques, and an entrepreneurial team that can "manage chaos," say six Rensselaer management professors. In their new book, Radical Innovation: How Mature Companies Can Outsmart Upstarts (2002), the Rensselaer team lays out a manifesto for managing corporate innovation:

"The business model these days is more than 'build a better mousetrap'" says Hark Rice'71, director of the Severino Center for Technological Entrepreneurship. "Firms need to build a different mousetrap. If they don't do it, a competitor will and will drive them out of the market."

Rice is one of the six Rensselaer management professors who have followed top-secret research projects at 10 major corporations. Funded by a significant grant from the Sloan Foundation in partnership with the Industrial Research Institute, the research examined radical innovation at Air Products, Analog Devices, DuPont, GE, GM, IBM, Nortel Networks, Polaroid, Texas Instruments, and United Technologies.

The researchers found that creating the culture of entrepreneurship within a big corporation was no easy task, but sustaining that culture was a real management conundrum--"an unnatural act," says Richard Leifer, associate professor of management (p.5).

"It's impossible to predict manufacturing costs, sales figures, market response, and profits for a product that doesn't exist," says Gina O'Connor, assistant professor of marketing and another member of the research team. "Traditional management and marketing techniques just don't work when applied to radically new technologies (p. 5)," but established firms are learning some new tricks.

The Ransselaer Management professors note that Texas Instruments, for example, developed the Digital Micro-Mirror Device capable of creating a high-quality screen image by bouncing light off 1.3 million microscopic bidirectional mirrors squeezed onto a one-square-inch chip. The technology will displace rolling movie films and has opened up an entirely new infrastructure for distributing motion pictures to theaters.

Information, it seems to me, is the life-blood of an organization. Modern corporate dynamics are such that vital information does not quickly appear-if at all-on the corporate radar screen. The gap in vital information must be replaced by anticipation. In the words of the hockey great Wayne Gretzky, "....skate to where the puck is going to be, not where it has been" (Radical Innovation, 2000, p. 5).

References

Am I vulnerable? (2002). Integral. Disruptive Technologies. http//www.disruptivetechnologies.com/ami.html

Jones, D. (2000). Will business schools go out of business? USA Today, May 23.

The pc "toy": The minicomputer makers' global killer. (2002). Integral. Disruptive Technologies. http ://www.disruptivetechnologies.com/dt_examples/dtedec.html

Pocket pal diary. (2001). Myron Manufacturing Corporation.

Radical innovation outsmarting the upstarts. Rensselaer Alumni Magazine. Dec 2000, p.5.

The rise and fall of disc-drive manufacturers. (2002). Integral. Disruptive Technologies. http//www.disruptivetechnologies.com/dt_examples/dte-drives.html

Thomas, J.P. & Waterman, R.H. (1982). In search of excellence. New York: Harper & Row

Ira Smolowitz

Professor of Finance and Dean, Bureau of Business Research American International College Springfield, MA 01109