“The Incumbent's Dilemma: Which Disruptions...

“The Incumbent's Dilemma: Which Disruptions Matter?”

In collaboration withChintain Vaishnav

MIT Communications Futures ProgramOctober 2010

http://cfp.mit.edu 1

Charles Fine Charles Fine (([email protected]@mit.edu))

Chrysler LGO Professor ofManagement and Engineering Systems,

MIT Sloan School andEngineering Systems Division

Excerpts from

Telecom Incumbent’s Lament:“Almost every day, someone comes into my office

and tells me that some new innovation in the marketis going to disrupt our business model and destroy

us unless we react immediately and forcefully.”

“We know that most of these putative disruptors willharmlessly self-destruct. However, we also believethat any given day could bring the arrival of a truly

threatening force that we must counter at all costs orrisk annihilation.”

“How do we tell the difference?Can you give us a model or framework to help?”

3

“Disruptive Technology” announcementsby The New York Times, 1999-2008

1999

2000

OrganicLEDNanoScienceinChipManufacturingOpenSourceSo;wareOnlineBookStoresInternetAdverEsingDigitalPhotographyGigabitEthernet

2001 OnlineJournalsOnlineInvestmentFirms

2002 WiFiMeshNetworks

2003 WiFiMeshNetworks

SegwayScooter

2004 P2PServiceProviders

AlternaEveEnergy

2005 P2PFileSharingOnlineShopping

2006 OnlineBookContentOnlineCommodityFuturesExchangeYouTube(PoliEcalAdverEsing)YouTube(VideoContentDistribuEon)

2007 PaintFilms

2008 AdverEsingusingSocialNetworks

Christensen’s Conditions for Disruptive Technology

Firm Price PrimaryPerformance

AncillaryPerformance

Incumbent High High LowEntrant Low Low High

Innovation Dynamics can beRADICAL (disruptive) or INCREMENTAL (sustaining)

Perf

orm

ance

Time

How to measure performance?How to know where you are on the “S”?Where in the value chain?Worse before better?

5

ALL COMPETITIVE ADVANTAGE IS TEMPORARY

Autos:Ford in 1920, GM in 1955, Toyota in 2000Computing:IBM in 1970, Wintel in 1990, Apple in 2010,World Dominion:Greece in 500 BC, Rome in 100AD, G.B. in 1800Sports: Red Sox in 2007, Celtics in 2008, Yankees in 2009

The faster the clockspeed, the shorter the reign

6

Performance Pushan overwhelmingly superior technology/process(penicillin, mass production)

Customer Pullnew customers care about different measures of performance(wireless phones, personal computers)

Organizational Competenciesincumbents cannot do what the innovators can(Dell supply chain, Southwest Air)

What makes an innovation disruptive?

Disruptive Product or Technology Innovation vs.Disruptive Process Innovation

Perf

orm

ance

Time

Craft Production

Mass Production

Lean ProductionIn Products/Technologies:

Vacuum tubes to

IC’s

Mainframes to PC’s

Chemical to Digita

l Photography

Wire-line to

Wireless Telephony

AutomotiveProcess Innovators--Ford--Dell--Wal-mart--Southwest Air--Toyota--Li & Fung

8

CreativeArtists

ContentMarketing

ContentDistrib.

Content & HWConsumption

ContentPublishers

ContentSales

iPod/iPhone

iTunes

iTunes

iTuneshomepage

Listening accessoriesOpen, thenlicense

ContentClosed tonon-MP3,non-Applemusic

NetworksClosed to allbut onecarrier perregion; slowlyopening

ApplicationsClosed to non-Apple apps;then explosiveApp StoreGrowth

Apple’s Disruptive Products & Value Chain Design

RetailStores

AppStores

9

Li & Fung

Li & Fung as a Two-Sided Platform:A Value Chain for Make-to-Order SupplyChains

MaterialsSuppliers

FactoriesBrands Retailers

Design, Marketing, SalesSourcing, Production Orchestration,

Logistics

Model to Assess Disruptive Power(ex: Skype vs. Verizon; Tesla vs. Toyota)

1.1. Consumers care about price, primary performanceConsumers care about price, primary performance(transport or communication) and ancillary(transport or communication) and ancillaryperformance (carbon footprint, extra features) of aperformance (carbon footprint, extra features) of aproduct/service.product/service.

2.2. Incumbent has integral value chain, good at productIncumbent has integral value chain, good at productquality and primary performance. quality and primary performance. Rich in complementary assets.Rich in complementary assets.

3.3. Entrant has modular value chain, good at innovativeEntrant has modular value chain, good at innovativeservices/features and ancillary performance. services/features and ancillary performance. Quick atQuick atadding features.adding features.

4.4. Each firmEach firm’’s product/service has some degree ofs product/service has some degree ofpositive network externalities (e.g., the larger the userpositive network externalities (e.g., the larger the userbase for Skype or electric vehicles, the more attractivebase for Skype or electric vehicles, the more attractiveto new users).to new users).

5.5. Each firmEach firm’’s product/service has some degree ofs product/service has some degree ofswitching costs.switching costs.

11Integrated Value Chain: Good at Quality

Modular Value Chain: Good at Innovation, Speed

Customers(care about

quality, innovation)

.Incumbent

Entrant

12

Technology and Industry Disruptions

TechnologyDisrupEon

NoTechnologyDisrupEon

IndustryDisrupEon

NoIndustryDisrupEon

•WeakIncumbentNetworkEffect•StrongEntrantNetworkEffect•ConsumerhighlypricesensiEveandwillingtoriskadopEnginnovaEveservicewithlowqualityandcompaEbility

QuadrantNotRelevant •StrongIncumbentNetworkEffect

•ConsumersvaluequalityandcompaEbilityoverinnovaEonandlowprice

•Incumbentscanaffectswitchingbehavior•Incumbentsinnovatewhilemaintainingquality•Incumbentscontrolcomplementaryassets•EntrantsstruggletoofferqualityduetolackoffuncEonalcontrolormarketpower

Electricvehicles

Digitalmusic

Linuxvs.Windows


•StrongNetworkEffect



TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

?

DISRUPTION IN COMPUTING:THE COMPUTER IS PERSONAL

PERSONAL COMPUTERS DISRUPT MAINFRAMES & MINICOMPUTERS

DISRUPTION IN COMPUTING:THE COMPUTER IS PERSONAL

PERSONAL COMPUTERS DISRUPT MAINFRAMES & MINICOMPUTERS





TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

IBMPC’sbeatbackApple&Tandy.

DISRUPTION IN COMPUTER DISTRIBUTION:CAN PERSONALIZED DESIGN & DELIVERY

OF PC’S DISRUPT TRADITIONALCHANNELS?





TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

DISRUPTION IN COMPUTERDISTRIBUTION: THE DESIGN &

DELIVERY IS PERSONAL





TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

DellofferscloneswithlowerpricesandpersonalizaEon.IBMRetailchannelsaremillstone;nolongercomplementary.

Disruption in News Delivery: News from GoogleNews & Blogs; Ads by Google

Video clips on YouTube; Ads by Google Classified ads on Craigslist.

17


•StrongNetworkEffect•ConsumervaluequalityandcompaEbilityoverinnovaEonandlowprice


TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

?

Disruption in News Delivery: News from GoogleNews & Blogs; Ads by Google

Video clips on YouTube; Ads by Google Classified ads on Craigslist.

18




TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEonConsumerslikefree

news;GoogledisintermediatescontentproducersfromadverEsers.

19

Disruption in Software & Content Distribution?"There's An App For That"

19




TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

?

20

Disruption in Software & Content Distribution?"There's An App For That"




TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

AppinnovaEonisFast&Flexible;NewPladorms(e.g.,iPhone+iTunes)formnewComplementaryAssets.

Disruption in Social Networking;Facebook TV:

Friends don’t let friends watch alone.Social network threatens content aggregators

21




TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

?

Disruption in Social Networking;Facebook TV:

Friends don’t let friends watch alone.Social network threatens content aggregators

22




TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

SEllupforgrabs?Price&EntrantNetworkvs.Quality&ControlofcomplementaryAssets(content)

Disruption in Storage & Time Shifting;what I want; when I want; where I want.

Tivo threatens traditional content aggregators?

23

?•WeakIncumbentNetworkEffect•StrongEntrantNetworkEffect•ConsumerhighlypricesensiEveandwillingtoriskadopEnginnovaEveservicewithlowqualityandcompaEbility



TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

Disruption in Storage & Time Shifting;what I want; when I want; where I want.

Tivo threatens traditional content aggregators?

24




TechnologyDisrupEon


IndustryDisrupEon

NoIndustryDisrupEon

CableCompanycanofferDVR;Contentcontrolalsokeyasacomplementaryasset.

a. Disruption in Computing; devices are personalb. Disruption in Networks; connectivity is ubiquitousc. Disruption in Value Chain Clockspeeds; value capture is fleetingd. Disruption in Content Control: catch me if you cane. Disruption in Intelligence; whose pipes you calling “dumb?”f. Disruption in Regulatory need; herding cats is tougher than

caging an elephantg. Disruption in Consumer & IP Protection: one phish, two phish;

spam phish, screw phishh. Disruption in Eyeball Monetization; glue ads to search resultsi. Disruption in Consumer Experience; seduce with “velvet

handcuffs” (ref G. Hamel, WSJ)j. Disruption in Software Distribution; "There's An App For That"k. Disruption in Social Networking; friends don’t let friends watch

alonel. Disruption in Storage & Time Shifting; what I want; when I want;

where I wantm. Disruption in Content Production: webcams & flips r’ usn. Disruption in Control: it’s my tube now. 25

The Future of TV and Video Value Chains;Collisions of Multiple Disruptions

Part I: In the Beginning there was Darkness . . . , then Black & White . . . , thenVertical Integration, then Technicolor, then CNN, then YouTube on iPhone

1.The Wizard of DOS (or The Gates of Hell?)a. How the PC & Gates won the (three-sided) standards warb. When open trumps closed – and when notc. The PC as a platform for computing, communications, innovation, . . . and

television

2.CyberSpace: The Final Frontiera. Packets & Routers vs. Circuits & Switchesb. Convergence and The Internet Hourglassc. Cable Push vs. Viewer Pulld. The Broadband Incentive problem

3.Journey to the Center of the Neta. Core-Edge Dynamicsb. Value Chain Dynamicsc. Business Model Collisions

Television Reloaded: The Story of Story Telling

Fine, Klym, Clark, Lippman

26

Part II: “For the locusts covered the face of the whole Earth; and theydid eat every herb of the land and all the fruit of the trees”

4.The Tortoise and the Internet Startup –a. Disruption dynamics; Innovation Dynamicsb. Legacy Telecom and Old Mediac. Attack of the Killers oIPsd. are no match for the myriad of new entrants enabled by the Web; case studies

of interesting startups and failing oldsters; Innovation dynamics

5.Green Eggs and Spam –a. The “bad guys” and the Dark Side of the Internet & Openness

(one phish, two phish; bait phish, screw phish) b. The role of governments, laws, courts

6.Ali-Baba and the 40 million downloaders –a. the story of digital music – from napster to appleb. The stories of books and newspapers;c. perspectives of content owners vs pipe owners vs users

7.David becomes Googliath –a. rise of Google and impacts on the media/communications landscape;b. role of advertising as payor;c. Youtube and user-generated content;d. Maps, location, and Privacy 27

Part III: “I will deliver them to the land flowing with milk and honey”

8.King Kong vs Jobszilla –a. Competition delivers value to consumers;b. The iPhone/iPad story & leveraging of the Apple platform;c. The user experience and Apple’s “velvet handcuffs”;d. revisiting openness vs closedness

9.Planet of the Apps –a. App stores and the app culture

10.The Mickey Mouse Cluba. FaceBook and Social Networkingb. Facebook TVc. Friends as Aggregators

11.Thanks for the Memories –a. I want a copy of everything vs. streaming from the clouds;b. TiVo, in the value chainc. Future thoughts

11.TV is a Many-Splendored Thinga. Future thoughts 28

29

All Conclusions are Temporary

Clockspeeds are increasing almost everywhereValue Chains are changing rapidly

Assessment of value chain dynamics

Build Strategiesand Roadmaps

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