Some of the most well-managed companies have failed in the past because they were too well managed.. and listened to their customers and invested in technologies to give to their customers what they wanted. They propose that most of the presently well-considered management principles are actually just situationally appropriate.
Why good management leads to failure:
The difference between sustaining and disruptive technologies.
The pace of development at outstrip the rate of development e-market needs. The relevance and competitiveness of technologies change. For instance, you keep improving mainframe computers beyond customers' needs.
Customer and financial situation of successful companies determine their future investments, relative to the entering firms.
Disruptive technologies:
Bring a very different value proposition compared to existing technologies. They may be lower in performance than the existing technology, but they offer something new which few new customers value.
Why people don't want to invest in disruptive technologies:
They are simpler and cheaper, offer lower margins.
They are first commercialized in emerging markets.
The most profitable customers of leading firms don't want or can't use these products.
So, since such tech is usually used by the least profitable customers, big companies don't want to invest.
Principle 1: Companies depend on customers and investors for resources
Best performing companies are best at providing their customers what they want. They don't invest in what the customers don't want until the customers start wanting it. But then it's too late. The best way out is to create an independent sub-organization that takes care of it.
Principle 2: Small markets do not offer sufficient opportunities to large companies
Considering the book values of the shares, it becomes more and more difficult o justify investment in small markets from the perspective of immediate gains.
Principle 3: Markets which don't exist can't be analyzed
Market research theories work best for sustaining technology. The record of people working on disruptive technologies is dismal. You cannot quantify a market that doesn't exist.
Principle 4: An organization's capabilities define its a disability
Hiring the right people is not enough. Organization capabilities depend on:
(A) The processes which convert the input to output.
(B) Organizational values, which managers use to make the decision.
People can be flexible to serve the processes and values at the organizations.
Principle 5: Technology supply may not equal market demand
While disruptive technologies work in small markets, big companies don't feel that they can be scaled up. While the established companies keep moving upwards in price and performance, they create a void in smaller markets. This void is filled by smaller companies.
Does the break-neck speed of improvement lead to failures?
Most of the incumbents have not lost to a competitor, they lost to competing technology. For instance, personal computers to the mainframe. A detailed review of technology development of hard drives, and how the mainframe drive manufacturers never considered the small disk manufacturers as competition, till the mainframe had to give way for minicomputers. Very detailed analysis.
Is it the organization and management failure?
First: most organizations are organized in groups working on individual components, they innovate on individual components. There is no one keeping track if the product itself is any good.
Second: An organization has to decide which characteristics of a given technology they want to invest in. If they bet on the incorrect dimension, they may crumble. For example, if weight is going to be important and they bet on volume.
Value network (proposed by the author): The context within which a firm identifies and responds to customers' needs, solves problems, procures inputs, reacts to the competition, and strives for profit.
VALUE NETWORK
There develops a value chain that leads to a final product. Each component is produced by a specialized organization and has different attributes.
Metrics of value: The same product may be valued much higher in one application than another. For instance, while laptop computers may pay quite high for size reduction per MB, this is not a required trait for mainframe computers.
The cost structure of value: Some aspects of the value chain may have a higher value than the others. Usually, most of the effort is focused on those aspects which cost the most. For instance, in case of mainframe computers, a 50-60% margin is needed due to high cost of distribution. The difference between an established firm and an incoming firm is its location in the value chain.
Technology s-curves and value network: Slow growth, accelerated growth, slow growth. Identify when the maturity is reached, to invest in new technology.
Managerial decision making: Each part of the value chain tried to innovate where they can make money.
Step 1: Disruptive tech develops in established firms: most of the time, but commercialized by new entrants.
Step 2: Marketing personnel ask from present customers.
Step 3: Established firms set up a pace for sustained innovation.
Step 4: New companies formed for new technologies.
Step 5: Entrants move upmarket
Step 6: Established firms jump on the bandwagon.
He looks at the disk drive industry from: (a) capabilities perspective (b) Organization structure framework (c) the s-curve framework y using data in retrospect (d) value network framework.
Perspective from value network:
(a) Each step of the value network works on specific criteria of product performance. It is also defined by the cost-structures suggested by the present customers.
(b) For the commercial success of an existing company, they need to address innovation n the existing value network. They usually were the innovation in their industry.
(c) The established firm's lack of attention to a non-competing technology becomes fatal when two different trajectories interact. This interaction also changes the rank order of the attributes.
(d) New firms have an attacker advantage. While the technology is not that different, the difference s in the architecture. The biggest roadblock is that the established companies are unwilling to go into a new value network
(e) It can mostly boil down to the flexibility which the new entrant has, compared to the old ones.
MECHANICAL EXCAVATORS INDUSTRY:
Moving from steam-powered o diesel-powered wasn't a disruption, and the established companies transitioned well. But when the architecture changed due to the hydraulics technology, old ones failed.
Once the lesser quality technology s good-enough, but offers other advantages, people go for it...Even if the existing technology offers better metrics.
Once a company has moved upmarket, into the high-margin consumers, they don't want to get down.
There are two theories which
When allocating innovation fund, companies se top-down approach and fund projects with maximum return. This is usually the projects to move upmarket.
As the ideas bubble up from bottom, middle managers chose relatively safe options. In resource allocation, the projects which target-present customers are alloted the resources preferentially.
It is also the best strategy to target the current market instead of running towards something non-existent. The good employees of a good organization will never let it happen.
If the customers of the company are themselves moving upmarket, the producers don't even realize that they are dragged along, eliminating themselves with the main market itself. As the companies move up, they create a void in the low market. This is where the new entrants enter.
The big companies chose to stay away because:
Big customers control the pattern. Since the customers don't want it...
Small markets don't solve the growth needs of big companies
Ultimate uses of the new technologies re still not well known.
Organization capabilities etc depend on the present business model. They find it difficult o change the architecture.
The disruptive technologies are usually into low value emerging markets... Not into established markets.
Tackle the above problems:
Embed a project in an organization whose customers need disruptive technology.
These orgAnizations should be small enough to be happy with small wins.
Fail quickly in search of new technology.
While you may use some resources of the big organization, don't transfer the values. Different values are needed.
Find a new market for new technology.
Customers as drivers:
A company usually follows what the customers need. Managers are just a medium. To manage disruptive technologies, one needs to fight the whole organization to change its course, or better, embed your technology in a smaller organization. A good company should not allocate resources which is not wanted by the customers. This is helpful for the personal career growth of the concerned manager as well as for the company profits.
It is very difficult to keep two companies with different par structures, one being disruptive and another incumbent, as one.
Should you be a first-mover or a follower?
They note that being a leader in sustaining innovation does not guarantee any advantage.
Being a leader in disruptive technology offers a huge advantage. Those following once the market was established made much less in revenue.
So, it is difficult or big companies to make enough money on emerging markets to sustain their growth. But all the metrics, including the share price, depend on this. So three possible approaches (third proposed as best):
Try to make the emerging market big enough, fast enough to be helpful: Gives example of apple newton PDAs which were impressive sales, but made just 1% of the big company, making them appear like a flop.
Wait, and enter the defined market as soon as it is large enough: gives an example of how the early mover may have a technology advantage.
Give the responsibility to a small organization that he growth is meaningful for them: Gives example that either a new spin-off or buy a small startup.
Markets that do not exist cannot be analyzed. They have to be developed both by the company and the customer. The plans should be for learning and discovery, rather than for execution. Since most of the top executives are trained in sustaining innovation, they can predict that innovation accurately, but cannot manage the fluidity of disruptive innovations.
Working harder and planning smarter is not really the answer. As experts forecast bout emerging markets is always wrong.
Failed ideas are different from failed businesses. Conserve resources as you move from idea to idea to find the winning one. Most of the successful ventures had to give up their original ideas and they helped learn what not to do.
No manager wants to put their neck on, for a technology that has a high probability to fail. They focus instead on the sustaining innovation.
In a disruptive market, the plan should, therefore, be to learn than o execute.
It is also important o keep in mind the assumptions based on which the resources are committed, especially n case of disruptive technologies.
It should, therefore, be understood that no one, the customer, or the producer knows the application of the technologies. It's a path of discovery for everyone. Don't believe what customers say, believe in what they do. Keep an eye.
Organizations have capabilities. If we put the same people in two different organizations, the results they achieve would be completely different. The organizations have THREE facets:
Resources.
The process is how employees create value out of resources. Processes usually develop as an answer to the task. But if the same process is applied in different contexts, they seem bureaucratic.
Values: Criteria based on which the decisions and priorities are made. They become more and more important as organizations become more complex.
The values also evolve with the company. Since value also determines the type of market a company focuses on, it changes as the company grows.
As the companies grow, they shift from resources (the initial people) towards processes and values. Startups which are not able to do so, flare out. The values given by the founders plays an important role in such cases. The processes and values slowly develop into culture. Therefore, changing becomes difficult as organizations grow.
While it is easy to change resources, it's not easy to change the process and culture. This can, however, be done by:
Acquire new organization: If the values and processes were the reason for acquiring, then it should not be integrated into the company.
Create new capability internally: this is difficult since the processes remain the same.
Create capability through spin-out organization: whether it is physically separated is less important than if it is independent of the resource allocation.
Industry leaders usually offer rate of performance improvement uch larger than the rate needed by the market. Historically, when this oversupply occurs, disruptive technologies get their opportunity.
The oversupply also changes the criteria by which the markets look at the product and technology. In case of oversupply of the basic attribute, like needed data storage, by established market and just enough data by disruptive disk drive of smaller size, given the latter just satisfies the need, cost per mb doesn't remain the criteria anymore. This criteria keeps changing.
A product becomes commodity when what is on offer exceeds what market demands. Thereafter, the differentiation doesn't matter. The customer need in such situations are satisfied by more than one company, and the differentiation doesn't matter.
Evolution market:
Buying hierarchy passes 4 phases:
Functionality, when there are no competition.
Reliability, when tgere are more than 1 competition.
Convenience, when two or more competition have reached equivalent reliability. Of the product and services.
Price, when all the levels have been passed.
Characteristics of disruptive products:
The weakness of new technology s their strength: the same property of the product which makes them useless in mainstream markets makes it sell in a disruptive market. It should, therefore, be seen as a marketing challenge.
Disruptive products tend to be cheaper, reliable and more convenient to use that established.
The supply usually vershoots the demand because companies listed to the strongest customers... While demands also overshoots the demand of the mainstream.
How markets work:
Move up in the market, abandoning smaller market.
March in lock-step with the customers need. Catch up with competition.
Create technology trajectories. Make people know what they want. Since there is no performance oversupply, since Microsoft always demands more than the market has, companies like IBM are still at the top.
As disruptive technologies do not fit the business models of established businesses, they also do not fit the methods developed by the value chain. He, therefore, proposed that the mainstream gasoline dealers will not agree to distribute electricity.
Innovation: The Attacker’s Advantage
Rebecca M. Henderson and Kim B. Clark, “Architectural Innovation: The Reconfiguration of Existing Systems and the Failure of Established Firms".
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