breaking culture

On the innovation of not listening to your customers

As I said above, I’ve now had a chance to read Christensen’s book on the Innovator’s Dilemma in order to correct some of my understandings of it in a previous post. In that post, I had said there were four things fishy about the theory he espoused, but really only addressed the first one.  Not being a master of pith, I went on a little too long about what might be wrong with his theory without spitting out what I found suspect in it.  It’s hardly a novel problem: I thought it was a synthesis of two frequent kinds of determinism quite popular in business journalism. It was a technological cum market determinism: the new technology meets market demands in such an innovative way that it almost inevitably succeeds.

This is actually quite different than the overall tenor of Christensen’s book.  His main point is, for this reader anyway, refreshingly dialectical.  Instead of being a Whiggish retrospective of how obviously the winners were able to succeed, it is an account of how a previous set of winners were seemingly unable to modify their business model to take advantage of emerging trends.  What he finds is a counter-intuitive paradox, one that makes it clear why his book was such an important book in management education.  Instead of saying these losers were somehow mismanaged in a textbook sort of way, he concludes that they were run in a textbook fashion of success, but that, “there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure” (xii).  They listened to their customers, invested in technologies that would help their customers, and did careful market research and allocated their resources according to what would produce the best returns—all what business textbooks would recommend.  Yet they all ended up in failure.

What this implies at a deeper level is that many of what are now widely accepted principles of good management are, in fact, only situationally appropriate. There are times when it is right not to listen to your customers, right to invest in developing lower performance products that promise lower margins, and right to pursue small, rather than substantial, markets.

Christensen claims that he is able to decipher when a company should pile into a disruptive innovation (and emerging markets and customers) and when it should focus on its core market and sustaining its incumbent success.  It has evidently had some success in helping managers navigate these transitions, but for my purposes, the key issue is to understand what he means by a disruptive innovation and to judge how well this concept sits in the framework developed by David Lewis to describe Gold Open Access journals.  Lewis says these represent just such an innovation and, therefore, that prospects for the sustained innovations of the pay journal industry are bleak.  Open Access is inevitable. 

Therefore, first I will look at Christensen’s theory and then see how Lewis interprets it.

On not listening to your customers

Looking primarily at the high turnover industry of disk drive manufacturers (he compares the industry players to fruit flies, which are conceived, born, mature and die all within a single day [3]) Christensen notices a pattern.  Incumbent manufacturers are very good at managing sustaining innovations—making the product they produce even better—but are not good at detecting threats from disruptive innovations.  The distinction between these is fuzzy in the abstract, but in the concrete industry of disk
drives its becomes pretty clear, at least in the process he outlines.  (It’s important to note that most all of the “customers” Christensen discusses are actually computer manufacturers of various kinds, manufacturers who then have to sell some other product to end users).

He doesn’t speak about the underlying production process (i.e. the need to amortize investments in the incumbent technology rather than, as Marx might put it, continually revolutionize them, causing a complete devalorization of previous investments) except to casually note that, as time went on, more of this production was moved offshore.  He also doesn’t mention the way these disks fit with the overall computer industry (how do smaller disks relate to innovations in microprocessers, operating systems, user interfaces, etc) or of the overall development of computer uses or users (no mention, for instance, of the development of the internet or the increased training of computer science in higher education.) 

Instead, the level of abstraction he chooses is that of the industry.  And within the industry, it is mainly a contest between able incumbents who are hemmed in by their own success and the wily upstarts willing (and able) to take a bet on a new direction.  In this sense, it is a familiar story.

1. Successful incumbent manufacturers produce a very good product for other valuable incumbent manufacturers.  14 inch disk manufacturers serve mainframe producers, improving their product according to the needs and innovations demanded by those manufacturers—mainly the ratio of data to the space on the disk.

2. An emergent market develops around a derivative technology (or, more often, makers of a derivative technology help to develop a market for their product).  This tends to be taking the data/space ratio of current manufacturers and plugging it into a smaller disk. In other words, current manufacturers have the technology at hand, often even developing it to a large extent and even putting it to market tests: but they don’t invest the resources necessary to turn it into a market because it isn’t what their current customers (think they) want.

2a. (incumbent market) Mainframe manufacturers don’t need a smaller disk: they have the same size slot they always have and the smaller disk doesn’t meet their overall data needs (they wanted disks that would hold a whopping 400 mb of data).

2b. (emergent market) minicomputer makers prize size over the overall data capacity—they want smaller 8-inch disks to fit into smaller machines, even if they don’t hold as much.

3a. Incumbent manufacturers—need high profit margin to continue their business model.  This is only possible if they focus on developing sustaining technology incumbent market of mainframes instead of the much smaller and lower margin market for minicomputers.

3b. Emergent manufacturers—(notably, most often they are disaffected engineers from the incumbent manufacturers) don’t need these high margins, and can afford to take the “off the shelf” technology (i.e. the current data/space ratio) and package it in smaller format so that it can serve this emergent market. 

4. As the emergent market becomes much bigger because more people can afford this cheaper, if less advanced (because it holds less overall capacity) final product, emergent manufacturers create improvements on their technology specifications (increasing data/space ratio so that the small disk holds more), often at a rapid pace.  They are then able to move up market, entering, for instance, the mainframe market which, in a fickle turnabout, now finds it does, in fact, want smaller disks especially now that they can hold as much as the larger disks. 

4a. Emergent manufacturers now overtake incumbents as the former are more experienced and have technical know-how and manufacturing capacity to serve what is now the dominant market for disk drives.  They are now incumbents and the process starts all over again.

This process repeats when 8 inch disks are overtaken by 5.25” disks (for desktop PCs), 5.25” are overtaken by 3.5” (for early portables), and 3.5” are overtaken by by 2.5” (for notebooks/laptops).  Each time, according to Christensen, the incumbents weren’t willing to devote enough resources in the emergent market in a disruptive technology.  They weren’t willing to do this because they were listening to their current customers, who said they didn’t want the new technology, and a few minutes later wrote them checks (it was the 80s) for large sums of money in exchange for the sustaining technologies they insisted would sustain their involvement in the enterprise.  These customers couldn’t see that, a few years down the road, they would want that technology after all.  The incumbents, in these cases, would have done well to have not listened to their customers and instead found a way to devote resources to these emergent technologies.  Hence, sometimes it is wise to imagine that, like the management advice Christensen surveys, the adage “the customer is always right” is only “situationally appropriate.”

Next up: Value Networks and Economic Power