breaking culture

Value Networks and Economic Power

As I said earlier, Clayton Christensen set out to understand why very successful incumbent firms were unable to modify their existing model of production to take into advantage of what he calls disruptive innovation.  In contrast to sustaining innovation, at which these successful firms excelled, disruptive innovation called forth markets that had thinner margins, lower tech demands, and lower demand overall.  This disruptive innovation seemed to be a diversion of important company assets, until it was apparent that it would overtake the primary market, at which point it was too late to competitively shift production to that innovation.  These companies customers were adamant that they didn’t want this innovation-until they did.  As mentioned before, one way of phrasing this is that sometimes you just shouldn’t listen to your customers. 

For a more elaborate explanation, Christensen develops the idea of the “Value network” which he defines as, “the context in which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors and strives for profit” (32).  This is another way of saying that mainframe manufacturers are forced by their market position to compete with other mainframe manufacturers in serving mainframe customers.  But it is also a way of pointing out how emergent technologies are eventually able to overtake incumbents: they are able to meet the needs of their own value network and eventually able to meet those of the higher market value networks above them.  Christensen finds it telling that, “each value network exhibits a different rank ordering of the most important product attributes, even for the same product” (34).  While this is mostly just a novel way of describing a pretty straightforward process—emergent technologies/manufacturers become dominant when they can serve both the emergent and dominant markets—the idea of the value network is important in so far as it does not appear in Lewis: this becomes a telling absence, as I’ll elaborate on shortly.

As for Christenson, he provides a unique and refreshing perspective on the way these technologies change and how this relates to management’s usual understanding of navigating this.  This is a change from the narratives he cites early in his study, which focus on clear successes and clear failures without specifying how either got that way—or realizing the contradiction of today’s unequivocal success becoming tomorrow’s obvious candidate for failure.  However, it is interesting that he resists noting just this narrative within his own analysis—and how this can, perhaps, create an even more productive narrative in relation to Lewis’ analysis of OA.

In Chapter 2 of his analysis, Christensen uses the company Seagate as the example of organizational failure, particularly in its failure to develop the 3.5” disk market.  It is eventually overtaken in this market by the upstart Conner Peripherals, thus proving the Disruptive Innovation hypothesis.  The latter is supposed to explain, according to his subtitle “How new technologies cause great firms to fail.”  But Seagate is actually a curious example of a company that managed to navigate these changes rather well.  Because he’s focused on the failures, Christensen doesn’t seem to be able to account for this success.

Seagate started out, in Christensen’s own account (and that of the wiki on the company), as an emergent 8” disk manufacturer (originally called Shugart) in 1978. It hit its stride in the emergent market for 5.25” drives, where it became one of the premier firms.  Conner Peripherals, an offshoot of Seagate, founded in 1985, did indeed become a legendary upstart, overtaking its corporate ancestor in the market for 3.5” drives (in a 1990 feature, the New York Times declared it “the fastest growing start-up company in US history”).  But even this separation is curiously unequivocal. 

Although much of the history is clouded in speculation, there are a few facts.  While Conner profitably manufactured the 3.5” drive, its invention is credited to a Scottish firm, Rodime.  Conner’s 3.5” drive evidently overlapped enough with Rodime’s plans that it eventually settled a lawsuit for patent infringement for an undetermined amount (speculation put it at about US$10million.)  After winning the suit, Rodime went on to try suing every other manufacturer of 3.5” drives, and especially targeted Seagate, which, despite Conner’s success, remained one of the key players in the market.  Its patent infringement case was eventually dismissed, but on appeal it was revealed that Seagate had evidently colluded with other players in the market, telling them to refuse Rodime’s request that they license their technology against its patent (i.e. Seagate’s council told them to act as if Rodime’s patent was illegitimate) promising to give other firms legal cover so long as they refused these requests (i.e. so long as they didn’t follow down Conner’s path, whether because Rodime had a case originally, or Conner in acting as if it did, created a market that others might then be forced to pay into).  A few years later, after Conner’s incredible rise, Seagate acquired Conner and it remains one of the key players in the disk drive industry today.  Though Christensen glosses over this tenacity, he ends his Value Networks chapter by observing that Seagate had positioned itself well in the then emerging (c. 1997) flash memory market by retaining its stake in the upstart SanDisk.

In retrospect, it seems odd that Christensen would overlook this narrative of success, but I’m sure there are many good reasons for it—primary of which it doesn’t gel with his overarching hypothesis. He tests the external validity of this hypothesis in a variety of other fields (mechanical excavators, steel mills, insulin and several others) so I’m not willing to claim this counter narrative does any mortal damage to his overall concept of disruptive innovation: as his accumulated data on, for instance, the number of entrants vs. incumbants in each market shows, Seagate is a deviant case (oddly, though, the deviant case he tries to use as the norm). 

However, in looking forward to Lewis’ adoption of Christensen’s concept it is worth mentioning an alternative scenario: instead of an industry leader succumbing to disruptive innovation, it can use the heft it has in terms of market position, economic muscle, and a slick legal team to outmaneuver, destroy or simply acquire the leaders in the emergent, disruptive technology.  And certainly in the intervening decade and a half or so, these tactics have fit into a pretty reliable strategy of inoculating large firms from upstart competition.  This scenario may also be counter to the more ethical mainstream of business education, but in the Hobbesian playscape of neoliberal capitalism, its hardly rare. 

As such, in looking back to my original post on Christensen, it is clearly possible that the regulatory system may have less to do with helping to choose between competing business models (though his final chapter on the electric car seems prescient in its argument that, even if California’s policies hadn’t required it, the technology should be dealt with as disruptive.  The way US carmakers lost out to Japanese confirms his recommendations pretty clearly.)  However, the lack of political intervention can as easily result in an imbalance of economic power, where monopoly or oligopolies are able to assert an inordinate amount of market dominance.  This was eventually the charge that Rodime leveled against Seagate—and which the courts roughly agreed with.  There is clearly a lot of fuzziness around the facts in this particular case, but the fact as is that economic and political power are not taken into account.  Christensen’s framework seems constitutionally unable to allow for such a scenario.  And in this way, it does demonstrate the kind of technological cum market determinism I sensed early on, just from a different direction. 

My #2 concern is only confirmed indirectly, but this is because I had read his meaning of “bottom,” “middle” and “top” of the market to mean something like Upper, middle and lower income segments.  In fact, Christensen (and likely business textbooks in general) has little interest in speaking in these kinds of terms.  As a guiding assumption, they may think these technologies eventually trickle down to the average income household, but this is not at all what Christensen means: he is speaking about emerging, low margin areas of the market vs. established, high margin areas.  In a sense there is overlap in these distinctions with the purchasing power of various income segments, but only indirectly.  When low margin 5.25” disk makers provided them to desktop PC manufacturers, they were mostly serving very high income families (and possibly educational institutions) who could afford these luxury devices.  As these disks became cheaper to manufacture, they joined the downward price trajectory of most components of the PC, eventually making it possible for more people to own a PC.  I’m not sure how this gels with the overall trajectory he maps, as it would seem that, eventually this move from low margin to high margin would return again to low margin, only this time with a high volume.

In any case, arguing against the overall hypothesis is my (admittedly unrefined) hunch that, while the very high margin business might fade some, it is pretty certain that customers remained for some of these producers.  In other words, there would still have been a need for the 5.25” and then the 3.5” and then the 2.5” disk, long after the top end of the market had moved on.  In fact, ending with these last two form factors makes wraps up his story nicely since these continue to be used, with the sustaining innovation leading the way towards ever increasing data/space ratios (with slimmer platters being the objective).  5.25” disks are now obsolete, but Seagate was making (or at least shipping) them until after Christensen’s book was published (1998). My point here is that there is always a staggering trend of adoption and obsoletion in the market and some of these companies would still need to serve the stragglers.  For instance,  it is now September of 2011 and the last producer of the 1.44 MB floppy disk ceased production only a few months ago.  Digital TV conversion in the US, despite beginning in 2009 (and being officially delayed by 6 months), won’t actually be over till 2015. 

In this way, he provides an implicit approval of what, in my #3 issue in the previous post, I call the myth of the clean break.  It is on this myth that I will claim David Lewis bases most of his argument for the inevitability of open access.  When this is joined with his lack of attention to the value networks of libraries and scholarly communication, it makes for some problematic conclusions - or more accurately, a limited range of possible scenarios.