Innovation plays out in a number of ways. In some cases, it’s the collaboration between university laboratories and their business affiliates that has an edge. For example, in biotech, competitive advantage often depends on the ability to commercialize ideas from university research laboratories as quickly as possible.
In other cases, an entrepreneur’s garage has an advantage. When there are hundreds or thousands of potential business models that might succeed, the best way to find out which will succeed is to allow each brave or disgruntled genius to try out his own approach. Many fail, but a few will succeed. This is the essence of the Silicon Valley model.
The third way is the Kaizen way of continuous incremental innovation. In this model, an established company enters a new field, and makes products. There may be initially some setbacks, but it learns quickly, iterates, and improves efficiency and quality.
The Japanese have applied the Kaizen method to get a competitive position in a host of industries. Hybrid cars are a good recent example. The initial version of Toyota’s Prius wasn’t that great but their third generation of these cars is a hit. Much as what Toyota and Honda have done with hybrids, Kyocera, Sharp, Sanyo and Mitsubishi Electric are doing, using Kaizen, to relentlessly drive prices of solar cells down by 7 percent a year to emerge as market leaders. Kaizen method works best for products where patient capital is needed and the lifetime needs for capital are rather high.
However the relentlessly falling capital intensity for building new products is enabling startups move into territory that was dominated by established players. This dynamic has played out in the telephone switch space in the past. In the early-80s there were only 3-4 companies worldwide that had the wherewithal to invest in creating a digital telephone switch. But by the late-90s, the capital requirements had reduced and the new generation telephone switch, now called softswitch, could be built on standard high-performance computer platforms. Not surprisingly startups became the innovation leaders in this category. A similar change is about to unfold for radios in mobile networks (called base transceiver stations). The next generation products will use software-defined radios built on mostly off-the-shelf platforms. It’s a safe bet that startups will set the pace of innovation in this space.
This new battleground where established companies and startups are fighting over next generation products is where the interesting action is taking place. One can see this as a war between two different innovation ideologies; a war that is fueled by the shrinking capital needs of new products due to the emergence of modular value chains and R&D globalization. And this war is playing out in a range of industries, right from telecom, enterprise software, pharma/biotech to the entertainment industry. The outcomes of many of the individual battles are critical for they will shape the new industry structures. Let me know if you see things the same way.
Here are a few thoughts on the differences between “Disruptive” and “sustainable” innovation. This is based on Christiansen’s Innovators Dilemma. Christiansen’s identifies a clear wall (for an organization) between the two types, A wall that cannot be crossed easily.
Innovation is disruptive for an organization if it cannot be absorbed by the organization because its processes or value systems hinder the absorbtion. By the same logic organizations can take up sustainable innovations because their values support the direction.
Some examples
From the Innovator’s dilemma:
The 3.5″ drive manufacturers could not look at the 1.5″ drives because the markets, profitability was different. this hit their processes (specifically their value chain, how their sales folks identified the target market and sold there).
Here are a few that are developing in the telecom Industry. As I see it, the telecom industry has a couple of similar “walls”, some of which the barbarians are breaching and some that are being setup for being pulled down.
The first is the advent of VoIP and it’s attendant implications. The cost structure for deploying and delivering “traditional” telephony is completely different from the VoIP paradigm. What is worse (for the incumbents) is that those who have used VoIP are used to receiving free calls (and people like Skype have exarbated that). Customers would not like to be migrated to a low cost regime if a costless version is available - and network quality will not be an acceptable reason. The value systems of the Incumbents is expecting a certain ROI from the service as well as the intrinsic assumption of owning everything end-to-end. Skype has zero ROI and doesn’t own the network. This change (for the incumbent) will be extremely painful (basic VoIP service will be free over time) as they will have to gut their own processes and expectations in quite a few areas.
The second are a few intrinsic assumptions that the telecom industry is based upon. A few are:
- We must own the infrastructure end-to-end to be able to offer reliable services and
- We must own the intelligence that drives value to customer within the network.
- A voice call needs 64 Kbps (DS0) thruput.
This assumption is being disrupted by the IP network and the players within the IP field. Some of the limitations that result from the assumptions of the telecom industry have made are:
- There hasn’t been a Google or Amazon in the telco field. The ownership of the infrastructure is much too stifling for new and innovative services to come up. Companies like Google and Amazon enrich the entire IP network, attracting more customers. This is one of the reasons why data services are growing faster than voice services. If videophony does take off, it will be in the IP networks (eg. Skype) and not the telecom networks.
- SS-7 has a lot of extremely useful user functionality that never took off (e.g. call forwarding etc.,) because the users were never given simple to use tools to manage these. IP networks have already begun to implement some of these from a different perspective (e.g. Yahoo chat - you can take your laptop to anywhere in the world and log into yahoo chat and all your IMs and calls will get to you).
- Skype uses higher fidelity codecs. A lot of my friends have migrated to skype because you can “hear better” and catch voice nuances better. This opens completely new opportunities. I’m waiting for the day when I can play a CD down a Skype connection.
There are more of course…