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MEDIA INNOVATION: Disruptive Technology and the Challenges of Business Reinvention
Richard A. Gershon, Ph.D.
Western Michigan University
Richard A. Gershon, Ph.D.
Professor, Co-Director
Telecommunications & Information Management
School of Communication, 1903 W. Michigan Ave.
Western Michigan University
Kalamazoo, MI 49008
Tel. (269) 387-3182 (O)
Email: [email protected]
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Abstract
This paper will examine the importance of innovation (and innovative thinking) to the
long term success of today‟s media and telecommunications companies. Specifically,
it will address two important questions. First, what does it mean to be an innovative
media business enterprise? Second, why do good companies fail to remain innovative
over time? This article will examine some of the people, companies and strategies that
have transformed the business of media and telecommunications. The arguments
presented in this paper are theory-based and supported by case-study evidence. Special
attention is given to three media companies: Sony Corporation, Netflix and Home Box
Office. A major argument of this research, is that even the best managed media
companies are susceptible to innovation failure.
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MEDIA INNOVATION: Disruptive Technology and the Challenges of Business Reinvention
INTRODUCTION
The lessons of business history have taught us that there is no such thing as a
static market. There are no guarantees of continued business success for companies
regardless of the field of endeavor. Schumpeter (1942) introduced the principle of creative
destruction as a way to describe the disruptive process that accompanies the work of the
entrepreneur and the consequences of innovation. In time, companies that once
revolutionized and dominated select markets give way to rivals who are able to introduce
improved product designs, offer substitute products and services and / or lower
manufacturing costs. The resulting outcome of creative destruction can be significant
including the failure to preserve market leadership, the discontinuation of a once highly
successful product line as well as the potential loss of jobs.1
Today, the international business landscape has become ever more challenging.
Global competition has engendered a new competitive spirit that cuts across countries
and companies alike. No business enterprise large or small remains unaffected by the
desire to increase profits and decrease costs. Such companies are faced with the same
basic question; namely, what are the best methods for staying competitive over time?
In a word, innovation.
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What is Innovation?
Rogers (1995) defines innovation as “an idea, practice or object that is perceived
as new by an individual.” (p. 11). In principle, there are two kinds of innovation; namely,
sustaining technologies versus disruptive technologies. A sustaining technology has
to do with product improvement and performance. The goal is to improve on an existing
technology by adding new and enhanced feature elements (Christensen, 1997).
A computer manufacturer, for example, is routinely looking to improve on basic design
elements like speed and throughput, processing power and graphics display. In short,
a sustaining innovation targets demanding high-end customers with better performance
than what was previously available (Christensen, 2003).
In contrast, a disruptive (or breakthrough) technology represents an altogether
different approach to an existing product design and process. A disruptive technology
redefines the playing field by introducing to the marketplace a unique value proposition.
Consider, for example, that music recording technology has never been cheaper or more
readily accessible. The speed and efficiency of producing Internet delivered music using
MP3 file-sharing software has fundamentally changed the cost structure of music
recording and distribution on a worldwide basis. The combination of the Apple iPod and
iTunes media store has created the first sustainable music downloading business model
of its kind (Gershon, 2009). More importantly, Apple has redefined the future of music
retail sales and distribution. MP3 music file-sharing and E-commerce are the quintessential
disruptive technology. There is no going backwards.
This paper represents a unique opportunity to look at the importance of
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innovation and innovative thinking to the long term success of today‟s leading media
and telecommunications companies. Specifically, it will address two important questions.
First, what does it mean to be an innovative media business enterprise? Second, why do
good companies fail to remain innovative over time? This article will examine some
of the people, companies and strategies that have transformed the business of media and
telecommunications. The arguments presented in this paper are theory-based and
supported by case-study evidence. Special attention is given to three media companies:
Sony Corporation, Netflix and Home Box Office. These companies were selected
because they introduced a disruptive technology or service that fundamentally changed
the competitive business landscape following their respective product launch. In short,
they were absolute game changers. Preserving market leadership is difficult to sustain
over time. A major argument of this research, is that even the best managed media
companies are susceptible to innovation failure. The challenge, therefore, is how to
make media innovation a sustainable, repeatable process?
INNOVATION AND BUSINESS STRUCTURE
Innovation is important because it creates lasting advantage for a company or
organization (Hamel, 2006). It allows a business to develop and improve on its existing
product line as well as preparing the ground work for the future. Successful innovation
occurs when it meets one or more of the following conditions. First, the innovation is based
on a novel principle that challenges management orthodoxy. Second, the innovation is
systemic; that is, it involves a range of processes and methods. Third, the innovation is part
of an on-going commitment to develop new and enhanced products and services. There is
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natural progression in product design and development (Hamel, 2006). Table 1. provides
a clear illustration of the above principles.
Table 1.
Successful Innovation: Feature Elements
The innovation is based on a novel principle
that challenges management orthodoxy.
Sony: Walkman potable music stereo and
Playstation videogame system.
The innovation is systemic; that is, it involves
a range of processes and methods.
Dell Computer: Direct-to-home sales delivery,
Just-in-time manufacturing, 24/7 customer
support.
The innovation is part of an on-going
commitment to develop new and enhanced
products and services.
Apple: iPod, iTunes, iPhone
While most organizations recognize the importance of innovation, there is a wide
degree of latitude regarding the method and approach to innovation. For some business
enterprises, innovation is deliberative and planned. It is built into the cultural fabric of a
company‟s ongoing research and development efforts. Other times, innovation is the
direct result of a triggering event; that is, a change in external market conditions or internal
performance that forces a change in business strategy (Wheelen & Hunger, 1998).
There are three major kinds of business and technology innovation. They
include: 1) product innovation, 2) process innovation and 3) business model innovation.
Some of today‟s more creative media companies are innovative in all three areas.
Product Innovation
Product innovation refers to the complex process of bringing new products and
services to market as well as improving on existing ones. Highly innovative companies
display a clear and discernible progression in the products they make. They force themselves
to create newer and better products and challenge the competition to do the same.
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If successful, an original product innovation creates an entirely new market space and invites
a host of imitators to follow. For that reason, being first to market can represent a huge
advantage as evidenced by such companies as HBO, pay cable television; Sony, Walkman
portable music player; ESPN, cable sports network; Netflix, video home delivery service and
eBay, on-line auctioning to name only a few. The difference of a three to four year head start
can make a significant difference in helping to establish brand identity and market share.
Sometimes, the issue is not about harnessing so called “break through” technologies.
Rather, innovation (and innovative thinking) is also about finding new ways to improve
upon existing technologies and service applications. Product innovation allows a business
to develop and enhance its existing product line as well as preparing the ground work
for the future. Consider, for example, the dramatic growth of cell phone technology
among developing nations located in Southeast Asia, Latin America and Eastern Europe.
The deployment of cellular telephone systems (and adaptive solutions) are proving to be
faster and more cost effective than building (or reconstructing) traditional telephone systems.
This is especially true in those regions of the world with poor wireline infrastructure.
In urban areas, cellular telephone deployment eliminates the challenges of implementing
physical wireline systems that require negotiating rights of way clearance between telephone
carriers and cities, as well as the arduous task of cutting up city streets and stringing wires
on buildings and houses.
Some notable examples of media and telecommunications product innovation can
be seen in Table 2. What is interesting to note, is the transformative (disruptive) effect that
each of the said products had on the competitive playing field at the time.
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Table 2.
Media & Telecommunications
Transformative Product Innovation: Select Examples
Apple
Sony and Philips
Nokia
Walt Disney
Home Box Office
Amazon
the Personal Computer, Apple iPod
the Compact Disk
Mobile Internet 3G cell phone design
Theme parks and resorts
Premium television and film
E-Commerce delivery of goods and services
Sony & Philips Corporation, the Compact Disk (CD)
In the early 60's, the general junction laser was developed at MIT's Lincoln Labs
and later improved at Bell Research Labs. But it was Sony and the Philips Corporation that
would refine the idea into the modern compact disc (CD). In 1975, the optical and audio
teams at both Sony and Philips began collaborating on the digital recording of information
on to a laser disc. Sony President Norio Ohga, a former student of music, was enamored
with the possibilities of digital recording. He designated a small group of Sony engineers
to give the laser disc top priority.
In the meantime, Philips audio division in Eindhoeven, Holland was busy at work
on their own version of the optical laser disc. From August 1979 to June 1980, both
companies saw the value of collaboration as teams of engineers would alternate site visits
to both sets of laboratories in Tokyo and Eindhoeven. At a June meeting of the Digital
Audio Disc conference, both Sony and Philips presented a set of recommended standards.
In the weeks and months that followed, both Sony and Philips engineers worked together
toward refining the CD player (Gershon & Kanayama, 2002).
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Demonstrations of the CD were being made worldwide in preparation for the
planned launch of the CD in October 1982. Norio Ohga, for his part, was convinced that
CDs would eventually replace records given the technology's superior sound quality.
That said, however, Ohga recognized that the development of the CD would meet with
fierce resistance from many in the recording industry (including even some at CBS Records)
who felt threatened by CD technology. It should be noted that in 1968, Sony had entered
into a joint partnership with CBS records to form CBS/Sony records. That partnership
would prove vital in promoting the cause of CD technology.
It should be pointed out that the introduction of a disruptive technology often
meets with strong user resistance. In one such product demonstration, executives stood up
in an auditorium in Athens, Greece and demonstrated their opposition to business change
by chanting "The truth is in the groove. The truth is in the groove." (Nathan, 1999, p. 143).
To them, the CD format was an unproven technology made by hardware people who knew
nothing about the software side of the business. Worse still, the conversion to a CD format
would require enormous sums of money while possibly destabilizing the entire music
industry.
On August 31, 1982, an announcement was made in Tokyo that four companies,
including, Sony, Phillips, CBS and Polygram had jointly developed the world's first CD
system. In time, the Sony / Philips CD became the defacto standard throughout the industry.
By 1986, CDs had topped 45 million titles annually, overtaking records to become the
principal recording format. CD technology would ultimately redefine the field of recording
technology and spawn a host of new inventions, including the portable CD music stereo, the
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digital video disc (DVD) and the CD based videogame console. For Sony, CD technology
would prove invaluable for a soon-to-be launched videogame system called Playstation.
Process Innovation
Today, innovation is about much more than developing new products. It‟s about
reinventing business processes and building entirely new markets to meet untapped
customer needs. Davenport & Short (1990) define business process as "a set of logically
related tasks performed to achieve a defined business outcome." (pp. 11-12). A process
is a structured, measured set of activities designed to produce a specified output for a
particular customer or market. It implies a strong emphasis on how work is done within
an organization. In their view, a business process exhibit two important characteristics:
1) they have customers (internal and external) and 2) they cross organizational boundaries,
(i.e., they cut across different divisions and subunits).
Business process innovation involves creating systems and methods for
improving organizational performance. The application of business process innovation
can be found in a variety of settings and locations within an organizational structure,
including product development, manufacturing, inventory management, customer service,
distribution etc. (Davenport, 1993). A highly successful business process renders two
important consequences. First, a highly successful business process is transformative;
that is, it creates internal and external efficiencies that provides added value to the company
and organization. Second, it sets into motion a host of imitators who see the inherent
value in applying the same business process to their own organization.
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One technique for identifying business process in an organization is based on
the principles of value chain analysis proposed by Porter (1985). Value chain analysis
looks at the combination of business and technology activities through which a firm adds
value to the final product or service outcome (Kung, 2008). Table 3. provides a comparison
of five media and telecommunications companies that are industry leaders in the use of
business process innovation. Each of the said companies have rendered a host of imitators
in the way they have advanced business process.
Table 3.
Five Media and Telecommunications Companies
The Transformative Impact of Business Process Innovation
Home Box Office
In 1975, HBO helped advance the principle of
satellite/ cable networking by using satellite
communication to advance long haul television
distribution.
Dell Computers In the area of computer manufacturing, Dell created
a highly successful business model utilizing just-
in-time manufacturing techniques as well as direct-
to-home sales capability and 24/7 customer service.
Pixar Studios Developed computer generated animation graphics in
contrast to traditional cartoon animation techniques.
Examples include, Toy Story, Finding Nemo, Monsters
Inc., The Incredibles, Cars, Wall-E, Up etc.
Apple Computer Using Mp3 software technology, the combination
of the Apple iPod and iTunes media store have
created the first sustainable music down-loading
business model of its kind.
Netflix Has become the largest on-line DVD rental service
in the U.S., offering flat rate rental by-mail to
customers. Developed a highly sophisticated supply
chain management system.
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Netflix
Netflix is an on-line subscription based DVD rental service. Netflix was founded
by Reed Hastings in 1997. The story goes that Hastings found an overdue rental copy of
Apollo 13 in his closet and was forced to pay $40 in late fees. The business that emerged
from Hastings‟ frustration was a rental company that uses a combination of the Internet and
the U.S. Postal Service to deliver DVDs to subscribers directly. Netflix is the prototypical
example of process innovation in action. Netflix was founded during the emergent days
of electronic commerce (EC) when companies like Amazon.com and Dell Computer were
starting to gain prominence. Netflix offers the public a cost effective and easy to use EC
system by which consumers can rent and return films.
Understanding the External Competitive Environment. Netflix was conceived at a
time when the home video industry was largely dominated by two major home video retail
chains; Blockbuster Video and Hollywood Video as well as numerous “mom-and-pop”
retail outlets. Customers rented movies, primarily on VHS cassette, from a retail location
for a specified time period and paid a $3 to $4 fee for each movie rented. Companies like
Blockbuster fully recognized that renting a movie was largely an impulse decision.
Having access to the latest movie was a high priority for most would-be renters. Market
research at the time showed that new releases represented over 70% of total rentals
(Shih et. al., 2007).
The challenge for Netflix founder Reed Hastings was whether he wanted to
duplicate the “bricks and mortar” retail approach used by such companies as Blockbuster
and Hollywood Video. The alternative was to utilize the power of the Internet for
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creating an EC site for placing video rental orders and providing on-line customer service.
Early on, Netflix focused their efforts on early-technology adopters that had recently
purchased DVD players. In contrast, most video rental store outlets were still using VHS
cassette tapes. According to Hastings (2007),
We were targeting people who just bought DVD players. At the time, our
goal was just to get our coupon in the box. We didn‟t have too much competition.
The market was underserved, and stores didn‟t carry a wide selection of DVDs
at the time. (Shih et. al., HBS, p. 3.)
Adopting an electronic commerce (EC) model would require a method for
physically delivering the rented DVDs to the subscriber. The solution had to be simple
and cost effective. Netflix made the decision to partner with the U.S. Postal Service
(USPS) to deliver DVDs to its subscribers. DVDs are small and light, enabling inexpensive
delivery and easy receipt by virtually all U.S. customers.
Netflix and Business Process Innovation. There are two issues that are central to the
Netflix business model. The first is product inventory. Netflix has contracted with all major
U.S. studios and select international studios for the programming rights to distribute the
said movies as part of their program service. One of Netflix‟s operating strengths is that it
does not pay for its inventory. Instead, the company engages in a risk and profit sharing
arrangement with the major movie studios. Subscribers are able to access over 100,000
different titles that are listed on the company‟s website. The second issue is speed and
delivery time which is highly dependent on the working relationship between Netflix and
the USPS. Netflix considers delivery time to be a key measure of customer satisfaction.
In past years, Netflix has worked with the USPS to reduce the time it takes to deliver a movie.
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To that end, Netflix developed the now highly recognizable red envelope as well as to
presort all outgoing mail deliveries by zip code rather than relying on the USPS. Second,
instead of returning completed movies to the distribution center of origin, the USPS delivers
all returned movies to the closest Netflix distribution center.
Benefits and Features. Neflix offers its customers unlimited DVDs for a fixed monthly
price. In practical terms, the average consumer may only receive two to five DVDs in a
week‟s time given the particular service plan as well as personal viewing habits. The public
perception is that Neflix provides greater value to the consumer when compared to a
traditional video rental store which charges by the individual DVD rental unit. Second,
Netflix offers consumers greater convenience in the form of “no late fees.” The subscriber
is free to hold on to a specific video as long he/she wants (E-Business Strategies, 2002).
Third, Netflix has developed a highly sophisticated supply chain management
system that enables the company to offer subscribers good selection as well as fast turn
around time. Rather than adopt a traditional retail approach, Netflix has harnessed the
power of the Internet to create a virtual organization. The company maintains a series of
58 regional centers that serve as hub sites for DVD collection, packaging and redistribution.
Each regional hub site is staffed by approximately 20 staff members. They are tasked with
four primary responsibilities:
Remove DVDs from return sleeves
Inspect for broken or ruined DVDs
Repackage and route new DVDs to end customer
Maintain customer profiles
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Fourth, a big part of Netflix‟s success is the direct result of personalized marketing
which involves knowing more about the particular interests and viewing habits of one‟s
customers. To that end, Netflix fully utilizes the power of the Internet to promote a proprietary
software recommendation system. The software recommendation system makes suggestions
of other films that the consumer might like based on past selections and a brief evaluation that
the subscriber is asked to fill out. Netflix‟s interactive capability and recommendation system
changes the basic relationship between retailer and consumer and shifts the emphasis from
persuasion sales to relationship building.
The proprietary software recommendation system has the added benefit of
stimulating demand for lesser known movies and taking the pressure off recently released
feature films where demand sometimes outstrips availability. The focus on lesser known
films is in keeping with Anderson‟s (2006) principle of the “long tail.” The term describes
the niche strategy of businesses, such as Amazon.com or Netflix, that sell a large number
of unique items, in relatively small quantities. Such companies have learned the value of
selling small volumes of hard-to-find items to a large number of customers.2 The success
of the Long Term principle is made possible by the Internet and advancements in EC.
Fifth, Netflix has adapted to changing technology by offering a “watch instantly”
feature which enables subscribers (at no extra cost) to stream near-DVD quality movies
and recorded television shows instantly to subscribers equipped with a computer and
high speed Internet connectivity. What is interesting to note, is that the “watch instantly”
feature is delivering in real time and in greater numbers what cable television has failed
to achieve in terms of its highly touted video-on-demand system feature.
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Netflix has revolutionized the DVD rental business through the use of business
process innovation and its technology platform. As the company looks to the future, there
are a number of strategic challenges in the offing. First and foremost, is the competitive
threat posed by cable television and its future video-on-demand capability. Second,
as part of a cost savings move, the USPS is giving serious consideration to the elimination
of one of its delivery days from six to five. This can only hurt Netflix‟s commitment to
speed and turn around time. Netflix‟s “watch instantly” feature represents an important step
in addressing both issues. The solution, in part, will depend on the speed at which television
monitors and computers become one and the same entity. Hastings has said on several
occasions that Netflix‟s purpose is not to provide DVDs via the mail, but rather to allow
for the best home video viewing for its customers.
Business Model Innovation
Business Model Innovation involves creating entirely new approaches for doing
business. Business model innovation is transformative; that is, it redefines the competitive
playing field by introducing an entirely new value proposition to the consumer. Kim &
Mauborgne (2005) in a book entitled, Blue Ocean Strategy, introduce the term value
innovation as a way of describing how successful businesses capture uncontested market
space, and thereby make competition irrelevant. The metaphor of ocean refers to the
marketplace. "Blue oceans" refer to untapped or uncontested markets which offer little or
no competition for those companies prepared to swim the waters and design an altogether
new product or service. According to the authors, Blue Ocean strategy represents an
opportunity to create something different from everyone else (i.e., a new value proposition).
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In doing so, competition becomes irrelevant since no one has claimed that landscape by
offering the said product or service. They cite the example of Cirque du Soleil which
redefined the business of circus entertainment by combining theatre, dance and circus artistry
in a way that had never been done before. Some notable examples of business model
innovation in the field of media and telecommunications can be seen in Table 4.
Table 4.
Select Examples of Media and Telecommunications
Business Model Innovation
Google Helped advance the development of key-word
search Internet advertising
eBay Electronic auctioning on the Internet -- creating the
world‟s largest on-line marketplace.
HBO Developed the principle of pay cable television services
Apple Launched iTunes, the first sustainable MP3 music
downloading business.
Amazon Created a highly successful EC business model
Amazon.com -- specializing in the delivery of books
and other retail items
Home Box Office, Inc.
The real move to modern cable television began on November 8, 1972, when a
fledgling company named Home Box Office (HBO) began supplying movies to 365
subscribers on the Service Electric Cable TV system in Wilkes Barre, Pennsylvania.
That night, Jerry Levin, then Vice-President for Programming, introduced viewers to
the debut of HBO. The feature programming for that inaugural night was a hockey game
between New York and Vancouver and a film prophetically entitled, Sometimes a
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Great Notion. Today, HBO‟s premium television entertainment can be seen in more
than 150 countries around the world.
HBO & Innovation. From the beginning, HBO developed two important innovations
that helped to promote its rapid growth and development. First, HBO introduced the
principle of premium television (i.e., business model innovation). Specifically, HBO
achieved what no other television service provider had accomplished to date; namely,
getting people to pay for television. The principle of advertiser supported “free television”
was firmly engrained in the mind‟s of the American public. What HBO did was change
public perception about the nature of television entertainment. HBO offered a unique value
proposition emphasizing recently released movies and specialized entertainment that could
not be found elsewhere on the public airwaves. While HBO was not the first company to
introduce a monthly per channel fee service, they were the first to make it work successfully.
This marked the beginning of premium television entertainment and helped establish a new
business model for conveying television (Parsons, 2003, Gershon & Wirth, 1993).
Second, HBO utilized microwave and later satellite communications for the
transmission of programming, rather than distribution by videotape (i.e., business process
innovation). Prior to HBO, there was no precedent for the extensive use of satellite
delivered programming in the U.S. HBO's 1975 decision to use satellite communications
was significant in two ways. First, it demonstrated the feasibility of using satellite
communication for long haul television distribution. As a consequence, HBO was able
to create an efficient distribution network for the delivery of its programming to cable
operators. Second, the development of the satellite / cable interface would usher in a
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whole new era of cable programmers that were equally capable of leasing satellite time
and delivering their programs directly to cable operating systems, including: WTBS,
1976; ESPN, 1979; CNN, 1980; and MTV, 1981. Thus, was born the principle of cable
networking; that is, television programming designed exclusively for cable operating
systems and later direct broadcast satellite systems (Gershon & Wirth, 1993). The principle
of satellite / cable networking would transform the business process of long-haul television
distribution for evermore. As cable analyst, Paul Kagan once remarked:
Rarely does a simple business decision by one company affect so many.
In deciding to gamble on the leasing of satellite TV channels, Time Inc. took
the one catalytic step needed for the creation of a new television network
designed to provide pay TV programs. (HBO, Inc., 1984).
THE CHALLENGES OF STAYING INNOVATIVE
Authors Collins & Porras (1994) make the argument that highly successful
companies are those that are willing to experiment and not rest on their past success.
In time, tastes, consumer preference and technology changes. It‟s hard for even the most
innovative companies to stay current. Researcher Clayton Christensen (1997) suggests
that even the best managed companies are susceptible to innovation failure. In fact,
past success can sometimes become the root cause of innovation failure going forward.
Ironically, the decisions that lead to failure are made by executives who work for
companies widely regarded as the best in their field.
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The Innovator’s Dilemma
A basic argument of this paper is that even well-managed companies are
sometimes susceptible to innovation failure. The main reason is that such companies
are highly committed to serving their existing customers and are often unable
(or unwilling) to take apart a highly successful business in favor of advancing unfamiliar
and unproven new technology and service. Christensen (1997) posits what he calls the
innovator’s dilemma; namely, that a company's very strengths (i.e., the ability to develop
reliable suppliers, be responsive to customer needs and realize consistent profits) now
become barriers to change and the agents of a company‟s potential decline.
Accordingly, strength becomes weakness, and the same reasons that enabled a
company to become successful, are now responsible for its failure. Advancing new
technologies and services requires expensive retooling and whose ultimate success is hard
to predict. Such companies lose because they fail to invest in new product development
and/or because they fail to notice small niche players who enter the market and are
prepared to offer customers alternative solutions at better value (Birnbaum, 2005).
The anticipated profit margins in developing a future market niche can be hard to justify
given the high cost of entry; not to mention the possible destabilization of an otherwise
highly successful business. Therein, lies the innovator‟s dilemma.
The Innovator’s Dilemma and Product Life Cycle
Product Life Cycle theory was first proposed by Raymond Vernon (1966)
and explains the evolution of a product development from the point of its introduction
into the marketplace to its final stages of decline. The theory of product life cycle has
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evolved over the years and has come to include a series of four stages, including:
1) Introduction, 2) Growth, 3) Maturity and 4) Decline. After a product or service is
launched, it goes through the various stages of a life cycle and reaches a natural decline
point. Part of the innovator‟s dilemma is to know when in the course of the product
life cycle to innovate. The decision to innovate represents a strategic choice to discontinue
(or phase out) a mature product in favor of an untested one. The decision to innovate
has to occur well before the product hits its decline phase in order to allow sufficient time
for development. This means that the critical decision has to occur during the very time
when the product is mature and realizing its highest profits. (See Figure 1).
Figure 1.
The Innovator’s Dilemma and Product Life Cycle
Introduction Growth Maturity Decline
Sales Volume
?
Innovator’s Dilemma
The downside risk is that the manufacturer may get it wrong and thereby destabilize
an otherwise highly successful product line. The history of media and telecommunications
is replete with examples of companies faced with the innovator‟s dilemma. It is worth
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noting that many companies once regarded as highly innovative can momentarily lose their
creative edge only to rebound at a later time (i.e., IBM, Sony, Disney, Apple, Nintendo etc.).
In sum, few companies are able to remain consistently innovative across time.
There are four primary reasons that help to explain why companies fail to remain
innovative. They include:
The Tyranny of Success
Organizational Culture
Lengthy Development Times and Poor Coordination
Risk Averse Culture
The Tyranny of Success
Past success can sometimes make an organization very complacent; that is, they
lose the sense of urgency to create new opportunities (Tushman & O‟Reilly, 1997).
Collins (2001) makes the point unequivocally when he writes that, “good is the enemy of
great.” (p. 16). Companies, like people, can become easily satisfied with organizational
routines. They become preoccupied with fine-tuning and making slight adjustments to an
existing product line rather than preparing for the future. They are engaged in what MIT‟s
Negroponte (1995) describes as the problem of „incrementalism.‟ Says Negroponte,
“incrementalism is innovation‟s worst enemy.” (1995, p.188) The history of business is
filled with examples of past companies where senior management failed to plan for the
future. Such companies did not anticipate a time when a substitute product (or changing
market conditions) might come along and dramatically alter the playing field.
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IBM. As an example, IBM made its name and fortune in the development of
mainframe computers. At the start of the 1980‟s, IBM recognized that the computing
needs of the modern business organization was undergoing a major change. More and
more, business computing was shifting away from the centralized mainframe towards
the stand alone desk top computer. Initially, IBM got it right with the development of the
IBM PC. But the wild success of the IBM PC also began to undermine the company‟s
core mainframe business. Instead of adjusting to the future, IBM became a victim to its
own corporate bureaucracy and past success (Carroll, 1993). In the end, the company
could not let go of mainframe computer design principles despite the numerous studies
commissioned by senior management arguing to the contrary. In time, IBM would make
the strategic adjustment to move into business services, but not before a gut wrenching
corporate reorganization that took place at the start of the 1990s.
Organizational Culture
Organizational culture (or corporate culture) refers to the collection of beliefs,
values and expectations shared by an organization's members and transmitted from one
generation of employees to another. Organizations, (even large ones), are human
constructions. They are made and transformed by individuals. Culture is embedded
and transmitted through both implicit and explicit messages such as formal statements,
organizational philosophy, adherence to management orthodoxies deliberate role modeling
and behavioral displays by senior management (Pilotta, Widman & Jasko, 1988).
But what happens when organizational culture stands in the way of innovation?
What happens when being tied to the past (and past practices) interferes with a company‟s
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ability to move forward? The combination of past success coupled with an unbending
adherence to management orthodoxy can seriously undermine a company‟s ability to step
out of itself and plan for the future. Suddenly, creative thinking and the ability to float
new ideas gets caught up in a stifling bureaucracy.
AT&T. In November 1974, the U.S. Justice Department initiated a massive civil law
suit against AT&T. The Justice Department alleged that AT&T monopolized the business
of long distance telephony by exploiting its control over local telephone service and by
restricting competition from other telecommunication carriers and equipment manufacturers.
Effective January 1, 1984, AT&T spun off its 22 Bell Operating Companies representing
nearly three quarter‟s of the company‟s total assets. The long term consequence of that
action was the divestiture of AT&T; the largest corporate reorganization in U.S. business
history (Gershon, 2019). At the time, AT&T possessed 90.1% of America‟s long distance
telephone market. During the course of the next 10 years, AT&T‟s control over long
distance would steadily decline to 40% (Kirkpatrick, 1993).
The AT&T divestiture agreement, more than any other judicial action, forever
changed the business of telecommunications in the U.S. It was a watershed event that
ushered in a whole new era of telecommunication products and services for business and
residential users (Wilson, 2000; Horwitz, 1986). Moreover, the AT&T break-up sent a
loud and clear message to the world‟s Post, Telephone & Telegraph (PT&T) entities that
government protected monopolies was a thing of the past and that global competition in
the field of telecommunications had arrived (Gershon, 2009). As for AT&T itself, the
company that was once the largest corporation in the world, would in time become a
25
pale shadow of its former self. Despite several strategy initiatives and three corporate
restructurings, AT&T was never able to make the adjustment to a highly competitive
marketplace from its once secure position as a natural monopoly. In addition, the company
was faced with strategic business and technological changes that ultimately proved to be
an insurmountable barrier.
Despite the obvious competitive and technological challenges, one of the
company‟s most salient issues was how to address the organization‟s own internal culture.
The management at AT&T understood the external challenges. The problem was how
to overcome the company‟s institutionalized bureaucracy dating back to the days of
Alexander Graham Bell. The culture was sometimes irreverently referred to as “carpetland.”
As journalist Leslie Caulie (2005) writes,
Literally a century in the making, the culture was so omnipresent that it even
had its own nickname: the Machine. It was an apt moniker. Almost impenetrable
to outsiders, the Machine was a self perpetuating mechanism that was loath to
change… Process was a big part of the Machine‟s artistry. At AT&T‟s operational
headquarters in Basking Ridge, New Jersey, meetings could ramble on for weeks
or even months. It was not uncommon for AT&T execs to have meetings to talk
about meetings. Ditto for memos about memos… The Machine steadfastly resisted
change, and embraced those who did the same. (pp. 116-117).
Strategic changes in the marketplace, most notably competitive services from the
Regional Bell Operating Companies (RBOCs) Verizon and SBC as well as the advent of
cellular telephony proved insurmountable. Long distance telephony had become a
commodity and was no longer a sustainable business. Talented employees who attempt to
test the boundary waters of an organization‟s internal culture are met with such well worn
corporate phrases as “that‟s not the AT&T or IBM way,” or “that‟s the way we‟ve always
done it around here.” Sometimes what passes for management wisdom and experience
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is inflexibility masquerading as absolute truth (Hamel, 2006). It would only be a matter
of time before AT&T would be sold off in pieces to the highest bidder.
In 2001, AT&T sold its broadband division to Comcast Corporation for
$54 billion (Cauley, 2005). In January 2005, SBC, the second largest RBOC in the U.S.
acquired AT&T business and residential services for more than $16.9 billion. At first
glance, the proposed deal seemed to mark the final chapter in the 120-year history of
AT&T; the first great American company of the information age and the original model
for telecommunications companies worldwide. Instead, SBC recognized the value of
the AT&T brand and renamed the newly combined company AT&T in 2006.
Lengthy Development Times and Poor Coordination
The combination of changing technology and shifting consumer demands makes
speed to market paramount today. Yet companies often can‟t organize themselves to move
faster. Too often, companies that are highly compartmentalized can become immobilized
when it comes to fast turn around times given the entrenchment of existing department and
area silos. This, in turn, results in a lack of coordination that can seriously impair product
innovation and development times. According to a Business Week (2006) survey, the
number one obstacle to innovation is slow development times. Respondents noted that
the biggest challenge to product innovation was lengthy development times (32%) followed
by a lack of coordination (28%). (“The World‟s Most Innovative Companies,” 2006).
Lengthy development times and poor coordination are closely tied to the execution of
strategy. The problem often starts with executive failure to properly articulate the goals
of innovation change to the organization as a whole.
27
Microsoft Vista. In January 2007, after years of hype and anticipation, Microsoft
unveiled its Windows Vista operating software (OS) to a decidedly lukewarm reception
by the PC community, IT pros, and tech. savvy users alike. Instead of a revolutionary
next-generation OS that was suppose to have a variety of new features, the professional
business community got a slow, underperforming OS with very little going for it.3
Vista was plagued with performance and compatibility problems from the start.
Following its immediate launch, Vista proved significantly less stable than its predecessor
XP operating system. Computer users experienced more hard locks, crashes, and blue
screens in the first weeks of use than was the case of the XP operating system.
Considering that improved stability was one of the important reasons for creating Vista,
users were understandably upset. According to a now-public internal Microsoft memo,
8% of all Vista crashes reported during the months immediately following its launch
were due to unstable graphics card drivers.
A second problem had to do with performance speed. Today‟s computer user is
very mindful of the time it takes to process a file or connect to the Internet. Such routine
tasks are measured in seconds. Imagine what happens when that same task takes two to
three times as long to occur. Windows Vista OS was seen as anything but an improvement
in performance. In time, six different versions of Vista would be offered to the public
plus multiple service packs. A third problem had to do with compatibility issues. Getting
Vista to work with various application software and peripheral devices such as printers
and scanners became a major problem for users. Additionally, if the user needed to connect
to a virtual private network (VPN) that wasn‟t supported by Vista‟s built-in client, the
28
user was probably stuck.
Officials at Microsoft have conceded that the company failed in terms of the
product launch. Microsoft rushed the Vista product launch before it was ready. There
was poor coordination of information and missed deadlines between the company‟s
senior level software designers, marketers and equipment manufacturers. The unsuccessful
launch of Vista represents a kind of innovation failure. The problem translates into a
public loss of confidence in Microsoft‟s flagship products.
Risk Averse Culture
A successful business is understood and well established. A variety of
commitments have been made in terms of people, manufacturing, production schedules,
and contracts going forward. Such commitments to on-going business activities have an
established trajectory. There is a clear pattern of success that translates into customer
clients, sales volume, and general awareness for the work that has been accomplished
to date (Kanter, 2006). At the same time, forward thinking companies recognize the
need to develop new business opportunities. Playing it safe poses its own unique hazards.
Even well managed companies can suddenly find themselves outflanked by changing
market conditions and/or the introduction of a substitute technology or service
SONY. Sony‟s co-founder Akio Morita was the quintessential marketer. He understood
how to translate new and interesting technologies into usable products. Nowhere was this
more evident than in the development of the original Sony Walkman portable music player
in 1979. The Walkman created a totally new market for portable music systems. By
29
combining the features of mobility and privacy, the Walkman contributed to an important
change in consumer lifestyle (Gershon & Kanayama, 2002). Throughout the decades of the
1980‟s and 90‟s, the Sony Walkman came to define portable music.
And yet even Sony, a company known for its innovation prowess, was not
impervious to the innovator‟s dilemma and the problems associated with innovation failure.
As illegal music downloads exploded in popularity in the late 1990s, Sony, like the rest of
the music industry was unable or unwilling to adapt to the dizzying pace of change involving
MP3 software technology. Sony didn‟t want to cede its commitment to existing audio
technology; most notably the Sony Walkman portable music CD player. After all, the
Walkman had proven be a highly successful technology in the past and a steady source of
revenue over the years. Why change a winning formula?
Even as music fans illegally downloaded songs by the thousands onto their
PCs, Sony was slow to react. Instead of addressing the MP3 market, Sony chose instead to
build devices around its own MiniDisc technology. Sony was also paralyzed by
departmental silos at exactly the wrong time. In the fall of 1999, Sony introduced two digital
music players. The first, developed by the Sony Personal Audio Company, was the Memory
Stick Walkman, which enabled users to store music files on a device that was similar to
today‟s portable flash drive technology. The second, developed by the Vaio Company, was
the Vaio Music Clip, which also stored music in memory and resembled a fountain pen.
The third and most important silo involved Sony Music itself. Sony, unlike Apple, was a
major producer of music. But instead of turning that natural synergy into an advantage,
Sony did just the opposite. Sony Music was more concerned more with its ability to avoid
30
music piracy and illegal downloading rather than promoting the success of any of its newly
developed hardware products (Aaker, 2008).
The introduction of the Apple iPod in 2001 was a watershed moment in the
development of digital music storage technology. The combination of the Apple iPod and
the company‟s iTunes music store in April 2004 proved to be the quintessential disruptive
technology. Apple redefined the music industry. The irony, of course, was that Sony knew
about the research and development work being done at Apple two years before the launch
of the Apple iPod (Chang, 2008). Yet Sony was not prepared to move quickly enough and
adjust strategy in order to preserve its dominance. Within three years, Sony lost an
estimated 70% market share in the portable music market. Since then, Sony has reentered
the MP3 portable music market and is staging a comeback with the introduction of its
S-series portable music players.
In sum, successful businesses (with an established customer base) find it hard
to change. There are no guarantees of success when it comes to new project ventures.
Not surprisingly, companies can become risk averse to change. As Kanter (1989)
writes, whenever something new is created, there is always going to be a high degree
of uncertainty tied into the project. No one knows for certain what resources will be
required, how the project will turn out and how it will be received.
… the newer it is, the more likely that there will be little or no precedent and
no experience base to make useful forecasts. Timetables may prove unrealistic.
Anticipated costs may be overrun. Furthermore, the final form of the product
may look different from what was originally envisioned. (p. 217).
31
DISCUSSION
Lessons Learned -- Strategies Going Forward
Strong innovative companies start by changing the culture of the organization.
As Hoff (2004) notes, “inspiration is fine, but above all, innovation is really a management
process.” (p. 194). There are no short cuts when it comes to innovation. Putting the
right structures people and processes in place should occur as a matter of course –
not as an exception. Not every innovative solution has to be a blockbuster. Sometimes,
small incremental changes in the area of process innovation can make a big difference
to an organization‟s bottom line (“Most Innovative Companies,” 2007). The Japanese
auto industry, for example, use the term kaizen to describe the principle of continuous
improvement. Forward thinking companies go beyond simply supporting research and
development program to create a culture where everyone has a role to play in making
the organization better.
Developing a Culture of Innovation
Companies, like people, can become easily satisfied with organizational routines
that stand in the way of being innovative. Instead of blue ocean thinking, managers
become preoccupied with fine-tuning and making slight adjustments to an existing product
line rather than preparing for the future. Forward thinking companies must be able to
deconstruct management orthodoxy. Respect for past success is important. However,
too much reliance on the past can make you risk averse. Instead, forward thinking
companies must create a culture of innovation, where, experimentation and development
mistakes are all part of the process of testing new boundaries. Accordingly, the CEO
32
and senior management team set the tone by putting their full weight behind the need
to be creative and make a difference in the overall performance of the organization.
The Value of Partnerships and Collaboration
One of the most important lessons executives have learned about innovation is
that companies can no longer afford to go it alone. The traditional model of R&D is to
create and manufacture products exclusively within confines of one‟s own organization.
The basic logic is; if a company wants something done right, they create it themselves
or build it in-house. A number of researchers challenge that assumption and make
the argument that the not not-invented-here approach is no longer sustainable. Instead,
there is a clear, decided move toward partnership agreements (Dubini & Provera, 2008;
Bouncken, et.al., 2008; Chesbrough, 2003). Clearly, companies like Sony and Philips
recognized this some years ago when it co-developed the compact disc.
Instead, companies should be drawing business partners and suppliers into
so called innovation networks. According to Chesbrough (2003), the idea behind open
innovation is that there are simply too many good ideas available externally and held
by people who don‟t work for your company. They simply cannot be ignored.
Even the best companies with the most extensive internal capabilities have to take into
consideration external knowledge and information capabilities when they think about
innovation. Thus, good ideas can come from outside one‟s company as well as internally.
33
Conclusion
The lessons of business history have taught us that there is no such thing as a
static market. There are no guarantees of continued business success for a company in
a particular market segment. Over time, tastes, preference and technology changes.
Innovative companies keep abreast of such changes, anticipate them and make the
necessary adjustments in strategy and new product development. The irony, of course,
is that even the best managed companies are susceptible to innovation failure.
Specifically, a company's very strengths and on-going success can lay the groundwork
for its eventual decline. This occurs at a time when the company is realizing some
of its highest success (i.e., the innovator‟s dilemma). There is also the element of risk
when attempting to develop a new product or service. The solution, therefore, is to
develop a culture of innovation where risk and experimentation are supported.
Failure is also part of the process. If innovation can be likened to a sports team, there
is no such thing as a perfect 30 and 0 season. Rather, innovation is about putting
together a winning record (perhaps 26-4) and making innovation (like games) a
sustainable, repeatable process.
34
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Endnotes
1 The principle of disruptive technology owes its aegis to the work of Joseph
Schumpeter who argued that innovation leads to the gales of "creative destruction"
as new innovations cause old ideas, technologies and skills to become obsolete.
In Schumpeter‟s view, creative destruction however difficult and challenging,
leads to continuous progress moving forward. A good example of this is the impact
that personal computers had on mainframe computers. In doing so, entrepreneurs
created one of the most important technology advancements of the 20th century.
2 The group that purchases a large number of the "non-hit" items is the demographic
called the Long Tail. This suggests that a market with a high degree of choice will create
a certain measure of inequality by favoring the upper 20% of the items (i.e., major hits)
versus the other 80% (non-hits or long tail). The Pareto principle (also known as the
80-20 rule) states that for many events, roughly 80% of the effects come from 20% of
the causes.
3 Work on Vista began in 2001 under the code name Longhorn. The release of Windows
Vista occurred more than five years after the introduction of Windows XP, thus making
it the longest time interval between two releases of Microsoft Windows. Even still,
Vista became the subject of numerous criticisms by various user groups who claim that
Vista is hard to load and can make computers less stable and run slower.