Does Technology Disruption Always Mean Industry...

© 2004 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology

Does Technology Disruption Always MeanIndustry Disruption?

Chintan [email protected]

Engineering Systems DivisionMassachusetts Institute of Technology

July 23, 2008 Plenary PresentationThe International Conference of System Dynamics

Athens, Greece

2© 2008 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology

Christensen’s Conditions for Disruptive Technology

Example Cases:Mini millsDisc Drives

Ref: The Innovator’s Dilemma,Clayton Christensen (1997)

HighLowLowEntrantLowHighHighIncumbent

AncillaryPerformance(AdditionalFeatures)

PrimaryPerformance

(Basic Features)

PriceFirm

Time/Engineering Effort

Prod

uct P

erfo

rman

ce

First (incumbent) Technology

Second (entrant)Technology

Question: Are Christensen Conditions necessary and sufficientfor industry disruption?


Technologies in Computer and Communications Industries

Have they displaced the existing industrial order?

Potentially Disruptive Technology

Price ComparedTo Incumbent

Primary PerformanceComparedTo Incumbent

Ancillary PerformanceComparedTo Incumbent

LOWOften free

LOWLow initialreliability andease of use

HIGH- Quick bug fixing- Code customization

MeetsChristensenConditions

LOWCheaper tobuild and operate

LOWLow mobility

HIGH- Higher speed- Wireless-Wired interconnection


LOWOften free

LOWLow reliability

HIGH-Voice, Text, Video convergence


Open SourceSoftware[OperatingSystems]

WiFi MeshNetworks[WirelessOperators]

P2P ServiceProviders[Long DistanceCall Providers]

Do they meet Christensen Conditions?


Industry Structure in Computer and CommunicationsIndustries

What factors influence such variation in outcome?

Potentially Disruptive Technology

IndustryStructure(2000)

IndustryStructure(2007) Key Observations

Open SourceSoftware[OperatingSystems]

WiFi MeshNetworks[WirelessOperators]

P2P ServiceProviders[Long DistanceCall Providers]

1. Microsoft2. IBM3. CSI4. Oracle5. HP

Microsoft still has90% of the OS market

No IndustryDisruption

1. Microsoft2. IBM3. Oracle4. SAP5. Symantec

1. Verizon2. SBC3. AT&T WL4. Sprint PCS5. Nextel

1. AT&T2. Verizon3. Sprint-Nextel4. T-mobile5. Alltel

1. AT&T2. WorldCom3. Others4. Sprint

1. AT&T2. Verizon3. Comcast4. Time Warner5. Charter

MajorIndustryChanges

-Broadband providersown parts of accessmarket -P2P Service big inKorea and Japan

-AT&T and T-Mobile own 1/3 US hotspots-Nokia, Samsung, lead Wireless-WiFI handset market

No IndustryDisruption


Model Setup and Assumptions

• A behavioral model (akin to behavioral game theory model)• 2 Firms – Incumbent, Entrant• 20 year period (think technology paradigms…)• Incumbent enters at Year 0• Entrant enters at Year 6 (when incumbent is mature)• Firms initialized with Christensen’s conditions…– Entrant has half Cost base than Incumbent– Entrant has half Initial Primary Performance than Incumbent– Entrant has double the Initial Ancillary Performance than Incumbent

• Both firms endowed with a total attention (resources) = 1• Each firm allocates resources to Primary and Ancillary Performance only• Consumers are homogenous in their preferences


Adopters

Switching

Fractiona l Net

Population Growth

Rate

+

Potential

Adopte rsAdoption

Pote ntial

MarketNet Population

Growth Rate

Adoption from

AdvertizingAdoption from

WOM

+ +

Advertizing

EffectivenessContact

RateAdoption

Fraction

++

+

++

<Market Entry

Switch>

Industry De ma nd

Refere nce Price

<PotentialMarket>

De mand Curve

Slope

Refe rence

Popula tion

Reference Industry

Demand Ela sticity

Lowest Price

<Price>

Adoption and Industry Demand


Consumer Preference and Behavior

Product

Attractiveness

Attractiveness from

Primary Performance

+

Attractiveness from

Ancillary Performance

+

Price

-



Adopters

Attractiveness from

Installed Base

Product

Attractiveness

Market Share of

Product

Attractiveness

Total Product

Attractiveness

+

+

+

+

+

-

Attractiveness from

Primary Performance

+

Attractiveness from


+

Price

-

R1

Network Effect

B1

Market Saturation



Adopters

Attractiveness from

Installed Base

Product

Attractiveness

Market Share of

Product

Attractiveness

Total Product

Attractiveness

+

+

+

+

+

-

Switching to

Competitor

-

-

Attractiveness from

Primary Performance

+

Attractiveness from


+

Price

-

R1

Network Effect

B1

Market Saturation

B2

Switching Behavior


Corporate Strategy: Incumbent’s Initial Focus

Adopters

Attractiveness from

Installed Base

Product

Attractiveness

Market Share of

Product

Attractiveness

Total Product

Attractiveness

+

+

+

+

+

-

Switching to

Competitor

-

-

Attractiveness from

Primary Performance

Primary

Performance

Resources to

Primary

Performance

Market Share+

+

+

+

+

Attractiveness from


+

Price

-

R1

Network Effect

R2

Primary

Performance

Effect

B1

Market Saturation

B2

Switching Behavior

“The only strategy was that of a monopolist. Incumbent A did not care what Other features you want!” Director, CTO Organization, Incumbent A

• Based on 4 Interviews– 2 Incumbents, 2 Entrants


Adopters

Attractiveness from

Installed Base

Product

Attractiveness

Market Share of

Product

Attractiveness

Total Product

Attractiveness

+

+

+

+

+

-

Switching to

Competitor

-

-

Attractiveness from

Primary Performance

Primary

Performance

Resources to

Primary

Performance

Market Share+

+

+

+

+

Entrant's Expected

Market Share

Attention to

Ancillary

Performance

Effect of Entran'sMarket Share on

Attention to AncillaryPerformance

Resources to

Ancillary

Performance

Ancillary

Performance

Attractiveness from


+

+

+

+

+

Price

-

-

-

R1

Network Effect

R2

Primary

Performance

Effect

B1

Market Saturation

B2

Switching Behavior

B3

Diversification into


R3

Resource

Conservation

ResourceReorientation

Delay

Corporate Strategy: Incumbent’s Response to Entrant

“Incumbent cares about ancillary performance only with: the entry of the non-traditional competitor, and the growth of its market share.” Director, CTO Organization, Incumbent A


Effect of Entrant’s Market Share on Attention toAncillary Performance

Entrant’s Expected Market Share

Incu

mbe

nt’s

Atte

ntio

n to

A

ncill

ary

Perf

orm

ance

“First [when the entrant enters] the question is whether this is a price game or a performance game. Then, you realize that the future is ancillary.” Chief Strategist and Architect, Incumbent B


Resource Diversification

1 – Resources toAncillary Performance

0.8Entrant

1 – Resources toAncillary Performance

SMOOTH(Attention to AncillaryPerformance,Resource Reorientation Delay)

Incumbent

Resources to PrimaryPerformance

Resources to AncillaryPerformance

“First you have to write a report, then convince the leadership, and then the people who will work on it.” Director, CTO Organization, Incumbent A

Resource Reorientation Delay

Entrant’s Resources“After the prototype phase, 80% attention is on developing new features (ancillary performance) and 20% on scale and reliability (primary performance).” CTO, Entrant A

“New features is our forte. We are not going after the incumbent. The primary performance will come as a byproduct.” CEO, Entrant B.


Base Case BehaviorPassive Base Case - Incumbent does not respond to threatActive Base Case - Incumbent responds to threat

Adopters200 M

150 M

100 M

50 M

0 3 3 3

3

33 3 3 3 3

1

1

11

1

1 1 1 1 10 24 48 72 96 120 144 168 192 216 240

Time (Month)

Uni

t

Adopters[Incumbent] : Passive Base Case 1 1 1 1 1

Adopters[Entrants] : Passive Base Case 3 3 3 3 3

4 4 4

4

44

4 4 4

2

22 2

22

22 2 2

Adopters[Incumbent] : Active Base Case 2 2 2 2 2

Adopters[Entrants] : Active Base Case 4 4 4 4 4 4

Note: We have created the basic reference mode


Technological Uncertainty:Primary Performance Acquisition Delay

Technological uncertainty can help either the incumbent or the entrant

Adopters200 M

150 M

100 M

50 M

0 1

1

1

11

1 1

0 24 48 72 96 120 144 168 192 216 240Time (Month)

Uni

t


4 4

4

4

4 4

Adopters[Entrants] : Active Base Case4 4 4 4 4 4

5 5

5 55 5

2

2

2

22

2 2

Adopters[Incumbent] : Primary Performance Ack Short 2 2 2 2

Adopters[Entrants] : Primary Performance Ack Short 5 5 5 5

6 6

66

6 63

33

3

33 3

Adopters[Incumbent] : Primary Performance Ack Long 3 3 3 3

Adopters[Entrants] : Primary Performance Ack Long 6 6 6 6


Market Uncertainty: Network Effect

Adopters200 M

150 M

100 M

50 M

0 4 4

4

4

4 4

1

1

1

11

1 1

0 24 48 72 96 120 144 168 192 216 240Time (Month)

Uni

t



5 5

5

5 5 5

2

2

2

22 2 2

Adopters[Incumbent] : Network Effect Lo 2 2 2 2 2

Adopters[Entrants] : Network Effect Lo5 5 5 5 5

Adopters[Incumbent] : Network Effect Hi 3 3 3 3 3

3

3

3 3 3 3 3

6 6 6 6 6 6

Adopters[Entrants] : Network Effect Hi 6 6 6 6 6

With network effects the equilibrium can be winner take all (WTA). The strength of network effect determines the winner


Market Uncertainty: Switching Costs

Higher the switching costs the longer the incumbent retains the market.Longer retention buys time to reorient resources.

Adopters200 M

150 M

100 M

50 M

0 4 4

4

4

4 4

1

1

1

11

1 1

0 24 48 72 96 120 144 168 192 216 240Time (Month)

Uni

t



5 5

5 55 5

2

22

22 2 2

Adopters[Incumbent] : Switching Cost Exogenous Lo 2 2 2 2

Adopters[Entrants] : Switching Cost Exogenous Lo 5 5 5 5

6 6

6

66

6

3

33

33

33

Adopters[Incumbent] : Switching Cost Exogenous Hi3 3 3 3 3

Adopters[Entrants] : Switching Cost Exogenous Hi 6 6 6 6


Organizational Uncertainty: Resource Reorientation Delay

50% 75% 95% 100%Adopters[Incumbent]200 M

150 M

100 M

50 M

00 60 120 180 240

Time (Month)

The nature of technology and market matter more than firm’s agility. This is for future work…


Conclusion

Technology Disruption Does Not Always Mean IndustryDisruption!

Technology disruption may not change the existing industrialorder despite meeting Christensen’s Conditions when…

•The incumbent can maintaining the lead in Primary Performancewhile improving their Ancillary Performance

• Strong Network Effects are present

• The incumbent can influence the Switching Behavior

Our research argues for broadening the research agendaaround understanding industry disruption

© 2004 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology

Thank You!

Chintan [email protected] Systems DivisionMassachusetts Institute of Technology

Does Technology Disruption Always Mean Industry...

Documents

Transcript of Does Technology Disruption Always Mean Industry...