[MUSIC] So welcome back to our course on stretegic innovation. Today, we're starting on our second module. We're going to look at different types of innovations, and how organizations can effectively take advantage of the opportunities that these present. If you remember, in the first module, we talked about some of the generic challenges that young markets, and young technology present for firms and the idea that firms need to develop a ambidexterity. A capability to be able to effectively align themselves for the needs of mature markets as well as young technologies and young markets. And we talk a lot about how to do that but what we didn't talk about is differences between kinds of innovations and technologies, and there are such differences. The idea of ambidexterity is going to continue to be a theme, but scholars have developed several different typologies of innovations. Perhaps, the most important of these is the distinction between disruptive technologies and sustaining technologies that Clayton Christensen developed. And that's where we'll be going next and that's where we'll be spend most of our time but we'll take a look at others as well. And then in the second half of this module, we're going to think about how an organization can respond to innovations. If we think of them as coming in a stream where there is different kinds of innovations and technoloies, and market opportunities that are working through the organization's different units and so on. And how do we go ahead and manage those as a portfolio, so to speak. So the first lesson will be about disruptive technologies. We'll introduce that term and talk about what Christensen meant by it. The second lesson we'll talk about responding to dsruptive technologies. And also we'll get into other typologies of innovations, competence destroying versus competence sustaining. The third lesson we'll talk about this idea of innovation streams and the last one will be about corporate entrepreneurship. So in this video, we're going to talk about disruptive technologies. I'm sure you've heard and maybe used the term disruption. It comes out very frequently, you hear that firms are disrupting a market or that they have a disruptive strategy. What does this mean? Well, the idea of disruption is not something that you might have heard 25 years ago, and in fact, it was popularized by Clayton Christensen, who was a professor at Harvard Business School at this point. Now his research showed that what he called disruptive technologies were very hard for established market leaders to respond to. And that's something that we've seen already but we haven't actually talked about the idea of a disruptive technology. He had a very particular meaning for that term. And in fact, it's almost like disruptive technologies have become too popular. He and others have suggested that it's the term disruption has come to be used for many more things than disruptive technologies as such, and you know that's fine, right? If we take disruption just to mean something that means your competitor can't succeed by doing what they've done before that's perfectly fine. And in fact, there is a book by Professor Gans who goes ahead and uses that very definition for disruption. But I do think is worth us looking at what Christensen had to say, because he had a very interesting way of bringing together the dynamics of organizations, and markets, and technologies that builds on what we've talked about already. And so what we're going to do in this video is to talk through to Christensen's idea of disruptive technology and make sure that we have a good sense of what that is. And then as the module proceeds, we'll expand on this groundwork. So what exactly is a disruptive technology? See, Christensen really focuses on categories, ways where we can say this is in this category, this is in this category. There's two types and it's really important to get the category right. What he said is that there were a number of categories, radical versus incremental innovations. Competence destroying versus competence sustaining or preserving innovations. He said look, those actually are not the right categorizations. The right categorization is between what he called a sustaining technology and a disruptive technology. And the way that you distinguish between these two is by looking at customers' reactions to them. Sustaining technologies are ones that a firm's major customers demand. They're ones that they want. They're ones that satisfy needs those customers know that they have. Disruptive technologies on the other hand are technologies that might offer interesting new capabilities, but they're not capabilities that are valued by those existing customers. The customers don't want them and so this sets up a very interesting dynamic. To illustrate this, I'm going to take us through a diagram. And in fact, this is a diagram that's adapted from Christensen's original path breaking work. The example's going to look at the development of the disk drive industry, right? One of the core technologies that powered revolution and computers that happened from the 1970s to 1990s. This is what Christensen's actually studied. And so if you look at this diagram, we're simply going to have performance on a vertical axis in time on a horizontal axis. Now start by thinking about the market from the customer's perspective and what customer's demand. Performance in this case could be the amount of storage, the speed with which the data is accessed. We're going to keep it a little bit abstract, right? But if you look at the arrow, right, this arrow shows that customers demanded a certain level of performance initially. And then overtime, that level of performance increased. The customers found new ways to use the disk drives that disk drive manufacturers were producing, and the market expanded. So their demand shaped a trajectory, the market trajectory as to what was needed, right? What companies in the disk drive industry were being asked for by their customers? Now, at the time that Christensen started his research window, the first disk drives that he was looking at, the first generation, were known as 14 inch disk drives. That's the size of the circular platter that the data's stored on. So 14 inches and these were the disk drives, that disk drive manufactures like control data corporation were producing. And if you notice where we have the dot placed over at the left, that technology met customer needs. Now overtime, as the technologies advanced the capabilities of those disk drive manufacturers showed what Christiansen called the technology trajectory. You can see that line is actually moving up more quickly than customer demands. This is pretty common. Now, the important point to note is that as disk drive manufacturers improved their 14 inch disk drives. And there were a number of major improvements that took a very significant investment in technology, very significant engineering work. Christiansen described these innovations as sustaining because these were ones that improved performance on dimension storage, speed that customers demanded. And the large disk drive manufacturers did just fine with this. This is the point of sustaining technologies is that you're staying close to your customer doing what your customer demands. And as long as you're doing that, it doesn't matter if the elevation is radical or incremental or competence destroying or competence sustaining. Christensen said the key is what you're customer is looking for. Okay, so now, let's talk about what ends up being the disruptive technology. Now, the point is, it isn't disruptive at first. What you see here that little dot, right, represents the performance of a new kind of this drive. One that only uses 8 inch platters. Okay, now this has lower performance than the 14 inch disk drives. All of the major disk drive manufactures explore this technology. It had some advantages, right? It's smaller, and so if space is important, you can build a smaller disk drive. But this is not a key dimension for existing customers of the disk drive manufacturers, right? These are customers who typically are using mainframe computers. That are in a dedicated computer room, size is not that important. So the key is that we've got a technology which is less capable in terms of raw storage and speed. It has something interesting, it's smaller, but it's not what our customers demand. Our customers stay with the 14 inch drives. Now at this point we really have one of Christensen's critical insights, the reaction of the existing disk drive manufacturers was driven by their customers. And in fact, what they were doing those disk drive manufacturers was what managers are often told to do, right? They're staying close to their customers and using their customers' express needs to drive their technology strategy. So they've backed off from developing those 8 inch disk drives. Kept them in reserve, so to speak. But this new technology didn't simply languish. All right, there were in fact customers who could use the new smaller disk drives. They weren't large customers these were mini computer makers such as DEC or data general. They were marketing smaller less expensive machines and the 8 inch technology here matched their needs and was valuable to them because they weren't selling their computers to customers who had an entire room to devote to the computer. In fact, this is the period when I was actually working in the computer industry as an entrepeneur. And I remember as those smaller disk drives came out we were, the company I was developing was selling computer systems to dentists, right? Where space is at a premium, so those smaller disk drives were valuable. But it was a tiny market, so it wasn't attractive. That a market was not attractive to large disk drive manufacturers. It was attractive to some of the smaller ones. Some new ones who saw the potential. So the market for 8 inch disk drives developed separately from the market for 14 inch disk drives for a period, right? And what you see here is that the customer's demands increased for the 8 inch disk drives, there was a technology trajectory have been proven for the 8 inch disk drives. But at least at first, if you're one of the large disk drive manufacturers where your big market is the mainframe computer builders or users, you're saying look, this technology still isn't something that our customers are demanding. We're watching it, but we're not jumping in, okay. Then, the point of disruption occurred. That technology trajectory didn't stop below the customer needs for the large disk drive manufacturers, the ones who were focusing on the 14 inch. You'll notice as that line extends, the technology trajectory for the 8 inch drives, it never catches up with the 14 inch disk drive one. The 8 inch disk drives always were less capable and so the companies making those 14 inch disk drives thought that they were in a good position. But if you look right at that point there where the technology trajectory for the 8 inch drives hits the customer demands for mainframe computer makers. That was the point of disruption, because at that point the 8 inch drives where attractive to the main large customers of the large incumbent disk drive manufacturers. So once the technology trajectory of the disruptive technology ends up intersecting with the market trajectory of that mainstream market, that's when the battle is really joined. At that point the disruptive technologies start to eat into the market that formally was dominated by the prior technology and the incumbent firms. Large disk drive companies, in this case, large disk drive manufacturers recognize that they need to compete. And we're going to talk more about that and it doesn't happen all at once. But the essential message is that in this battle the established firms, Christensen's found that they lost. They lost that battle, why? Well, you look at what ended up happening, they introduced the products late, right? They find that they can't just take the disk drives with the new technology off the shelf. By then new competitors are hard to beat. They've established market positions. They have a lot of knowledge about the idiosyncrasies of new technology and they have substantial scale and experience. They're not just little upstarts anymore. So this is where you get an overturning of the market leaders. And this is why the disruptive technology message is so important. So that's going to be the end of this video. In summary, we've explored exactly what a disruptive technology is, as compared to this simple idea of disruption. We've talked about the idea of the technology trajectory and the idea that it starts out low and eventually intersects with the needs of the mainstream market. What we're going to do in the next video is we're going to talk a little more about exactly why the incumbent firms had a lot of trouble responding. And what Christensen suggests they do in response. I'll look forward to seeing you then.