The fall of market leading companies is not linked to bad management as is widely thought, but to disruptive technology that comes in at the low end and pulls the rug out from under their feet.
According to Clayton Christiansen, a Harvard professor and author of “The Innovator’s Dilemma”, each market becomes involved in “a trajectory of improvement” with their offerings, which panders to the needs of very demanding users at the high end rather than those with simpler needs at the low end.
“Technological improvements occur faster than any customer can use them and any company that offers products and services that are aimed at the mainstream today are likely to overshoot in future,” he explained at his keynote speech at the Santa Cruz Operation’s SCO Forum user group meeting in Santa Cruz this week.
“This is because they have good managers that are taught to make products and services appeal to higher tier customers because they can sell them at higher margins. But this causes most companies to overshoot what customers at the low end can use,” he continued.
This was Digital Equipment’s dilemma as the PC emerged to occupy space at the low end of its minicomputer business in the 1980s, he claimed.
“DEC looked at technology that could serve its best customers and thought that PCs were just toys compared to the standards of the time. It listened to Wall Street, which liked the minicomputers’ 60 per cent margins compared to the PCs’ 30-35 per cent, but the more it listened, the less able it was to serve the low end,” he said.
“This always happens - a vacuum is created at the low end, which sucks in cheaper and easier to use technology, and success stories are those companies that are good at introducing products at the right time into the mainstream. Taking lower margins and offering products at lower prices kills other companies. It’s very difficult for companies at the high end to pursue things at the low end, but if they miss the low end today, they miss the mainstream tomorrow,” he continued.
Current examples of disruptive technology today include retailing over the Internet and Cisco and its router technology for managing networks, which is threatening established telecoms players such as MCI and Nortel in the voice telephony market.
Intel’s new Merced 64bit processor, which is due to ship in the middle of next year, also has the potential to disrupt the established Risc players, Christiansen attested, but the chip giant faces the same problem itself in future.
“Intel shot through the mainstream market by the time it released Pentium III, which is why it later attacked the low end with the Celeron processor. If it had not done that, we’d have been reading different stories about AMD and Cyrix,” he said.
But he continued: “There’s an impending modularisation of chip design. In the early days, technology tends to be integral rather than modular as was the case with mainframes. As a result, integral companies have to dominate early on because they need to do everything in relation to their technology.”
He added: “But when they overshoot, higher performance doesn’t make a difference any more and customers resist paying the price. New companies then focus on speed to market and the ability to customise, which is the way they compete. I expect to see a more fragmented industry in future, where specialist providers provide different pieces of the puzzle and different ones assemble it - but I also expect Intel to see this.”
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