The key to deal with disruptive innovation
In 1997, Kodak won the rights to acquire three Chinese film factories, leaving rival Fuji Film far behind. Five years later, it bought into the last Chinese consumer film-maker, Lucky, seizing an overwhelming dominance in the segment.
But those assets have become huge burdens for the US film-maker and the company's thousands of printing outlets have become insignificant.
The reason for this turn of events is related to Kodak's failure to anticipate a new trend that would redefine the business the popularity of digital photography.
In the fast-changing business world, companies have to be on their toes for such disruptive changes, but how?
Clayton Christensen, a professor of business administration in Harvard Business School, points out that companies should always look for opportunities in constraints on consumption.
According to his theory, a disruptive innovation includes three components: a value proposition, a profit formula, and a compatible business model.
Value proposition
Microprocessor maker AMD used to be a minor competitor against Intel, with no significant market share. However, Intel focused on maintaining the Moore Law, namely the clock speed of microprocessors doubles every 18 months. But customers found the computing speed too fast and clock speed was no more the No 1 determinant in their purchases.
At the same time, AMD offered the 64-bit computing technology, which focused on enterprises' needs such as security and scale. AMD's market share reached a record high last year and dragged Intel to follow it on 64-bit computing and multi-core microprocessors.
Profit formula
With an attractive value proposition, a company also needs a profit formula so that its innovation is commercially viable.
Nick Yang and his Stanford classmate Zhou Yunfan started a mobile messaging company, Kongzhong, in 2003. Chinese cellphone users at the time wanted to make their mobile experience unique and fun, so Kongzhong provided music and pictures to be downloaded at 1-2 yuan, just about the price of a bus ticket.
The services, using low-cost Internet and wireless technologies, were lapped up by millions of Chinese mobile phone users. This spurred Kongzhong to make an initial public offering on the NASDAQ in 2004 and it became one of the most successful Internet companies from China.
Proper business model
Now, let's examine why companies need a proper business model.
Eight years ago, software giant SAP was using the same distribution channel to supply to large businesses as it did for small and medium enterprises.
So effectively, it was using distributors to sell software worth millions of dollars with no special incentives to sell them at lower prices to smaller players. Its distribution channel, obviously, foundered until SAP found a new business model four years ago.
So, with all the three components in place, how does a company tackle disruptive innovations?
Christensen believes there are several ways:
It can be created. Discount retailers are a typical example: their gross margin is around 20 percent, half that of department stores, but their cash flow runs six cycles a year, twice that of department stores. So retailers also live a comfortable life now.
It can be leveraged. After Sony developed the first transistor radio in Japan, it extended the leadership to TV sets, tape recorders, camcorders, and then the Walkman.
It can be liquidated. When General Electric outsourced some work to Indian firm Infosys, it took advantage of the outsourcing wave to focus on its core business and increase its competitiveness.
One typical mistake for many companies is that they position themselves and their products according to segments, rather than "jobs to be done".
So they usually focus on products, demographic characters of target customers, and what they want to buy. But in Christensen's theory, they should consider customers' problems, the circumstances under which customers have certain demands, and why.
A traditional business model is that when a company gets to know McDonald's, say, has good sales from milkshakes, they find out the demographic information on customers and then develop better milkshakes than McDonalds.
But a study shows customers buying McDonald's milkshakes usually come early to the restaurants, grab a cup of milkshake, return to their cars and sip it on an hour-long drive.
So the real reason consumers buy milkshakes is boredom and they compete with other products that kill boredom, such as peanuts and cigarettes.
Christensen believes that when companies adopt his theory, they usually find out the market is much bigger and their potential much greater.
(China Daily 04/04/2007 page15)
