Digital Equipment Corp. (DEC) was one of the world's most widely admired companies in the 1970s because of the brilliance of its management team. When the Massachusetts minicomputer maker began to unravel a decade later, its precipitous fall was chalked up to the ineptitude of that team. How could smart managers become so stupid so fast?
They didn't, according to Clayton Christensen, author of The Innovator's Dilemma and professor at Harvard Business School: They were ambushed by disruptive innovation. What Digital management had failed to account for was a crummy PC that none of its customers wanted and that generated far less profit than its coveted $250,000 to $500,000 minicomputers.
Like former market leaders in products ranging from automobiles and steel to the steam shovel, DEC was riding a trajectory driven by performance improvement, Christensen explained. On this trajectory, industry giants always find a way to win: They use their own improvements and those from lesser competitors to perfect products that sell to their best customers for ever-growing profits -- until the day somebody comes in at the bottom of the market with an idea or product or service that puts the giant out of business.
The new product is usually inferior (as was the case with early PCs) but cheaper and available to a large population. Eventually the new technology is perfected, and sucks more and more customers from the middle, displacing the original leaders."That is the mechanism of creative destruction," Christensen said.
Will disruptive innovation put CIOs between a rock and a hard place?
Academic theories about bygone companies and obsolete products don't seem like the type of fare to rev up an audience of in-the-trenches CIOs looking for some practical advice to take home. However, at a time when disruptive innovations in technology -- from cloud computing and enterprise mobility to all types of outsourcing -- threaten traditional IT products and services, Christensen left CIOs buzzing -- soul-searching, even -- after he offered up one unnerving example after another of why accepted business methods often prove useless or actually counterproductive in the face of disruptive innovation.
Chantal Bezilevice president of IT, Business Development Bank of Canada
"It is amazing to me that the steam shovel industry is so applicable to the high-tech industry, especially when he talked about the new entrants that did it in," said Jason Ruger, director of IT strategy and security at Motorola Inc., referring to the displacement of the steam shovel by hydraulic technology. "It definitely hits home."
Motorola's radios and TVs were undercut by competitors using new technology, Ruger said. More recently, with its focus on analog cell phones, the company was slow to grasp the digital revolution. Of course, he hastened to add, Motorola's partnering with Google Inc. on its Atrix cell phone tablet is a "great example of disruptive technology" that should worry laptop manufacturers. In his view, it is a move that separates Motorola from a competitor like Palm Inc. "Are we smart enough now to know that won't get cannibalized by the next disruptive wave? I am pleased that we are at trying to innovate," he said.
Outsourcing to oblivion
Another aspect of disruptive innovation that struck a nerve among CIOs at the Gartner conference was the potential folly of outsourcing. The business principle at work here, Christensen said, is the widely held belief that companies should focus on their core business and outsource the commodity work to people who can do it less expensively. The big integrated steel mills, for example, ceded their low-profit businesses to so-called mini-mills -- which continued to move up the steel production value chain and now account for about 60% of the steel market in North America.
A modern-day example is Dell Inc.'s strategy to unload one component after another to AsusTek Computer Inc., the Taiwan-based computer maker. At first, the result was the proverbial win-win: As Dell kept palming off components to Asus, its return on net assets kept improving. Asus kept taking on more and more of Dell's non-core business, from motherboards to assembly to supply chain to design -- right up until the day Asus no longer needed Dell to sell computers, and Dell was left with little more than a brand name, Christensen said. The scariest part? Dell might have "been killed sooner," he added, had it not adopted this strategy.
"I think his point was to be careful which metrics are driving the financial analysis," said an IT executive at Georgia Pacific Corp., the Atlanta-based paper company. "But where do you draw the line?"
What are your IT customers hiring you to do?
What seemed to resonate most with CIOs was Christensen's parting advice to first understand the job their customers are trying to get done. Instead of figuring out which IT products to build or buy to fill a gap in the IT architecture, CIOs need to think in terms of providing an experience their customers can use.
Chantal Bezile, vice president of IT at the Business Development Bank of Canada, got it. "We focus very much on trying to improve what is there, instead of understanding what it is the business users are trying to do," she said.
Bezile's IT shop complains that the business departments are building their own applications. A few years ago, however, when these business lines first took matters into their own hands, central IT didn't want anything to do with the effort. "It was small technology. It was not robust, but it met the business' needs," she said. Now there are business units that pretty much "have their own IT shops," she added. "We are working to resolve that, but it is exactly the phenomenon [Christensen] was describing."
Motorola's Ruger also worries about IT not understanding the job his users need to get done. "We definitely don't do a good job with that in IT," he confessed. An example was IT's assumption that employees wanted to use Windows XP and Internet Explorer.
"We designed all our apps for that, not realizing they want to use five different browsers … and IE6 and IE8. What we missed was that people viewed our job as giving them access to anything they do in the office to any device on any platform."
The kicker? IT departments need to do it economically, because there is a slew of Indian outsourcing companies ready to step in if they can't.
Let us know what you think about the story; email Linda Tucci, Senior News Writer.