How can companies enter markets with strong incumbents and still grow substantially? Disruptive innovation is an important tool to achieve such growth. Companies may enter by creating a new market altogether, or by creating a new business model which changes the rules of the game.
A four-part series of extracts from IIM Ahmedabad Business Books, starting today, explores some of the key management and business issues faced by Indian companies. Today’s extract from “Strategies for Growth: Help your Business move up the Ladder” by Atanu Ghosh discusses how organisations should pursue disruptive innovation.
Creating disruptive innovation capabilities is very different from sustaining innovation capabilities — to the extent that it is often felt these capabilities are conflicting in nature, and managing both these within a single organisational boundary may be impossible. Managerial resources available to an organisation are indeed a constraint, and this creates a challenge for an organisation to design a delicate balance between sustaining and disruptive innovations.
On a day-to-day basis, sustaining innovation definitely receives greater managerial attention. To ensure that disruptive innovation pursuits don’t take a backseat, an organisation should allocate specific resources, at the beginning of the budgetary allocation itself, for such pursuits in the middle of a business cycle (more so for an organisation seeking ambitious growth trajectory). Any request for resources to kick-start or continue a disruptive innovation pursuit is bound to be turned down since such pursuits have small, uncertain markets to begin with and fall short of the traditional way of measuring success of a business. So, a sustaining innovation project will always get priority than one of disruptive innovation if there is a clash for organisational resources. But an organisation needs to understand that this is not a zero sum game. As a result, there should be separate funds for the specific purpose of encouraging disruption-related projects. This will ensure that neither sustaining nor disruptiveinnovation pursuits feel that the other is cannibalising required resources.
This brings us to another equally important measure that organisations should take to ensure that disruptive innovation pursuits are not compromised. We have been saying, time and again, that business growth through disruptive innovation follows a very different trajectory altogether. By their very nature, these innovation projects germinate in emerging markets with high uncertainty. It would be incorrect to measure these projects the way managers evaluate traditional ones — financial matrices, period-over-period growth, market presence, etc will all go wrong. This is not to say there should be no performance evaluation of these projects at all, but there needs to be a qualitative assessment of these pursuits. Since these disruptive innovation projects operate under uncertainty, the assessment should involve evaluation of the assumptions made by the managers and their relevance thereof. Also, an attempt should be made to understand how comprehensive these assumptions are, and whether they address all the contingencies that can arise in the business environment.
Illustration I: Apple iPod/ iTunes
Apple, Inc is considered iconic when it comes to product development. This example attempts to explain the way in which iTunes may be considered a disruptive innovation. The iPod was launched in 2001, a year in which Apple’s global market share of personal computers was around three per cent. The iPod is a device where customers load digital songs for subsequent listening. It is important to point out here that at the time there were other digital music players, such as MP3 players, available in the market which could serve similar utility for customers. However, Apple had the foresight to encourage iPod customers to use the Internet. Along with the launch of the iPod, Apple also launched iPod Lounge, a website owned by Apple wherein iPod users could design customised covers and accessories for their music device and send suggestions to the organisation. Simultaneously, Apple launched iTunes. iTunes is software used to play and organise digital music. Apple ensured that iTunes was bundled with each iPod. iTunes ensured that songs available in common formats such as MP3 could not be played on the iPod. These songs had to be converted to an iPod-specific format using the iTunes interface to be played.
Two years on, in 2003, Apple launched the iTunes Music Store. This was an Internet-based interface through which iPod users could load songs onto their music player. Songs were available in the iTunes Music Store for a nominal cost of $0.99.
If we look at the sequencing of product introduction by Apple, it is clear that the iPod was not a disruptive innovation. Products with similar output features existed in the market, as discussed earlier. It is the bundling with iTunes that gave Apple the disruptive edge. It changed the very business model of the industry…. Because of iTunes, iPod users were locked-in and had to purchase songs from the iTunes store. By previously encouraging customers to use iPod Lounge, a perception in the market had already been built that iPod users had to be educated in Internet use. It was not a very daunting task for Apple to lead iPod users to the iTunes Music Store to purchase music.
Illustration II: Nintendo’s Wii
This case illustrates the introduction of disruptive innovation in the video game industry, wherein a relatively smaller player grows (using the tool of disruptive innovation, of course) to overtake stable bigwigs. Fusajiro Yamauchi founded Nintendo in 1951. Prior to this, he had ventured into the business of playing cards in 1889. Nintendo continued to manufacture and sell playing cards until 1970, when the organisation began making video games and electronic toys, after which it entered the United States market, making and marketing video games and enhancements. The year 2000 was a landmark year for the video game industry, given that all the three major players launched new products. Previously, Nintendo was the market leader in video gaming. However, with the launch of Sony’s PlayStation2, Nintendo lost this coveted position. PS2 outsold its competitors, including Microsoft’s Xbox and Nintendo’s GameCube. Sony and Microsoft continued to enhance their products by adding new features, but with the appointment of Satoru Iwata as President of Nintendo in 2002, the organisation decided to take a very different route to growth.
Nintendo observed that in Japan the customer base of the video game industry was in decline. This may be attributed to new variants of the products being very complicated. The product features were more than what many segments of customers wanted. Even in the segment that remained, Sony and Microsoft continued to launch new product enhancements. Given this current industry paradigm, Nintendo decided to take a different path altogether…. It realised that there is a huge market for non-gamers as well. There were segments of the existing customer base which slowly ceased to buy video games, the ones with increased enhancements as well as price. Nintendo decided to target these two segments. There was definitely uncertainty, as new product introduction was not the sure shot mantra for success. Also, since this would be an emerging market, traditional measures of performance might give a gloomy picture. Despite all this, Nintendo launched the Wii — a revolution in itself. Here was a video game system with games that could be played with a simple wand-like controller. There was no complex wiring or controls to be manoeuvred. The movement of the controller was detected by the screen’s motion detectors, translating these motions into gaming action. Needless to say, this was an instant hit, and within a year of Wii’s launch, the market value of Nintendo tripled.
There is another element of the Wii strategy that we need to discuss. Prior to the launch of Wii in 2006, the organisation had moved very cautiously in capturing the new market segment. It was taking baby steps so that any wrong move didn’t prove disastrous. For example, Nintendo developed and launched a new hand-held gaming device called double screen (DS) in 2004. This was the first step towards a simplified product, and this had a touchscreen. Customers could even write on the screen using a stylus. There was no need for an array of buttons or a joystick to play games. Next, a Wi-Fi connection was launched, as a result of which DS users could play with other players on a particular network. Based on these steps, the Wii was finally launched in 2006.
Illustration III: Tata Nano
Tata Nano is the Rs1 lakh car released by Tata Motors in 2008. It was made available to customers from 2009, and is considered the cheapest car in the world. This car was launched against the backdrop of intense competition in the Indian automobile industry. Not only were existing national players coming up with a new range of cars, but foreign organisations had started setting up shop. Previously, the Indica V2 (specifically the diesel variant), a product of Tata Motors, was considered an outright success with a substantial market share….
Tata Nano was targeted more towards two-wheeler owners… This led to the creation of an entirely new segment. This market did not exist earlier, given the unaffordability of even the basic variants of other automobiles. Also, this market was initially uncertain and at a nascent stage. All these factors qualify this move of Tata Motors as one of disruptive innovation.
Reprinted with permission
Next week: Extract from Managers Who Make a Difference: Sharpening Your Management Skills by TV Rao
