Sustaining and Disruptive Innovation, MTI Class Two

This is the second post about the class on technological entrepreneurship I’m teaching up at Columbia.  Class one was an introduction to the why of entrepreneurship, as well as an outline of what the course will be. Class two dives right into innovation theory. The main goal is to start them thinking about innovation in a more comprehensive way–it’s not invention, it’s not discovery. For this I use Christensen’s The Innovator’s Dilemma. This also serves the subsidiary goal of beginning the acculturation of the students into the businessperson’s innovation milieu.

First, we had a speaker. Lizzy McVay Greene, founder of Plovgh. Plovgh is disintermediating the food business by connecting farms directly to local markets. It’s a great first company to talk to the students about because it’s an area of endeavor they can immediately understand, it touches on some of the key points about business model innovation, and it’s easy to ask “Why now?”, “How big is your market?”, “What’s the value proposition?”, “Who are your customers?”, etc. Lizzy is also a great entrepreneur for this because she spent time in the industry prior and has a deep knowledge of it and its problems–attributes I would like my students to develop. An excellent way to start off the speakers for the semester.

Then we dove into Christensen. I like Christensen, and certainly you can’t go a day in the startup world without someone saying something is ‘disruptive.’ They are usually wrong–at least they are not using the word disruptive the way Christensen uses it–but the idea (perhaps more accurately called ‘radical’ disruption) that startups can challenge established companies by doing something unexpected and different drives technology entrepreneurs everywhere.

I start out with Google as a case study in innovation. The fun part with this is that the class expects me to say that the search engine is disruptive. But it’s clearly not, it’s sustaining; the pay-per-click advertising model is what was disruptive with Google. I start out with the evolution of the search engine (slides 4-6; slide 4 should be credited to Wikipedia, not sure how the citation got dropped.) The idea being that there have been several waves of innovation in search engine technologies over the years, and the companies in each wave have gotten better along the axis of quality that characterized the wave. We then talk about the technology s-curve and its causes and show the waves of innovation as successive s-curves. This idea of successive s-curves is from a Christensen paper (see slide 9, although I’m pretty sure it did not originate with him.) This, of course, is the archetypical ‘sustaining’ innovation curve: the introduction of new technologies to support steadily rising quality along a specific measure.

Slides 10-12 are among my favorites. They quote Andrall Pearson, the former president of PepsiCo and a McKinsey consultant, in an article he wrote for the HBR, saying that “successful innovators usually have a pretty clear idea of the kind of competitive edges they’re seeking. They’ve thought long and hard about what’s practical in their particular businesses.” That is, the quality metric is known; innovation, to Pearson, is finding a way of improving products along the existing quality metric–sustaining innovation. Slide 11 is from another HBR article (with my annotations) showing that most innovation is optimizing existing products for existing customers (while the most profitable innovation is developing breakthroughs for markets that don’t yet exist.) I’ve read in many places that the vast majority of innovation in the world is incremental/sustaining, but never seen any backup. This was the only article I’ve found purporting to quantify this, although I’m pretty sure the data is more anecdotal than authoritative. But the idea that most innovation is sustaining is what I’m getting at. The next slide (12) is the punchline: the second half of the Pearson quote. First it goes into knowing your business cold if you want to innovate (and this is something I repeat over and over in the class.) But the payoff of the quote is: “most of PepsiCo’s major strategic successes are ideas we borrowed from the marketplace–often from small regional or local competitors.”[1] This is an awesome example of why sustaining innovation is so hard: you come up with a great new idea and as soon as you are successful enough for anyone to notice, your giant competitor steals it.[2]

This leads us into a discussion of disruptive innovation (slides 15-17) and then we talk about the minimill case study from Innovator’s (slide 18; I like this story and the adoption of hydraulics story better than the disk drive story, they are cleaner.) Then we go back to Google and whether it was disruptive. We talk about the two ‘customers’ of Google–the paying customers and the users–and what quality means to each of them (slides 19-24.) This is a great place to let the students talk and figure it out themselves; they are usually pretty conversant about Google and now have enough background to work through the sustaining/disruptive innovation question on the search engine. They usually need some help with what ‘quality’ means to an advertiser and how Google disrupted the industry by finding a quality metric (lowering risk) that is completely different from what existed before (reach), and how this created an entirely new market of smaller advertisers.

Finally, we talk about a way to qualify types of innovation into the 2×2 chart in Innovator’s, emerging/established market and new/proven tech. Disruptive innovation is just one of these four quadrants, but I want to make the point that startups can start in any of the four. While Christensen’s disk drive stats show that the disruptive quadrant has the best chance of success, it’s easy to think of companies that have started and thrived in each of the four quadrants. I then tie this to Steve Blank’s four market types (although only three of Blank’s market-types overlap.)

Here are the slides:

So, some thoughts.

I like Christensen less every time I teach him. To a large extent, his theory is descriptive, not prescriptive. Justin called me on this, and there will be some slides in class three about it, but I still believe that no matter how hard you try to create something ‘disruptive’, there’s no way to know if the new market a disruptor needs to be successful will actually come into existence or not. Christensen has made a career trying to disprove his own greatest ideas (see, for instance, his roster of “Innovator’s” books that came after the original: “The Innovator’s Solution”, “The Innovator’s DNA”, etc.) but Innovator’s is pretty clear that disruptive innovation can’t be predicted or defended against. I’m not really so interested in debating whether or not the idea of disruptive innovation is actionable or not, it’s just that I can’t think of many ways to make it actionable. In fact, if you think about the actionable startup strategies we do have–the lean startuppy things–they are aimed almost entirely at non-disruptive innovation: iteration is a way to create incremental innovation, customer discovery is a way to find out what existing markets look like, etc. There are no maps to the unmapped places–one of the main themes of the course. The best advice that exists on being disruptive is: be prepared to fail, be resilient when you do. While this is valuable advice, I cover it elsewhere.

I want to chuck Christensen, but haven’t figured out what I would replace him with. This semester I become more interested in the neo-Schumpeterians, like Carlota Perez, as innovation theorists. I use their ideas in class three, but I don’t really find Perez’ Technological Revolutions and Financial Capital all that useful as a book for would-be entrepreneurs. If I could, I would probably read Mokyr’s The Lever of Riches, but not sure I could fit it into the course. I’ll let you know what I decide.

Class three we’ll talk about technological revolutions, their origins and try to tie that to ideation.

1. You’d assume this would be one of those “did I say that out loud” moments, but it was in the HBR.
2. There’s an interesting argument to be made that the Internet has changed this dynamic because of the ability to launch nationally, rather than regionally. This seems to have been true in some cases–Facebook, for example–but whether it is true more generally and what that means needs some serious thinking.