If you want to beat the industry leaders, you shouldn’t try to outperform them in an established market, but “disrupt” them by creating a situation where they want to flee from you.
And if you want to create a new growth business, you should start by competing against nonconsumption, by offering products and services so simple and affordable that people who lacked access to them will be delighted to use them, even they may be low-quality at first.
This is the growth-creation advice to Japan offered by Harvard Business School professor Clayton Christensen, who discussed “disruptive technology” at Keidanren Kaikan on Sept. 2 in a seminar organized by the Keizai Koho Center.
According to the professor, the incumbent leaders of an industry will “almost always” survive the fight over sustaining innovations in the established market. “The leaders figure out a way” to make better products they can sell for higher profits to their best customers, he said.
“But every once in a while we see a different kind of technology come into an industry, and we call this a ‘disruptive technology,’ ” Christensen said.
Such a technology is disruptive not because it brings about a breakthrough in performance, but because it redefines the market by introducing a product that is not as good as what the leaders make but is simple and affordable and can improve later to meet the needs of mainstream customers, he explained.
“And what we learn is that, almost always, entrant companies win the battles of disruptive innovation,” he said.
Christensen discussed the history of the steel industry in the United States, where new firms using minimills have gradually beat larger, integrated steelmakers.
Minimills use scrap steel melted in electric furnaces to make products instead of iron ore smelted in blast furnaces. When low-cost minimill technology became viable in the 1960s, the quality of the products was so low they could only be used for concrete reinforcement bars, Christensen said.
Integrated steelmakers were happy to leave the reinforcement bar market to minimills, because it never made sense to protect their share of the low-end, low-profit market and they could concentrate on more profitable segments, he said.
But when minimills monopolized the reinforcement bar market, the price of the product collapsed, forcing them to move upmarket. This again forced the integrated makers to escape into even higher segments of the market rather than fight the low-cost minimills.
This process was repeated until the minimills accounted for about half the steel production in the United States, forcing all but one of the integrated makers to go out of business, Christensen said.
The minimills won the battle because they engaged in a fight from which the industry leaders were motivated to flee, the professor said.
“In the whole story, there were no stupid managers,” he said as he explained how both sides took logical actions. “The integrated mills were doing what financial markets wanted them to do — get out of low-margin products, move to high-margin products and listen to their best customers.”
Christensen said the major industries that were the main engines driving Japan’s economic miracle through the 1980s went through this same process.
In the auto industry, for example, he said that Toyota, Nissan and Honda sold low-price, low-quality cars in the 1960s that drove their American competitors into higher segments of the vehicle market. Nippon Steel, Sony, Seiko and Canon did the same thing.
“Now each one of those Japanese companies is now at the high end of the market, making finest-quality products in the world,” he said.
The question is: What they would do if there was no room for growth at the high end?
When the American companies got stuck in the high end of the market after being disrupted by Japanese competitors, their employees left and collected venture capital to start new waves of disruptive growth, the professor said.
“So even though the individual companies stalled and began to fail, the (American) economy kept going because we could start new waves of growth business,” he said.
However, the Japanese economy as it is today is not structured to start new waves of growth business, Christensen warned. “Venture capital does not work well here, employees tend not to be willing to leave their employers, and so if Japan played the game once, the game is essentially finished.”
In addition to the low-end approach that the minimills took, another way to disrupt the market is to target people who were previously not considered potential customers, the professor told the audience.
When the personal computer was introduced, a whole new population of consumers who did not have the money or skill to run a computer could suddenly own one.
Similarly, NTT DoCoMo’s i-mode service created a new growth market by enabling a wide range of people — including teenagers — to access the Internet on mobile phones, he pointed out.
“If you are running a company like Hitachi, and ask yourself where is the growth going to come from, would it come from making even better high-definition TVs, or even better high-quality air conditioners? I don’t think so,” he said. “There are huge new growth markets surrounding Japan if companies use their technology to make products that are simple, affordable and compete against nonconsumption.”
However, many of the leading firms tend to use their resources to sustain technological innovations in their core business, he said. “And they spend a lot of money and create no growth.”
Back in the 1950s, the transistor proved to be a disruptive technology against the widespread use of the vacuum tube in the consumer electronics industry.
At that time, the transistor was still not good enough to be used in conventional products, such as table-top radios and floor-standing TVs. So the consumer electronics giants in the U.S., such as RCA and General Electric, spent billions of dollars in joint research to improve the technology before commercializing it, Christensen said.
But when Sony introduced the first pocket radio with transistor technology in 1955, he said, the Japanese firm targeted customers who historically couldn’t even afford to be in the market — teenagers.
Although the product was of such poor quality it would have been rejected outright by their parents, American teenagers were delighted because they had never been able to own a radio before, creating a booming, new market, he said.
“So if I want to create a new business, the right customers to focus on are not the customers in the mainstream market, but they are nonconsumers who historically have not been able to afford to own or have the skill to use the product,” he said.
Today, Japanese, U.S. and European governments are spending billions of dollars on research to improve solar energy technology. But Christensen said he doubts whether solar energy will ever be commercially viable enough to cover the huge electricity demand in those industrialized countries.
On the other hand, solar energy can be a boon for the 2 billion people in Asia and Africa who currently lack access to conventional power, he pointed out.
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