BSAD 281:66 TECHNOLOGY MANAGEMENT - CHAPTER 7: DISRUPTIVE TECHNOLOGIES

Section 7.1: Learning Objectives

• Identify the two characteristics of disruptive innovations.
• Understand why dominant firms often fail to capitalize on disruptive innovations.
• Recognize examples of past disruptive technologies and learn from the disruption that faced once-dominant firms, including Kodak, and currently, Intel.

Understanding Disruptive Innovation

• Many large firms fail to transition as new technologies redefine markets.
• This is seen across various industries, with tech being particularly fertile ground.
• The market-creating price elasticity of fast/cheap technologies catalyzes the fall of giants.

Characteristics of Disruptive Technology

• Disruptive technologies create market shocks and catalyze growth.
• True disruptive technologies have two characteristics:
  • Come to market with a set of performance attributes that existing customers don’t initially value.
  • Over time, these attributes improve and invade established markets.
• These attributes mark the shift from analog to digital.
• Examples:
  • Early digital cameras had terrible photo quality.
  • Early digital music, video, and mobile phones had poor performance.

Impact of Digital Products

• Digital products now have a market-disrupting impact.
• Examples:
  • Digital cameras have nearly eliminated film use.
  • Record stores are largely obsolete.
  • Mobile phones are many people's only phone.
  • Smartphones are the only personal computer for many in emerging markets.
  • Internet phone service is often indistinguishable from conventional calls.

The Giant Killer

• Figure 7.1 illustrates how disruptive innovation overtakes incumbent market leaders over time. As the performance of the disruptive technology improves, it eventually meets and exceeds the performance demanded by the high end of the market.

Examples of Disruptive Innovation

• Web video: Initially of terrible quality, cheaper processors enabled internet access on TVs and DVD players.
• Netflix: One of the few firms to navigate through tech-fueled disruption.
• Digital audio: Portable MP3 players were initially terrible but Apple timed its market arrival with cheaper, smaller storage and iTunes.
• Spotify: A Swede launched Spotify, dominating the market by focusing on streaming as Apple focused on the U.S. market.
• Ride-sharing services: Uber ushered in the sharing economy and gig work, creating a large international brand with numerous drivers.

Why Big Firms Fail

• Failure to recognize disruptive innovations as a threat.
• Resources aren’t dedicated to developing the potential technology.
• Firms don't nurture the needs of a new customer base.
• Early customers of disruptive technology value different features than incumbent customers.
  • Example: Free call over a quality call, portable music over high-fidelity music.
• Disruptive technology becomes good enough to appeal to incumbent customers and invade those markets over time.
• Startups amass expertise and scale quickly.
• Big firms are forced to play catch-up, rarely closing the gap.

Intel: A Study of Disruption in Progress

• Intel's struggles are due to incursions from ARM (chips for mobile phones) and Nvidia (AI and machine learning chips - valued at over $1 trillion).
• ARM-based chips power nearly all smartphones and are more power-efficient than Intel chips.
• ARM doesn’t manufacture chips; firms outsource production to third parties like TSMC.
• Apple used ARM technology and eventually created its own chip, the M1, for Macs, outperforming Intel chips.
  • The first laptop/desktop chip was as much as 3.5 times faster than Intel chips used in earlier Macs.
  • Graphics process up to 6 times faster.
• Nvidia surpassed Intel in value and profits and has over 80% share of the graphics chip market.
• Nvidia offers a full ecosystem around its chips, including hardware, OS, SDKs, and services.

Intel's Response

• Developed lower-power chips for the smartphone market.
• Developed a Curie chip for wearables but pulled back.
• Refocused low-power chips on the industrial Internet of Things.
• Doubled down on competition in the AI market with its own AI chips and platform.

Section 7.2: Learning Objectives

• Suggest techniques to identify potentially disruptive technologies.
• Understand how incumbent firms might more effectively nurture their experimentation and development of potentially disruptive technologies.
• Contrast the approaches used by Yahoo! and Intuit when encountering disruptive technologies, and understand how firms might learn from these examples.
• Examine several potentially disruptive technologies, brainstorm what it might take for their potential to be realized, and consider the potential positive and negative impacts of these innovations across industries, workers, consumers, and governments.

Avoid the McNamara Fallacy

• The McNamara fallacy involves basing decisions on past data, which is risky with disruptive innovation.
• Example: Uber was dismissed by analysts who failed to anticipate the impact of superior product-market fit and convenience.
• Uber grew the market worldwide and reduced car ownership.
• Gig economy workers filled taxi service gaps.
• App-based ride-sharing improves payment, trust, safety, and ride arrival accuracy.

Improve Your Radar

• Remove shortsighted, customer-focused, bottom-line-obsessed blinders.
• Converse with those on the experimental edge of advancements, such as top-tier scientific researchers and venture capitalists.
• Increase conversations across product groups and between managers and technologists.
• Rotate staff regularly to improve idea sharing and innovation.
• Employee departures to join future technologies may signal a development worth attention.

Yahoo!'s Squandered Mobile Opportunity

• Yahoo!’s success was desktop, browser-based.
• A mobile team was disbanded by a CEO who couldn't justify keeping engineers on underperforming projects.
• The team lacked an executive champion during the pioneering phase.
• Potential outcomes if the mobile team had been protected:
  • Flickr could have become Instagram.
  • Yahoo! Messenger could have become WhatsApp.

Spotting a Potential Disruptor

• Build a portfolio of options on emerging technologies by investing in firms, startups, or internal efforts.
• Options give the firm the right to continue and increase funding as a technology shows promise.
• Consider acquiring startups or investing more resources in promising separate divisions.
• Separate innovation from core businesses to encourage new market and technology development.
• Focus while isolating the firm from resource sapping by competing cash cow efforts.

Intuit Pilots a Course Through Disruption

• Intuit's strategies for dealing with disruption:
  • Acquisitions: Bought upstart rival Mint.com.
  • Migration to the cloud.
  • AI-driven learning models to detect trends and anomalies.
  • Customizable dashboard of widgets.
• KPIs (Key Performance Indicators): Measurable values to demonstrate progress toward goals (e.g., customer acquisition, cost reduction, ROI of online ad campaigns).
• Intuit has managed to find growth in disruption.
• Connected services (cloud-based or enhancing existing offerings) make up over 65% of revenues.

No Easy Answers

• The newspaper industry was decimated by internet alternatives.
• Fast/cheap technology fueled the internet and created a superior substitute for newspaper classifieds:
  • Unlimited length
  • Photos and email links
  • Instant modification and takedown, often free
• Even well-armed firms face costly transitions in battling disruptive newcomers.
• Disney’s streaming video has lost money since Disney+ debuted, while Netflix has posted positive operating income.
• Keys to being a tech victor, not victim:
  • Keep disruption-detecting radar dialed up high.
  • Watch the trajectory of fast/cheap technology curves.

Potential Disruptive Technologies

• 3D printing (additive manufacturing)
• Augmented reality (AR)
• Cryptocurrencies and blockchain
• Gene editing
• Driverless cars
• Wireless technologies
• Battery and related renewable fuel technologies
• Generative AI
• Robotics
• Quantum computing

Section 7.3: Learning Objectives

• Understand why early predictions of consumer 3D printing haven’t panned out.
• Recognize how modern additive manufacturing works.
• Understand how 3D-printed homes offer benefits over conventional manufacturing.
• Learn the circumstances where industrial additive manufacturing makes sense.

Section 7.3 Learning Objectives Continued

• Understand how additive manufacturers are using additive manufacturing to produce parts for a variety of firms from aerospace to life sciences.

Additive Manufacturing

• Consumer 3D printing has not reached predicted mass market adoption due to:
  • Quality and complexity issues.
  • Inability to produce durable products for practical purposes.
  • Low-end plastic materials that broke easily.
  • Cheap-looking printed products.
  • Difficult configuration and material selection.
• Three-dimensional printing is now often referred to as additive manufacturing.
  • Industrial 3D printing builds material layer by layer.
• Techniques for additive manufacturing include:
  • Spooling and melting plastic from a print head.
  • Resin printing using light to solidify liquid resin.
  • Metal printing (building up material from powder and baking, or using lasers to melt powdered metal).

3D Printed Houses

• 3D printing houses with cement offers advantages:
  • Cost advantages as homes cost less with fewer employees being needed.
    • Materials cost roughly 80,000 versus 150,000 for conventional homes
  • Less energy usage.
  • Fewer harvested materials are consumed.
  • New design creativity for designers and architects.
  • Structurally strong and good insulator.
  • Addresses issues associated with affordable housing, construction worker shortages, and supply-chain problems.

When Additive Manufacturing Makes Sense

• Additive manufacturing that has hit the mainstream:
  • Hearing aids.
  • Teeth aligners.
  • 3D printed parts of athletic shoes.
• For metal, alloy, and advanced materials parts, it's possible to create some 3D-printed components that are impossible to create via conventional techniques.
  • Single printed parts can often be stronger and lighter.
  • Minimal waste is important when using costly or toxic materials.
• Additive manufacturing shines during the design process.
  • Code changes easily alter the part design without requiring new molds or equipment redesign.

3D-Printed Hip

• 3D printing startup, VulcanForms, uses lasers to craft single-piece metal parts.
  • 150 lasers simultaneously melt powdered metal in layers thinner than a human hair.
  • Uses half the energy and a tenth of the material of a traditional factory and is quiet and clean.
• Firms that use Vulcan:
  • Stryker: Creates spinal implants and knee/hip replacement parts with intricate surfaces for bone grafting.
  • GE Aerospace: Additively printed jet engine fuel nozzles that are single-part, stronger, and lighter.

Future of 3D Printing

• The inability to hit predictions of early pundits hasn’t stopped innovation on 3D-printed life sciences, organs, or food.
• GSK and AstraZeneca actively working on 3D printing pills that include multiple medications in a single dose, lower the complexity of adhering to a treatment plan, improve prescription compliance, and lower health-care costs.
• Three-dimensional printing may prove vital for space travel —NASA is actively working on 3D printers that would take materials from the moon or Mars as 3D-printed input and recycle urine or feces for astronaut nutrients.

Section 7.4: Learning Objectives

• Understand Bitcoin, its appeal, strengths, and limitations.
• Understand blockchain technologies, their potential benefit, current weaknesses, and areas of promising and impactful use.
• Learn about the DeFi movement and its relation to cryptocurrency and blockchain technologies.
• Gain additional insights into evaluating the trajectory of technology and its disruptive capacity.
• Understand the failure of FTX and Alameda Research. Learn how this has led to the “crypto winter” and impacted the adoption and use of crypto and blockchain technologies.
• Understand the failure of FTX and Alameda Research. Learn how this has led to the “crypto winter” and impacted the adoption and use of crypto and blockchain technologies.
• Understand CBDC efforts and how these relate to stablecoins, and learn about how China’s e-CNY has struggled domestically but presents an alternative to the U.S. dollar for the global financial system.

Crypto, Blockchain, and DeFi

• In 2022, the NFT market saw weirdness.
  • Justin Bieber’s 1.3 million investment in a digital cartoon chimpanzee from the “Bored Ape Yacht Club” tanked in value by over 95 percent in just a few months.
  • Crypto used by Snoop Dogg in Snoopverse also lost over 94 percent of its value.
    • A series of high-profile hacks in nascent blockchain and crypto support Software led others to grow cautious.
• A stablecoin, TerraUSD, lost 95 percent of its value, leading to roughly 45 billion in losses by consumers.
• Misdeeds of Sam Bankman-Fried fueled a crypto bank run that led to 4 billion in customer losses, collapse in crypto valuations, and put the brakes on investment in an industry and technologies that were now seen as a hothouse for scammers.
• Bitcoin: An open-source, decentralized payment system that operates in a peer-to-peer environment without a bank or central authority.
• Cryptocurrencies: A digital asset where a secure form of mathematics is used to handle transactions, control the creation of additional units, and verify the transfer of assets.
• Blockchain: A distributed and decentralized ledger that records and verifies transactions and ownership.
• DeFi: Decentralized finance. An industry term for a bucket of blockchain-enabled financial services that function without the need for central authority, such as a bank or government.

How Crypto Works

• Bitcoins and other cryptocurrencies are transferred from person to person like cash.
• Transactions are recorded in a distributed, decentralized public ledger, known as a blockchain.
• Verification and time-stamping of transactions is performed by a pool of users called miners.
• Assets cannot be transferred without a special password called a private key, usually stored in a cryptocurrency wallet.
  *Passowrds are virtually impossible to guess, verification makes sure the same currency is not spent in two places at once.
• No single blockchain software is used by all efforts.

DeFi Explained

• The blockchain also underpins a set of technologies referred to as DeFi (decentralized finance).
• Advocates:
  • Envision a world where you can use your own holdings to issue loans and earn interest, just like a bank does.
    Personal loans, mortgages, and commercial loans.
    See opportunities for creating trading platforms for complex financial products.
• Transactions will be transparent, fast, and secure, and eliminate middlemen who currently offer financial services with transaction fees.

Challenges for DeFi

• Many things need to come together before DeFi efforts go mainstream.
  • Robust, reliable, and secure transaction platforms need to be developed.
  • Players have to agree to participate in running the shared infrastructure.
  • Participation in early DeFi efforts is considered a wild west of risk, and might even be considered illegal under some laws.
• Governments and international regulatory bodies are also concerned with the anonymity and immediacy built into this system and fear a decentralized and high-speed trading network will facilitate money laundering, criminal funds transfers, or may be used by bad actors like terrorists and rogue regimes.

China's Digital Currency

• Cash isn't dead but it is falling out of favor as bills and coins become cumbersome and easy to lost.
• Over one hundred governments are actively exploring efforts known as CBDC: A digital form of a government-issued currency (Central Bank Digital Currencies).
• CBDCs are not the same as stablecoins: Cryptocurrencies that have their value pegged to a currency or commodity, rather than have currency value float independently.
• China launched a CBDC trial with a digital currency known as the e-CNY (sometimes called e-yuan).

China's e-CNY

• China isn’t an entirely cashless society, but it’s already close.
  • Over 90 percent of people in China’s urban centers use digital payments.
  • Payment via WeChat holds over 55 percent of the market.
  • AliPay holds nearly 40 percent of what’s left.
• China has recently shifted to experimenting with its e-CNY CBDC as an alternative to the U.S. dollar.
• China has also begun running trials using the digital yuan in international trade.
• If successful, the e-CNY could challenge the U.S. dollar’s position as the world’s dominant reserve currency and allow foreign governments to make an end-run around the influence of the United States in global financial systems.

Crypto Benefits

• Eliminates transaction fees, which can top 3 percent.
• Cryptocurrencies could also be a boon for international commerce and cross-border remittance and expanding e-commerce in emerging markets.
• Straddle the line between transparency and privacy.
• Blockchains have no single controlling entity where fraud, corruption, damage, hacking, or government shutdown could occur.
• Blockchains are a standard for securely exchanging value and recording ownership over a network without an intermediary.
• Predictions of less expensive, faster, and more secure transactions.

NFTs

• An NFT is a non-fungible token.
• Can be embedded in digital products, such as art and images, identifying ownership, which is recorded on a blockchain.
• In theory, counterfeiting should never be an issue with NFTs; there is only one verifiable NFT.
• The blockchain always verifies when an owner transfers ownership to someone else.
• Early enthusiasm led to lots of experimental efforts.
• NBA began selling NFTs that were sort of like digital trading cards.
• The band Kings of Leon released an album using an NFT and raised 2 million.

The NFT Craze

• Things got a little bizarre in early 2021.
• Nyan Cat GIF sold for 590,000 even though the Internet was full of easily downloadable copies.
• A ten-second video clip was auctioned for 6.6 million.
• Fabled art auction house Christie’s sold an NFT JPEG by Beeple for 69 million.
• At the height of the early NFT craze, the total market was valued at 4.8 billion and one year later the market value fell by roughly 95 percent.
• NFTs still hold promise for all sorts of things:
  • Fraud-free event tickets
  • Membership cards
  • Video libraries

Examples of Blockchains in Action

• PepsiCo Labs
• Nasdaq stock exchange
• Collection of over forty-five of the world’s leading financial institutions, including Bank of America, Citigroup, HSBC, ING
• IBM
• Insurer Nationwide
• De Beers
• Spotify
• Kodak

Blockchain and Food Safety

• Food-borne illness and a tainted food supply can be a terrifying problem with serious financial and societal implications.
• U.S. romaine lettuce E.coli epidemic Sickened people across twenty-five states with estimates of its impact running into the hundreds of millions of dollars.
• Compound used in plastics production tainted milk in China, sickened some 300,000 dairy customers, and killed at least six infants.
• Wood pulp blended with parmesan cheese, horse meat passed off as beef and plastic found in chicken nuggets were also found.

Tracking Food with Blockchain

• While RFID tags are being used to track items, another method of following food from farm to fork is the blockchain.
  *French department store giant Carrefour is experimenting with the technology — the retailer sells over a million chickens.
  WWF World Wildlife Fund is using an RFID-plus-blockchain solution to track tuna.
• IBM is bringing together major players worldwide to track items through the food supply like Dole, Nestlé, Unilever, and Tyson Foods; Walmart, Kroger, and China’s JD.com with societal impact being massive:
  Insurance lowered, supplier and restaurant bankruptcy avoided, jobs saved, illness avoided and lives saved.

Concerns about Blockchain

• Consumer benefit needs to be stronger.
• Difficult to understand/use technology and has a bad reputation (drug dealers, extortion hackers, tax evaders, etc.).
• Firms have struggled under an ambiguous cloud of not knowing how they will be regulated and what legal issues apply.
• Volatility of the value, early technology couldn’t handle increasing transaction volume.

Bitcoin Price Fluctuation

• Figure 7.3 shows bitcoin price fluctuation from January 1, 2016, through July 26, 2023.

Crypto Evolution

• Consider how currencies have evolved:
  • Precious materials (gold, silver, etc.)
  • Currency backed by precious metals (the gold standard)
  • One based largely on laws and governmental trust
  • One allowing physical cash to be replaced by checks
  • To bits —credit cards and money transfers
  • Now, many use smartphone apps to snap photos of checks and have them electronically deposited into banks.
• With this evolution as context, does cryptocurrency seem like such an unlikely next step?