Disruptive Change: When Trying Harder Is Part of the Problem

Introduction

• When a breakthrough technology emerges, companies must consider it as both a threat and an opportunity.

How We Respond to Change

• Our responses to unexpected changes are often determined by how we perceive them.
  • Threat: Defensive reaction, immediate aggressive action.
  • Opportunity: Deliberate and reasoned response, postpone action.
• Business organizations react similarly.
  • Major market disruption influences how managers:
    • Describe the disruption.
    • Organize the response.
    • Allocate resources.
  • Threat: Overreact, commit too many resources too quickly.
  • Opportunity: Commit insufficient resources.
• The way managers frame a disruption shapes the strategy adopted.

Case Studies

Kodak (1996)

• CEO George Fisher knew digital photography could replace Kodak's core business.
• Resisted temptation to ignore it and invested over 2 billion in digital imaging R&D.
• Framed digital technology as a threat.
• Committed to price points and product specifications too early.
• Hastily installed 10,000 digital kiosks.
• Failed in both traditional and new markets.
• Industry outsiders (HP, Canon, Sony) succeeded by focusing on home storage and printing capabilities, uncovering new demand for convenience and selectivity.

R.R. Donnelly & Sons (1994)

• Executives believed digital technology could change book publishing economics through short runs on demand.
• Established a business unit to pursue the opportunity.
• Leading customers showed little interest.
• The new business didn't perform well, key executives left.
• Without a clear threat to the core, commitment was difficult to sustain, and the unit closed in two years.

The Common Cause of Failure

• Both Kodak and R.R. Donnelly framed disruptive technology in singular terms (threat or opportunity).
• Successful organizations treat disruptive innovation as a threat when allocating resources, and as an opportunity when discovering and responding to new markets.
• Managing competing frames requires adjustments to organizational structure and funding processes.

Framing the Issue

• Framing is a critical responsibility of business leaders because perception influences behavior.

Problems with Perceiving Disruption as a Threat

• Management practices that "create a crisis" exploit the human tendency to respond with greater energy when threatened.
• Threat-motivated responses lead to:
  • Defending the existing business model.
  • Committing resources in large lump sums.
  • Tightening existing organizational authority.
• These tendencies amplify each other.
• Early efforts are focused on current products and customers and are funded too aggressively, too soon.
• This creates lock-in penalties and imposes old norms on the emerging business.
• People fail to figure out the best way to serve new markets with new models.
• Kodak fell into this trap.

When Threat-Motivated Response is Effective

• Effective when an external threat doesn't require significant changes to work routines or business models.
• Fatal when fundamental changes are needed (cost structures, models, customer networks, product applications).
• The company pushes harder on previously successful paths, losing sight of direction.
• Most disruptions create net growth by starting new markets and attracting new customers.
• Digital market wasn't immediately cannibalistic.
• Minicomputers moved upmarket to attack mainframes after creating separate market growth.

Problems with Perceiving Disruption as an Opportunity

• No one feels the need to change; no support for experimentation, leading to failure.
• Resource allocation systems support existing businesses.
• Mark Twain: "Every once in a while one stumbles across a good idea, but with any luck you'll right yourself and pass it by."

Newspapers and the Internet

• In the mid- to late-1990s, the Internet could fundamentally change newspaper publishing.
• Industry leaders were slow to respond, then responded aggressively but rigidly, missing opportunities.
• Initially, managers undervalued the Internet.
• Online experimentation failed due to a different economic model.
• Print advertisers didn't value the Internet.
• Newsroom editors looked down on the Internet, fearing low quality and loss of control.
• Editors and business managers became nervous as online players attacked core franchises.
• Monster.com and Microsoft Carpoint threatened classified revenues.
• Citysearch threatened local news.
• Publishers invested heavily in defensive measures.
• Internet-related development expenditures increased from less than 5 million in 1997 to more than 700 million by 2000.
• Companies simply reproduced the printed newspaper electronically.
• Demand was for a different product.
• Fresh content (not replicated from the newspaper) led to higher market penetration.
• Print business models were limited online.
• Executives missed the independent opportunity.

Missed Opportunities: Want Ads and Interactive Marketing

• Want Ads: Monster.com cornered the online classified market.
  • It became the second-largest recruiting ad company in the world, controlling more than 50% of the online ad recruiting market.
  • Revenue grew to 536 millionin 2001; the company's pretax operating income was 150 million.
  • Almost 40% of its revenue comes from client services, such as candidate profiling and relocation services. These offerings are completely absent from most online newspapers' income statements.
• Interactive marketing: E-mail marketing accounts for nearly 10% of all online advertising revenue and is expected to grow to more than 25% by 2005.
  • Most newspaper sites do not track email, so they can't make money from them.
  • Demographically targeted ads can command up to 70% premiums over generic advertising.
  • Yahoo!, for example, lets advertisers sort campaigns by occupation, industry, gender, age, and location; it raises the premium charged for each additional demographic category.

Successes

• Knight-Ridder and the Tribune Company have achieved some success with their employment site, CareerBuilder.com, now the third largest job site on the Web.
• The New York Times Company has one of the most sophisticated demographic-targeting capabilities in the world; it has captured demographic data on more than 16 million registered users. Like Yahoo!, it gets significantly higher premiums for ads that are targeted to specific demographic categories.

Beyond Framing

• Recognizing the importance of careful framing is one thing; making organizational and process changes is another.

Provisional Lessons

• Separate for better performance: High performers operated independently from their parent organizations.
  • Separation helps untangle contradictory imperatives of threat and opportunity.
  • Freestanding ventures were more likely to view the new business as an independent opportunity and frame their plans accordingly.
  • Calling a business separate and making a business separate are two different things.
  • Direct reporting and physical proximity eliminated the autonomy needed to create different work patterns and decision rules required in the new business.
  • Intervention by the core organization can result in an overemphasis on established business practices, which preclude the development of ones that are more appropriate to the new market.
  • Separation benefits the core organization by allowing them to focus on what they do best.
• Fund in Stages: Top executives should help them do so by controlling the flow of investment.
  • The CEO pushed them to find new markets and new opportunities that would value the unique attributes offered by the CMOS technology. And he committed additional resources only when the management team identified and began developing new markets.
• Cultivate Outside Perspective: The greater a manager's experience away from the core organization, the less likely that motivation remains focused on the threat to the core organization.
• Appoint an Active Integrator: There is generally an executive who acts as an integrator, actively managing the tensions between the parent and the new venture.
  • Serves as mediators between the new venture and the parent organization.
  • Manages the framing across both organizations.
• Modularize Integration:There is a powerful tendency for established organizations to overemphasize the potential for integration and synergy between a newly launched business and the core business.
• Consider Acquisitions: Managers should therefore consider acquiring an already successful company in the new market environment. That organization will likely have established its own focus on growing the new opportunity, which can be maintained without putting the parent organization on the defensive.

Conclusion

• Labeling the innovation as a threat to the company's survival tends to free up resources and create organizational commitment.
• People who feel threatened tighten up, have trouble thinking creatively, and spend money on the wrong things, trying to keep their old business alive.
• Building a separate organization, funding in stages, and continuing to pay attention to the old business can help.
• Managers can unlock the potential of both the old and the new by framing innovations in a nuanced, balanced way.