In Defense of Routine Innovation8 June, 2015 / Articles
Almost every discussion of innovation today inevitably turns to the topic of “disruption.” Academics write about the power of disruptive innovation to transform one industry after another. Consultants have set up practices to focus specifically on helping companies become disruptive innovators. Venture capitalists tout their latest investments as potential disruptors. Even executives of large corporations talk about the need to make their behemoths into nimble disruptors.
It is, of course, with good reason that disruptive innovation draws our attention. Disruptive innovation — generally defined as innovation that fundamentally transforms the way value gets created and distributed in an industry — has the promise to catapult start-ups into multi-billion-dollar enterprises and topple seemingly untouchable giants, all at the same time. The promise of becoming the next Google, Amazon, or Apple (and the threat of becoming the next, Kodak, Polaroid, or Barnes & Noble) is certainly enough to make us take notice.
Yet all the excitement about disruptive innovation has blinded us to one simple but irrefutable economic fact: The vast majority of profit from innovation does not come from the initial disruption; it comes from the stream of routine, or sustaining, innovations that accumulate for years (sometimes decades) afterward. An innovation strategy has to include both. Let’s examine a few examples.
Intel is certainly one of the great disruptors of all time. Its microprocessor fundamentally altered the structure of the personal computer industry. Yet, its strategy for almost three decades has largely been that of a sustainer, not a disruptor. Its fortunes have been built upon its successes in pushing the technological frontier of the microprocessor. But its essential value proposition — a higher-performing, high-margin product — has not changed.
Let’s take the introduction of the x386 in 1985 as the starting point for the sustaining strategy (although one might argue that the x386 was itself just a sustaining innovation, relative to earlier generations). How has this strategy worked? Well, since 1985, Intel has generated cumulative operating income before depreciation of $287.4 billion.
Is Intel’s growth slowing today? Sure. Is it facing threats today from companies that are making chips better suited to mobile computing? Absolutely. Might it decline in the coming decade? Certainly a possibility. But, how many companies out there (or their investors) would pass up the opportunity to have generated close to three hundred billion in cash?
Another example is every innovation pundit’s favorite company to criticize today: Microsoft. Again, the company has its origins as a disruptor. But for much of its history, Microsoft has been an incredible sustainer. It has built and defended its competitive position by reinforcing its Windows/Office franchise. Its specific tactics have evolved over time, but the basic strategy has remained the same.
It is hard to pinpoint the exact point that Microsoft became a sustainer because it has been a sustainer for so long. Let me be generous to it and take the introduction of Windows 3.1 in 1985 as the transition point. (Many will argue, correctly, that there was not much novel about Windows and that, Microsoft did not really do anything “disruptive,” in the true sense of that word, since the introduction of DOS). Since 1985, Microsoft has generated $325 billion in operating profit cumulatively before depreciation. Not bad for a mere sustainer.
Is Microsoft’s growth slowing? Absolutely. Has it missed out on really key growth markets like search? Undeniably. Does Linux threaten it in corporate servers? Big time. Is the move toward mobile a potential disruptor for Microsoft? Certainly. Like Intel, these are challenges the company must navigate, but how many companies in corporate history have earned $325 billion over three decades? None as far as I can tell.
Then there’s Apple. The iPhone has got to be the single most successful consumer electronics product in history. Since 2011, Apple has generated $150 billion in cash flow, much of that from the iPhone. But was the device disruptive? There were plenty of smart phones and PDAs around long before the iPhone (the Palm Treo, Nokia 9000, etc.). Why did the iPhone succeed? The answer is pretty simple: It was better. It was better designed aesthetically and functionally. It was beautiful and far easier to use than the alternatives. And later, with the opening of the Apps Store, the iPhone became a much more versatile device.
There was no big disruption. The iPhone did not change the value proposition of the business; it did not create a new market or enter an existing market with a low-end alternative (a classic disruption strategy). The idea behind the App Store — allowing and making it easy to install third-party software on a device — has been around since the beginning of the computer industry. The iPhone has been extraordinarily successful, but it’s hard to argue that it was “disruptive.”
My intention is not to diminish or dismiss disruption. But there is far more to the innovation game than disruption. If you disrupt and can’t sustain, you don’t win.
There are many examples of initial disruptors in an industry that did not sustain their advantage because they were unable to rapidly build upon and improve their initial design. EMI invented the CAT scanner but was crushed by GE, which brought to bear its superior engineering experience and distribution in diagnostic imagining. There were dozens of early personal computer manufacturers in the late 1970s, but most of them failed after IBM entered the market. The early internet search companies (e.g., Lycos) were surpassed by Yahoo, which itself got crushed by Google because it had a far superior search algorithm. Palm and Nokia lost out in smartphones because they failed to win at this brutally competitive game of rapid evolutionary (sustaining) innovation.
In creating an innovation strategy, managers should strive to achieve the optimal balance between disruptive and sustaining efforts. There is no magic formula. Young start-ups are not going to beat an Apple or Google at its own game. They need to find an alternative value proposition, and disruptive strategies are likely the only route there. (This is why it makes sense for venture capitalists to obsess about disruption).
But once a company is established, innovation strategy means understanding how to leverage distinctive existing strengths to generate value and capture value. It means understanding how your repertoire of R&D skills, intellectual property, operating capabilities, relationships, distribution channels, and brand can protect and extend the value from innovation.
Playing to your strengths is a fundamental principle of strategy, and applies to innovation as well. Of course, there is a trade-off — another fundamental principle of strategy. If you play to your strengths, you will exclude certain options (Apple is probably not interested in putting Android on its phones anytime soon). Sometimes, with 20-20 hindsight, excluding a particular option turns out to be very costly. But management, unlike academic research, is not practiced with 20-20 hindsight.
Strategic thinking about innovation requires carefully understanding and evaluating the risks and benefits of leveraging existing capabilities and resources. It certainly does not mean allowing your existing resources to drag you into oblivion as the competitive landscape changes. But neither does it mean blindly observing the often-repeated mantra: “You should eat your own lunch before someone else does.” Sometimes, your own lunch is pretty good and the right strategy may be to protect and extend it as long as possible. A company that is a great sustaining innovator has no reason to be ashamed.