Wednesday, May 13, 2015

Michael Porter on disruptive technology

From the Porter interview at the end of the book Understanding Michael Porter: The Essential Guide to Competition and Strategy:
Magretta: What is a disruptive technology? Where does it intersect with your thinking about strategy? 
Porter: This is a really useful and compelling idea, but it is badly misused and misunderstood to refer to any and every competitive threat. It would be more helpful for managers to use the term only for the far less common situation of real game changers. 
A disruptive technology is not any new technology. Many new technologies are not disruptive. Nor is it any big technological leap, because many big leaps are not disruptive. A disruptive technology is one that invalidates value chain configurations and product configurations in ways that allow one company to leap ahead of another and/or make it hard for incumbents to match or respond because of the existing assets they have. So a disruptive technology is one that would invalidate important competitive advantages. 
The Internet offers a classic case. It was disruptive where the mechanism for delivering information was fundamental to the product or service, where the business, in essence, was the delivery mechanism. Travel agents, for example, or the recorded music business. But in other cases, the Internet wasn’t disruptive because it was simply one more channel for communicating with customers or suppliers. In those cases, established companies with the best product sets and brands were simply able to incorporate the new technology. It wasn’t incompatible or inconsistent with anything they were doing. 
Two questions will tell you whether you’re dealing with a disruptive technology or not. First, to what extent does it invalidate important traditional advantages? Second, to what extent can incumbents embrace the technology without major negative consequences for their business? If you stop and ask those questions, you’ll see that true disruptions are not so common. If you look over a decade, for example, at the hundreds of industries that make up the economy, I would guess that less than 5 to 10 percent would be affected by a disruptive technology. 
Having said that, managers should of course be on the lookout for potentially disruptive changes. The advice they get tends to focus on just one form of disruption: a simpler and less costly technology is improved and gets good enough to serve a need that’s currently met by a more complex and more costly technology. So most managers look for the threat to come from below, from some upstart you’ve been dismissing as being irrelevant to your business. And then you learn to your horror that for a lot of customers, the upstart is good enough. To use my value proposition terms, the customers’ needs were being overserved by the “old” technology. The new one meets just enough of their needs at the right price. Disruption from below is an example of a focus strategy. If you focus on the customers who don’t need all the special bells and whistles, you can establish a beachhead. A focuser with a disruptive technology can enter your industry and ultimately grow to occupy a major position. This is the Southwest Airlines story. 
But other forms of disruption play a role in strategy. The threat can come from above. You can have an advanced technology or a richer approach that performs at a high level but that can be simplified or streamlined to meet less sophisticated needs at much lower cost. We don’t have good evidence on which form is most prevalent, but both exist. Disruptive technology is compelling as a metaphor, but managers need to be rigorous about what’s creating the disruption. How does it impact the value chain? Relative price? Relative cost? The strategy fundamentals definitely apply here.