The management of disruptive innovations is very different when looking at relatively simple or self-contained technologies, products or services versus highly complex platforms and infrastructures. A lot of the hype you often hear when new innovations come about is the result of people not properly understanding the different dynamics that apply to simple versus highly complex innovations. Unrealistic predictions are then made about the near term impact and rate of adoption of the new innovation, because the innovation in question is quite complex in nature, but the predictions assumes that it is on the simpler end of the spectrum.
Let me illustrate what I mean by giving a few examples of different kinds of disruptive innovation across the spectrum from relatively simple to highly complex.
Similarly, flat panel displays replaced CRT monitors and televisions once their prices dropped to the point that many could afford them. Flat panel technologies have been around for decades. They are clearly much lighter and thinner than CRT-based products. But initiatlly, their costs were too high, so they were only used in consumer products that required relatively small panels, such as laptop computers. But now, the vast majority of monitors and TVs use flat panels displays regardless of their size.
Digital audio and video is a somewhat more complicated story. CDs were enthusiastically received when they first appeared in the 1980s, primarily because they offered significantly higher quality than analog magnetic devices like audio cassettes. Over time, people replaced their cassette collections with CDs, and eventually cassettes became obsolete.
Similarly, DVDs where a big hit when they first came out, and started to replace analog video tapes in the 1990s. Their much higher quality made analog video products obsolete over the next ten years.
But, the transition to IT-based digital music and video, which are based on hard disks, software applications and the Internet, - is a bit different. Since they are also based on digital technologies, there is no improvement in quality over CDs and DVDs, as was the case with the earlier transition from analog to digital. The key improvement, - a very big one indeed - is ease of access, that is, the ability to download or stream music and films over the Internet, as well as the ability to better manage music and video collections with software applications like iTunes. Will CDs and DVDs disappear entirely in the near future? While it is very hard to predict, my feeling is that CDs and DVDs will coexist with IT-based music and video for a long time.
The dynamics of innovation with complex platforms and infrastructures is quite different. Let me discuss some examples from my personal work experiences.
IBM announced its System 360 family of mainframes in April of 1964. Over the next thirty years, IBM mainframes became the premier platform for commercial computing. But once simpler platforms appeared in the mid 1980s based on PC and workstation technologies, mainframes started to lose the leading position they had previously enjoyed. The new client-server platforms became the fast growing platforms where most of the innovations now took place.
Many started to predict the impending demise of mainframes. In March of 1991, for example, VC and journalist Stewart Alsop famously wrote in InfoWorld: “I predict that the last mainframe will be unplugged on March 15, 1996.” A decade later, with mainframes still alive and going strong, Alsop metaphorically ate his words.
The architectural descendants of the System 360 adapted to the changing world that almost killed them and are actually doing quite well. They are no longer the only game in town, but now share their market with a variety of servers from IBM and other vendors. Their development continues. In July of 2010 I attended the announcement of the latest generation of mainframes.
For a while now, I have been trying to understand why mainframes are still around. How come the many advanced technologies and disruptive innovations of the last forty years did not render them obsolete, as they have transistors, CRTs and so many other products? What accounts for their enduring qualities?
I think that, like other complex platforms that have to survive for decades, mainframes owe their continued existence to two key qualities.
The first one, is that they must obviously provide good value to their customers, otherwise they would have long abandoned the platform. They have had plenty of server choices over the past twenty years. But, unlike transistors versus vacuum tubes or flat panel displays versus CRTs, mainframes continue to provide a unique value in their market segment that the competing platforms do not match.
Mainframes were designed to support the most critical business applications, including banking, inventory management and airline reservations. Mainframe customers like them because they are a highly cost effective platform for large, critical transaction workloads that require the highest degrees of performance, reliability and security. As long as mainframes can continue to provide good value for such mission critical workloads, customers see little reason to go through the large efforts and costs involved in switching to a different platform.
The second major quality that has enabled mainframes to survive through the years is their ability to evolve. Customers would have long stopped buying mainframes if the platform had not been able to embrace new technologies and market innovations while preserving their core strengths. This Darwinian ability to adapt and evolve is true of any complex product and platform that has similarly been able to survive major technology and market changes .
Let me now turn to the Internet, and in particular the development of IBM’s e-business strategy in the mid 1990s. At the time, a lot was starting to happen around the Internet, but it was not clear where things were heading, and in particular what the implications would be to the world of business.
The dot-com era was famous for its many innovations, but also for its hype. A lot of people were saying that in the Internet-based new economy, startups had an inherent advantage over existing companies, whose legacy assets, including their IT infrastructure, were no longer relevant, would slow them down and make it hard for them to compete.
Our job in the IBM Internet Division, - which was organized in December of 1995 with me as general manager, - was to figure out the business value around the Internet, what we should advise our clients to do and what new products and service needed to get developed. Equally important, we needed to come up with an Internet business model for IBM that made sense and was financially sound.
We carefully analyzed what was going on in the marketplace and worked closely with many clients around the world. They told us that their business operations were totally dependent on the IT infrastructures that they had built up over many years at great effort and expense. They saw no possible way to replace their infrastructure, as many were advising them to do, and the expenses involved would be prohibitive. They were happy to embrace the new, innovative capabilities of the Web, but it all had to be done in an evolutionary way while continuing their present operations and leveraging their existing IT infrastructure.
Their input was critical to our e-business strategy, which we succinctly described as Web + IT. Every business, we were convinced, would benefit from embracing the universal reach and connectivity of the Internet, not just startups. But, unlike the prevailing hype, we also believed that the brand reputation, installed customer base and IT infrastructures that companies had built over the years would be even more valuable assets when combined with the new Web capabilities.
There was no question that new, innovative business models were being created around the Internet. But we also strongly believed that with the universal reach and connectivity of the Internet, all companies - large and small, new and mature - would be able to do what they did much, much better. Our position was not very popular at the height of the dot-com hype, but once the bubble burst a few years later, it was clear that we had developed the right strategy and had given our customer the right advice.
Let me conclude by discussion a major new disruptive innovation I am currently involved in - the transition to universal, mobile digital money supported by a global digital payments infrastructure.
Money was not necessary when people lived in small communities where they knew and trusted their neighbors and could barter with them over the value of the labor, food and other things they were exchanging. But, the need for money, such as gold and silver coins, arose over 2500 years ago once civilization started to expand and people were dealing with strangers they may never see again and could not trust.
Money has played a major role in the world ever since, giving rise to commerce and economies, enabling the organization of companies and public institutions, and helping communities become more productive and raise their standard of living. A variety of institutions have arisen over the years to handle financial transactions for individuals and companies, including banks in the private sector and a variety of government agencies that regulate financial matters.
The transition to digital money and payments is being driven by the same digital technologies that are driving the evolution of the Internet and transforming just about every aspect of life around us: smart mobile devices, broadband wireless networks, cloud computing, information analytics and so on. Given the central role that money and the identity management that is integral to financial transactions, the transition to digital money promises to be one of the most exciting and challenging disruptive innovations in the decades ahead.
Besides banks, a variety of companies are getting involved in this transition to universal, mobile digital money, including mobile network operators and IT companies. In addition, a variety of startup companies are being formed to bring all kinds of new innovations to the world’s global payments infrastructure, and in particular, to the billions around the world who never had a banking relationships but are now joining the world’s digital economy through their mobile devices.
As happened in the early days of the Web, some are questioning whether the legacy assets of banks and other financial institutions will be of great value in this transition, including their payments infrastructure; processes like Know Your Customer (KYC), Anti-money Laundering (AML) and risk management; and relationships with government regulators around the world. Or, will their legacy assets and processes slow banks down and enable the more technology-based and new entrepreneurial ventures to forge ahead and lead in bringing to market the new digital money innovations.
As was the case with e-business fifteen years ago, I believe that the world’s new digital money platforms and infrastructures will be developed by combining existing assets, - such as the banks' back end payments infrastructure and financial management processes, - with the innovative technologies that will bring digital money capabilities to just about every person in the planet who has a mobile device, as well as bringing many new innovative financial capabilities to individuals, business and government around the world.
As is usually the case when dealing with complex matters, there is no one answer on how to best manage disruptive innovations. It all depends on the nature of the innovation - where it lies in the spectrum from very simple to highly complex; on the nature of the innovator - new entrepreneurial startup with few assets versus mature company with many legacy assets; and on the scope of their ambitions - bring a new product or service to market versus lead in transforming your industry, the economy and society in general.
The good news is that there is plenty of room for everyone to participate in the disruptive innovation game, whether you are an individual with a great new idea or a global company looking to transform yourself and your industry. You just have to get out there and seriously play the game.