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Disruptive Technologies: Catching the Wave

by Joseph L. Bower and Clayton M. Christensen

ne of the most consistent patterns in business is the failure of leading compa- nies to stay at the top of their industries when technologies or markets change.

Goodyear and Firestone entered the radial-tire mar- ket quite late. Xerox let Canon create the small- copier market. Bucyrus-Erie allowed Caterpillar and Deere to take over the mechanical excavator market. Sears gave way to Wal-Mart.

The pattern of failure has been especially strik- ing in the computer industry. IBM dominated the mainframe market but missed by years the emer- gence of minicomputers, which were technologi- cally much simpler than mainframes. Digital Equipment dominated the minicomputer market with innovations like its VAX architecture but missed the personal-computer market almost com- pletely. Apple Computer led the world of personal computing and established the standard for user- friendly computing but lagged five years behind thc leaders in bringing its portable computer to market.

Why is it that companies like these invest aggres- sively-and successfully-in the technologies neces- sary to retain their current customers but then fail

DRAWING BV CHRISTOPHER BING

to make certain other technological investments that customers of the future will demand* Un- doubtedly, bureaucracy, arrogance, tired executive blood, poor planning, and short-term investment horizons have all played a role. But a more funda- mental reason lies at the heart of the paradox: lead- ing companies succumb to one of the most popular, and valuable, management dogmas. They stay close to their customers.

Altbough most managers like to think tbey are in control, customers wield extraordinary power in di- recting a company’s investments. Before managers decide to launch a technology, develop a product, build a plant, or establish new channels of distribu- tion, they must look to their customers first: Do their customers want it? How big will the market be? Will tbe investment be profitable? The more as- tutely managers ask and answer these questions,

loseph L. Bower is the Donald Kirk David Professor of Business Administration at the Harvard Business School in Boston. Massachusetts. Clayton M. Chris- tensen. an assistant professor at the Harvard Business Schcx}}. speciahzes in managing the commercialization of advanced technology.

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DISRUPTIVE TECHNOLOGIES

the more completely their investments will be aligned with the needs of their customers.

This is the way a well-managed company should operate. Right? But what happens when customers reject a new technology, product concept, or way of doing business because it does not address their needs as effectively as a company’s current ap- proach? The large photocopying centers that repre- sented the core of Xerox’s customer base at first had no use for small, slow tabletop copiers. Tbe excava- tion contractors that had relied on Bucyrus-Erie’s big-bucket steam- and diesel-powered cable sbovels didn’t want hydraulic excavators because initially they v^ere small and weak. IBM’s large commercial, government, and industrial customers saw no im- mediate use for minicomputers. In each instance, companies listened to their customers, gave them the product performance they were looking for, and, in the end, were hurt by the very technologies their customers led them to ignore.

We bave seen this pattern repeatedly in an on- going study of leading companies in a variety of in- dustries that have confronted technological change. The research shows that most wcil-managed, estab- lished companies are consistently abead of their industries in developing and commercializing new technologies-from incremental improvements to radically new ;ipproachcs – as long as those tech-

Managers must beware of ignoring new technologies that d^n’t initially meet the needs of their mainstream i

nologics address the next-generation performance needs of their customers. However, tbese same companies are rarely in the forefront of commer- cializing new technologies that don’t initially meet the needs of mainstream customers and appeal only to small or emerging markets.

Using the rational, analytical investment pro- cesses that most well-managed companies have de- veloped, it is nearly impossible to build a cogent case for diverting resources from known customer needs in established markets to markets and cus- tomers that seem insignificant or do not yet ex^t. After all, meeting the needs of established cus- tomers and fending off competitors takes all the re- sources a company has, and then some. In well- managed companies, the processes used to identify

customers’ needs, forecast technological trends, assess profitability, allocate resources across com- peting proposals for investment, and take new products to market are focused – for all the right reasons-on current customers and markets. These processes are designed to weed out proposed prod- ucts and technologies that do nor address cus- tomers’ needs.

In fact, the processes and incentives that compa- nies use to keep focused on their main customers work so well that they blind those companies to important new technologies in emerging markets. Many companies have learned the hard way the perils of ignoring new technologies that do not ini- tially meet the needs of mainstream customers. For example, although personal computers did not meet the requirements of mainstream minicom puter users in the early \9H0s, the computing power ot the desktop machines improved at a much faster rate than minicomputer users’ demands for com- puting power did. As a result, personal computers caught up with the computing needs of many of the customers of Wang, Prime, Nixdorf, Data General, and Digital Equipment, Today they are perfor- mance-competitive with minicomputers in many applications. For the minicomputer makers, keep- ing close to mainstream customers and ignoring what were initially low-performance desktop tech-

nologies used by seemingly insignifi- cant customers in emerging markets was a rational decision-hut one that proved disastrous.

The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two impor- tant characteristics: First, they typi- cally present a different package of

performance attributes – ones that, at least at the outset, are not valued by existing customers. Sec- ond, the performance attributes that existing cus- tomers do value improve at such a rapid rate that the new technology can later invade those estab- lished markets. Only at this point will mainstream customers want the technology. Unfortunately for the established suppliers, by then it is olten too late: the pioneers of the new technology dominate the market.

It follows, then, that senior executives must first he able to spot the technologies that seem to fall in- to this category. Next, to commercialize and devel- op the new technologies, managers must protect them from the processes and incentives that are geared to serving established customers. And the

44 HARVARD BUSINESS REVIEW January-February 1995

only way to protect them is to create organizations that are completely independent from the main- stream business.

o industry demonstrates the danger of staying too close to customers more dramatically than the hard-disk-drive industry. Between 1976 and 1992, disk-

drive performance improved at a stunning rate: the physical size of a 100-mcgahyte (MB) system shrank from S,400 to 8 cubic inches, and the cost per MB fell from $560 to $5. Technological change, of course, drove these breathtaking achievements. Ahout half of the improvement came from a host of radical advances tbat were critical to continued improvements in disk-drive performance,- the other balf came from incremental advances.

The pattern in the disk-drive industry has been repeated in many other industries: the leading, es- tablished companies have consistently led the in- dustry in developing and adopting new technolo- gies that their customers demanded – even when those technologies required completely different technological competencies and manufacturing ca- pahilities from the ones the companies had. In spite of this aggressive technological posture, no single disk-drive manufacturer has been able to dominate the industry for more than a few years. A series of companies have entered the business and risen to prominence, only to be toppled by newcomers who pursued technologies that at first did not meet the needs of mainstream customers. As a result, not one of the independent disk-drive companies that existed in 1976 survives today.

To explain the differences in the impact of cer- tain kinds of technological innovations on a given industry, the concept oi performance trajectories- the rate at which the performance of a product has improved, and is expected to improve, over t ime- can be helpful. Almost every industry has a critical performance trajectory. In mechanical excavators, the critical traicctory is the annual improvement in cubic yards of earth moved per minute. In photo- copiers, an important performance trajectory is im- provement in number of copies per minute. In disk drives, one crucial measure of performance is stor- age capacity, which has advanced S0% each year on average for a given size of drive.

Different types of technological innovations af- fect performance trajectories in different ways. On the one hand, sustaining technologies tend to maintain a rate of improvement; that is, they give customers something more or hetter in the at- tributes they already value. For example, thin-film components in disk drives, which replaced conven-

tional ferrite heads and oxide disks hetween 1982 and 1990, enabled information to be recorded more densely on disks. Engineers had been pushing the limits of the performance they could wring from ferrite heads and oxide disks, but the drives em- ploying these technologies seemed to have reached the natural limits of an S curve. At that point, new thin-film technologies emerged that restored – or sustained- the historical trajectory of performance improvement.

On the other hand, disruptive technologies intro- duce a very different package of attributes from the one mainstream customers historically value, and they often perform far worse along one or two di- mensions that are particularly important to those customers. As a rule, mainstream customers are unwilling to use a disruptive product in applica- tions they know and understand. At first, then, dis- ruptive technologies tend to be used and valued on- ly in new markets or new applications; in fact, they generally make possihle the emergence of new mar- kets. For example, Sony’s early transistor radios sacrificed sound fidelity but created a market for portable radios by offering a new and different package of attributes-small size, light weight, and portability.

In the history of the hard-disk-drive industry, the leaders stumbled at each point of disruptive tecb- nological change: when the diameter of disk drives shrank from theoriginal 14 inches to H inches, then to S.25 inches, and fmally to 3.5 inches. Each of these new arcbitectures^initially offered the market substantially less storage capacity than the typical user in the established market required. For exam- ple, the 8-incb drive offered 20 MB when it was in- troduced, wbile the primary market for disk drives ‘ at that time-mainframes-required 200 MB on av- ‘ erage. Not surprisingly, the leading computer man- ufacturers rejected the 8-inch architecture at first. As a result, their suppliers, whose mainstream products consisted of 14-inch drives with more than 200 MB of capacity, did not pursue the disrup- tive products aggressively. The pattern was repeat- ed when the 5.25-inch and 3.5-inch drives emerged: established computer makers rejected the drives as inadequate, and, in turn, their disk-drive suppliers ignored them as well.

But while they offered less storage capacity, the disruptive architectures created other important at- tributes-internal power supplies and smaller size l8-inch drives); still smaller size and low-cost step- per motors (5.25-incb drives); and ruggedness, light weight, and low-power consumption 13.5-inch drives). From the late 1970s to the mid-1980s, the avail- ability of the three drives made possible the devel-

HARVARD BUSINESS REVIEW lanuary-February 1995 45

How Disk-Drive Performance Mei Market Needs

3000

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700 600 500 400

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Point at which hard-disk drives invade minicomputer market

Point at which hard-disk drives invade partable- computer market

Point at which hard-disk drives invade personal- computer market

75 76 -77 ’78 ’79 ’80 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90

Year

opment of new markets for minicomputers, desk- top PCs, and portable computers, respectively.

Although thc smaller drives represented disrup- tive technological ehange, eaeh was technological- ly straightforward. In fact, there were engineers at many leading companies who championed the new teehnologies and built working prototypes with bootlegged resources before management gave

a formal go-ahead. Still, tbe lending companies eould not move the products tbrougb their organi- zations and into tbe market in a timely way. Eacb time a disruptive technology emerged, between one-balf and two-thirds of tbe establisbed manu- facturers failed to introduce models employing tbe new arcbitecture-in stark contrast to tbeir timely launches of eritieal sustaining tecbnologies. Tbose

46 HARVARD BUSINESS REVIEW lanuary-February

DISRUPTIVE TECHNOLOGIES

companies that finally did launch new models typi- cally lagged behind entrant companies by two years-eons in an industry whose products’ life cy- cles are often two years. Three waves of entrant companies led these revolutions; they first captured the new markets and then dethroned the leading companies in the mainstream markets.

How could technologies that were initially infe- rior and usetul only to new markets eventually

None ol the established leaders in the disk-drive industiy learned from the experiences of those that fell before them.

threaten loading companies in established mar- kets? Once the dismptive architectures became es- tablished in theirnew markets, sustaining innova- tions raised each architecture’s performance along steep trajectories – so steep that the performance available from each architecture soon satisfied the needs of customers in the established markets. For example, the S.25-inch drive, whose initial S MB of capacity in lySO was only a fraction of tbc capacity that tbe minicomputer market needed, became ful- ly performance-competitive in the minicomputer market by 1986 and in the mainframe market by 1991. |See tbc graph “How Disk-Drive Performance Met Market Needs.”)

A company’s revenue and cost structures play a critical role in the way it evaluates proposed technological innovations. Generally, disruptive technologies look financially unattractive to estab- lished companies. Tbc potential revenues from the discernible markets are small, and it is often difficult to project how big the markets for tbe technology will be over the long term. As a result, managers typically conclude that the technology can- not make a meaningful contribution to corporate growtb and, therefore, that it is not wortb the man- agement effort required to develop it. In addition. established companies bave often installed higher cost structures to serve sustaining technologies tban tbose required by disruptive technologies. As a result, managers typically see tbemselves as hav- ing two choices when deeiding whether to pursue disruptive technologies. One is to go downmarket and accept the lower profit margins of tbe emerging markets that the disruptive technologies will ini- tially serve. The other is to go upmarket witb sus-

taining technologies and enter market segments wbose profit margins are alluringly high. [For ex- ample, the margins ot IBM’s mainframes are still higher tban those of PCs). Any rational resource- allocation process in companies serving established markets will cboose going upmarket ratber than going down.

Managers of companies that have championed disruptive technologies in emerging markets look

at tbe world quite differently. Witb- out tbe high cost structures of tbeir established counterparts, these com- panies find tbe emerging markets ap- pealing. Once the companies bave secured a foothold in tbe markets and improved tbe performance of their technologies, tbe established markets above them, served by high-cost suppliers, look appetizing. When tbey do attack, the entrant

companies find the established players to be easy and unprepared opponents because the opponents have been looking upmarket themselves, discount- ing the threat Irom below.

It is tempting to stop at this point and conclude that a valuable lesson has been learned: managers can avoid missing tbe next wave by paying careful attention to potentially disruptive technologies that do not meet current customers’ needs. But rec- ognizing the pattern and figuring out how to break it are two different tbings. Although entrants in- vaded established markets with new technologies three times in succession, none of the established leaders in tbe disk-drive industry seemed to learn from the experiences of those that fell before them. Management myopia or lack of foresight cannot ex- plain these failures. Tbe problem is that managers keep doing what has worked in tbe past: serving the rapidly growing needs of tbeir current customers. The processes tbat successful, well-managed com- panies bave developed to allocate resources among proposed investments are incapable of funneling resources into programs tbat current customers ex- plicitly don’t want and wbose profit margins seem unattractive.

Managing tbe development of new technology is tightly linked to a company’s investment pro- cesses, Most strategic proposals-to add capacity or to develop new products or processes – take shape at the lower levels of organizations in engineering groups or project teams. Companies then use ana- lytical planning and budgeting systems to select from among the candidates competing for funds. Proposals to create new businesses in emerging markets art particularly challenging to assess be-

HARVARD BUSINESS REVIEW January-Fcbnury 1995 47

DISRUPTIVE TECHNOLOGIES

cause they depend on notoriously utireliablc esti- mates of market size. Beeause managers are evalu- ated on their ability to place the right bets, it is not surprising that in well-managed companies, mid- and top-level managers back projects in which the market seems assured. By staying close to lead cus- tomers, as they have been trained to do, managers focus resources on fulfilling the requirements of those reliable customers that can be served prof- itably. Risk is reduced-and careers are safeguard- ed-by giving known customers what they want.

eagate Technology’s experience illus- trates the consequences of relying on such resource-allocation processes to evaluate disruptive technologies. By al-

most any measure, Seagate, based in Scotts Valley, California, was one of the most successful and ag- gressively managed companies in the history of tbe microelectronics industry: from its inception in 1980, Seagate’s revenues had grown to more than S700 million by 1986. It had pioneered 5.25-inch hard-disk drives and was the main supplier of them to IBM and IBM-compatible personal-computer manufacturers. Tbe company was the leading man- ufacturer of 5.25-inch drives at the time the disrup- tive 3.5-inch drives emerged in the mid-1980s.

Engineers at Seagate were the second in the in- dustry to develop working prototypes of 3.5-incb

Seagate paid the price for allowing start-ups to lead way into emerging market

drives. By early 1985, they had made more than 80 such models with a low level of company funding. The engineers forwarded the new models to key marketing executives, and tbe trade press reported tbat Seagate was actively developing 3.5-incb drives. But Seagate’s principal customers – IBM and other manufacturers of AT-class personal computers – showed no interest in the new drives. They wanted to incorporate 40-MB and 60-MB drives in their next-generation models, and Sea- gate’s early 3.5-incIi prototypes packed only 10 MB. In response, Seagate’s marketing executives low- ered their sales forecasts for the new disk drives.

Manufacturing and financial executives at the eompany pointed out another drawback to tbe 3.5- inch drives. According to their analysis, the new drives would never be competitive with rhe 5.25-

incb architecture on a cost-per-megabyte basis-an important metric that Seagate’s customers used to evaluate disk drives. Given Seagate’s cost structure, margin.s on tbe bigher-capacity 5.25-incb models tberefore promised to be much higher than tbose on the smaller products.

Senior managers quite rationally decided that the 3.5-inch drive would not provide the sales volume and profit margins tbat Seagate needed from a new product. A former Seagate marketing executive re- called, “We needed a new model that could become tbe next ST412 |a 5.25-inch drive generating more than S300 million in annual sales, which was near- ing tbe end of its life cycle|. At the time, tbe entire market for 3.S-inch drives was less than $50 mil- lion. Tbe 3.5-inch drive just didn’t fit tbe hill – for sales or profits.’

The shelving of tbe 3.5-inch drive was not a sig- nal that Seagate was complacent about innovation. Seagate subsequently introduced new models of 5.25-inch drives at an accelerated rate and, in so do- ing, introduced an impressive array of sustaining technological improvements, even though intro- ducing them rendered a significant portion of its manufacturing capaci ty obsolete.

Wbile Seagate’s attention was glued to the per- sonal-computer market, former employees of Sea- gate and other 5,25-incb drive makers, who had become frustrated by tbeir employers’ delays in

launching 3.5-inch drives, founded a new company, Conner Peripherals. Conner focused on selling its 3.5- inch drives to companies in emerg- ing markets for portable computers and small-footprint desktop prod- ucts iPCs tbat take up a smaller amount of space on a desk). Conner’s primary customer was Compaq

Computer, a customer that Seagate had never served. Seagate’s own prosperity, coupled with Conner’s focus on customers who valued different disk-drive attributes [ruggedness, physical volume, and weight!, minimized the threat Seagate saw in Conner and its 3.5-inch drives.

From its beachhead in the emerging market for portable computers, however, Conner improved the storage capacity of its drives by 50% per year. By tbe end oi 1987, 3.5-inch drives packed the capacity demanded in tbe mainstream personal- computer market. At this point, Seagate executives took their company’s 3.5-inch drive off the shelf, introducing it to the market as a defensive response to the attack of entrant companies like Conner and Quantum Corporation, the other pioneer of 3.5- inch drives. But it was too late.

48 HARVARD BUSINESS REVIEW laniuiy Fchruarv

By then, Seagate faced strong competition. For a while, the company was able to defend its existing market by selling ,?..S- inch drives to its established cus- tomer base – manufacturers and resellers of full-size personal c<,>m- putcrs. In fact, a large proportion of its 3.5-inch products continued to he shipped in frames that en- abled its customers to mount thc drives in computers designed to accommodate 5.25-inch drives. But, in the end, Seagate could only struggle to become a second-tier supplier in the new portable-com- puter market.

In contrast, Cormer and Quan- tum built a dominant position iti the new portable-computer mar- ket and then used their scale and experience base in designing and manufacturing 3.5-inch products to drive Seagate from the personal-computer market. In their 1994 fiscal years, the combined revenues of Conner and Quantum exceeded $5 billion.

Seagate’s poor timing typifies tbe responses of many establisbed companies to thc emergence of disruptive technologies. Seagate was willing to enter thc market for 3.5-inch drives only when it had become large enough to satisfy the company’s financial requircments-that is, only when existing customers wanted the new technology. Seagate has survived through its savvy acquisition of Control Data Corporation’s disk-drive business in 1990. With CDC’s technology base and Seagate’s volume- manufacturing expertise, the company has become a powerful player in the business of supplying large- capacity drives for high-end computers. Nonethe- less, Seagate has been reduced to a shadow of its for- mer self in the personal-computer market.

How to Assess Disruptive Technologies

PerFormance improvement required by moinslreoin market

Expected trajectory ol performance improvement

Current perbrmonce of potentially disruptive technology

Time

t should come as no surprise that few companies, when confronted with dis- rtiptive technologies, bave been able to overcome thc handicaps of size or suc-

cess. But it can be done. There is a method to spot- ting and cultivating disruptive technologies.

Determine whether the technology is disruptive ot sustaining. Thc first step is to decide which of the myriad technologies on the horizon are dis- ruptive and, of tbose, which arc real threats. Most companies have well-conceived processes for iden- tifying and tracking the progress oi potentially sus- taining technologies, because they are important to

serving and protecting current customers. But few have systematic processes in place to identify and track potentially disruptive technologies.

One approach to identifying disruptive technolo- gies is to examine internal disagreements over the development of new products or technologies. Wbo supports the project and who doesn’t? Marketing and financial managers, because of their managerial and financial incentives, will rarely support a dis- ruptive technology. On thc other hand, technical personnel with outstanding track records will often persist in arguing that a new market for the tech- nology will emerge-even in the face of opposition from key customers and marketing and financial staff. Disagreement between the two groups often signals a disruptive technology that top-level man- agers should explore.

DeEine the strategic significance of the disruptive technology. The next step is to ask the right people the right questions ahout the strategic importance of the disruptive technology. Disruptive technolo- gies tend to stall early in strategic reviews because managers either ask the wrong questions or ask the wrong people thc right questions. For example, es- tablished companies have regular procedures for asking mainstream customers-especially the im- portant accounts where new ideas are actually tested-to assess the value of innovative products. Generally, these customers are selected because they arc the ones striving the hardest to stay ahead of their competitors in pushing the performance of their products. Hence these eustomers are most likely to demand the highest performance from ,

HARVARD BUSINESS REVIEW lanuary-Fchruaiy 1995 49

DISRUPTIVE TECHNOLOGIES

their suppliers. For this reason, lead customers are reliably accurate when it comes to assessing the po- tential of sustaining technologies, but they are reli- ably inaccurate when it comes to assessing the po- tential of disruptive technologies. They are the wrong people to ask.

A simple graph plotting product performance as it is defined in mainstream markets on the verti- cal axis and time on the horizontal axis can help managers identify both the right questions and the right people to ask. First, draw a line depicting the level of performance and the trajectory of performance improvement that customers have historically enjoyed and are likely to expect in the future. Then locate the estimated initial performance level of the new technology. If the tech- nology is disruptive, tbe point will lie far below the performance demanded by current custoiners. (See the graph “How to Assess Disrup- tive Technologies.”)

V What is the likely slope of performance improve- ment of the disruptive technology compared with the slope of performance improvement demanded by existing markets? If knowledgeable technolo- gists believe the new technology might progress faster than the market’s demand for performance improvement, then that technology, which does not meet customers’ needs today, may very well address them tomorrow. The new technology, there- fore, is strategically critical.

Instead of taking this approach, most managers ask tbe wrong questions. They compare the antici- pated rate of performance improvement of the new technology with that of the established technology. If the new technology has the potential to surpass the established one, the reasoning goes, they should get busy developing it.

Pretty simple. But this sort of comparison, while valid for sustaining technologies, misses the cen- tral strategic issue in assessing potentially disrup- tive technologies. Many of the disruptive technolo- gies we studied never surpassed the capability of the old technology. It is the trajectory of the disrup- tive technology compared with that of the maikei that is significant. For example, the reason the mainframe-computer market is shrinking is not that personal computers outperform mainframes but because personal computers networked with a file server meet the computing and data-storage needs of many organizations effectively. Main- frame-computer makers are reeling not because the performance of personal-computing technology surpassed the performance of mainframe technolo-

gy but because it intersected with the performance demanded by the established i3](jr̂ (?(.

Consider the graph again. If technologists believe that the new technology will progress at the same rate as the market’s demand for performance im- provement, the disruptive technology may be slow- er to invade established markets. Recall that Sea- gate had targeted personal computing, where demand for hard-disk capacity per computer was growing at 30% per year. Because the capacity of

Small, hungry organizations are good at agilely changing

product and market strategies.

3.5-inch drives improved at a much faster rate, lead- ing 3.5-inch-drive makers were able to force Seagate out of the market. However, two other 5.25-inch- drive makers, Maxtor and Micropolis, had targeted the engineering-works tat ion market, in which de- mand for hard-disk capacity was insatiable. In that market, the trajectory of capacity demanded was essentially parallel to the trajectory of capacity im- provement that technologists could supply in the 3.5-inch architecture. As a result, entering the 3.5- inch-drive business was strategically less critical for those companies tban it was for Seagate.

Locate the initial market for the disruptive tech- nology. Once managers have determined that a new technology is disruptive and strategically critical, the next step is to locate the initial markets for that technology. Market research, the tool that man- agers have traditionally relied on, is seldom helpful: at the point a company needs to make a strate- gic commitment to a disruptive technology, no concrete market exists. When Edwin Land asked Polaroid’s market researchers to assess the poten- tial sales of his new camera, they concluded that Polaroid would sell a mere 100,000 cameras over the product’s lifetime; few people they interviewed could imagine the uses of instant photography.

Because disruptive teclinologics frequently sig- nal the emergence of new markets or market seg- ments, managers must create information about such markets – who the customers will be, which dimensions of product performance will matter most to which customers, what the right price points will be. Managers can create this kind of in- formation only by experimenting rapidly, iterative- ly, and inexpensively with both the product and the market.

50 HARVARD BUSINESS REVIEW lanuary-February

For established companies to undertake sucb ex periments is very difficult. Tbe resource-allocation processes that are critical to profitahility and com- petitiveness will not – and should not direct re- sources to markets in which sales will be relatively small. How, tben, can an established company probe a market for a disruptive tecbnology? Let start-ups-either ones the company funds or oth- ers with no connection to the company – conduct the experiments. Small, hungry organizations are good at placing economical bets, rolling witb tbc punches, and agilely changing prt)duct and market strategies in response to feedback fiom initial tor ays into the market.

Consider Apple Computer in its start-up days. The company s original product, rhe Apple I, was a flop when it was launched in 1977. But Apple bad not placed a huge bet on the product and bad gotten at least somcthin^i into the hands uf early users quickly. The company leamed a lot from tbe Ap- ple I about tbt.” new technology and about what cus- tomers wanted and did not want. )ust as important, a group of customers learned about what they did and did not want from personal computers. Armed with this information, Apple launched tbe Apple II quite successfully.

Many companies could bave learned tbe same valuable lessons by watcbing Apple closely. In fact, stime companies pursue an explicit strategy of be-

F’-verv company that has tried Id manage mainstream and iisruptive businesses within \ single organization failed.

ing ux’ond to invent -allowing small pioneers to lead the Vk̂ay into uncharted market territory. For instance, IBM let Apple, Commodore, and Tandy define the personal computer. It then aggressively entered the market and built a considerable person- al-computer business.

But IBM’s relative success in entering a new mar- ket late is the exception, not the rule. All too often, successful c(unpanies hold the performance of small-market pioneers to tbc financial standards they apply to tbeir own performance. In an attempt to ensure that they are using their resources well, companies explicitly or implicitly set relatively high thresholds for the size of the markets they should consider entering. This approach sentences

them to mnkmg late entries into markets already tilled with powerful players.

For example, when the 3.5-mch drive emerged, Seagate needed a S300-million-a-year product to replace its mature flagship 5.25-inch model, the ST412, and the 3.5-inch market wasn’t large enough. Over the next two years, when the trade press asked wben Seagate would introduce its 3.5- inch drive, company executives consistently re- sponded that there was no market yet There actu- ally was a market, and it was growing rapidly. The signals tbat Seagate was picking up about the mar- ket, influenced as they were by customers wbo didn’t want 3.5-inch drives, were misleading. When Seagate finally introduced its 3.5-inch drive in 1987, more tban S750 million in 3.5-ineb drives bad already been sold. Information about the market’s size had been widely available tbrougbout tbe in- dustry. But it wasn’t compelling enough to shift tbe focus of Seagate’s managers. They continued to look at the new market through the eyes of their current customers and in the context of their cur- rent financial structure.

The posture of today’s leading disk-drive makers toward tbe newest disruptive technology, 1.8-incb drives, is eerily familiar. Eacb of the industry lead- ers bas designed one or more models of the tiny drives, and the models are sitting on shelves. Tbeir capacity is too low to be used in notebook comput-

ers, and no one yet knows where the initial market for 1 .S-ineb drives will be. Fax machines, printers, and auto- mobile dashboard mapping systems are all candidates. ‘Tbere iust isn’t a market,” complained one industry executive. “We’ve got the product, and tbc sales force can take orders for it. But there are no orders because nobody needs it. It just sits tbere.” This executive has not considered

the fact that his sales force has no incentive to sell the 1.8-inch drives instead of the higher-margin pnxlucts it sells to higher-volume customers. And while tbc I .H-inch drive is sitting on the shell at his company and others, last year more than S50 mil- lion worth of 1.8-inch drives were sold, almost all by start-ups. This year, the market will he an esti- mated S150 million.

To avoid allowing small, pioneering companies to dominate new markets, executives must per- sonally monitor the available intelligence on the progress of pioneering companies through monthly meetings with technologists, academics, venture capitalists, and other nontraditional sources of in- formation. They cannot rely on tbe company’s tra-

HARVARI> BUSINESS REVIEW Mniury-Fcbruin’

DISRUPTIVE TECHNOLOGIES

ditional channels for gauging markets because those channels were not designed for that puqiose.

Place responsibility for building a disruptive- technology business in an independent organiza- tion. The strategy of forming small teams into skunk-works projects to isolate them from the sti- fling demands ot mainstream organizations is wide- ly known but poorly understood. For example, iso- lating a team of engineers so that it can develop a radically new sustaining technology just hecause that technology is radically different is a fundamen- tal misapplication of the skunk-works approach. Managing out of context is also unnecessary in the unusual event that a disruptive tech- nology is more financially attractive than existing products. Consider In- tel’s transition from dynamic ran- dom access memory (DRAM) chips to microprocessors. Intel’s early mi- croprocessor business had a higher gross margin than that of its DRAM business; in other words, Intel’s nor- mal resource-allocation process naturally provided the new business with the resources it needed.

Creating a separate organization is necessary on- ly when the disruptive technology has a lower prof- it margin than the mainstream business and must serve the unique needs tif a new set oi customers. GDC, for example, successfully created a remote organization to commercialize its 5.25-inch drive. Through 1980, CDC was the dominant mdepen- dent disk-drive supplier due to its expertise in mak- ing 14-inch drives for mainframe-computer makers. When the 8-inch drive emerged, CDC launched d late development effort, but its engineers were re- peatedly pulled off the project to solve problems for the more profitable, higher-priority 14-inch proj- ects targeted at the company’s most important cus- tomers. As a result, CDC was three years late in launching its first 8-inch product and never cap- tured more than 5% of that market.

When the .S,2S-inch generation arrived, CDC de- cided that it would face the new challenge more strategically. The company assigned a small group of engineers and marketers in Oklahtima City, Oklahoma, far from the mainstream organization’s customers, the task of developing and commercial- izing a competitive ri.2f>-inch product. “We needed to launch it in an environment in which everybody got excited abt)ut a $50,000 order,” one executive recalled. “In Minneapolis, you needed a Si millit>n order to turn anyone’s head.” CDC never

36.

the 70% share it had once enjoyed in the market for mainframe disk drives, but its Oklahoma City op- eration secured a profitable 20% of the high-perfor- mance 5.25-inch market.

Had Apple created a similar organiziition to de- velop its Newton personal digital assistant (PDA), those who have pronounced it a flop might have deemed it a success. In launching the product, Ap- ple made the mistake of acting as if it were dealing with an established market. Apple managers went into the PDA project assuming that it had to make a significant contribution to corporate growth. Ac- cordingly, they researched customer desires ex-

In order thai it mav live, a coiporation must be willing to

see business units die.

haustively and then bet huge sums launching the Newton. Had Apple made a more modest techno- logiciil and financial bet and entrusted the Newton to an organization the size that Apple itself was when it launched the Apple I, the outcome might have been different. The Newton might have been seen more broadly as a solid step forward in the quest to discover what customers really want. In fact, many more Newtons than Apple I models were sold within a year of their introducticm.

Keep the disruptive organization independent. Established companies can only dominate emerg- ing markets by creating small organizations oi the sort CDC created in Oklahoma City. But what should they do when the emerging market becomes large and established’

Most managers assume that once a spin off has become commercially viable in a new market, it should he integrated into the mainstream organi- zation. They reason that the fixed costs associated with engineering, manufacturing, sales, and distri- bution activities can be shared across a broader group of customers and products.

Tbis approach might work with sustaining tech- nologies; however, with disruptive technologies, folding the spin-off into the mainstream organiza- tion can be disastrous. When the independent and mainstream organizations are folded together in or- der !o share resources, debilitating arguments in- evitably arise over which groups get what resources and whether or when to cannibalize established products. In the history of the disk-drive industry, every company that has tried to manage main-

52 HARVARD BUSINESS REVIEW [anuary-Fchnury 1995

stream and disruptive businesses witbin a single or- ganization failed.

No matter tbe industry, a corporation consists of business units witb finite life spans: thc technolog- ical andmarket hases of any business will eventual- ly disappear. Disruptive tecbnologies are part of tbat cycle. Companies tbat understand tbis process can create new businesses to replace tbe ones tbat must inevitably die. To do so, companies must give managers ot disruptive innovation free rein to real- ize tbe tecbnology’s full potential-even if it means ultimately killing tbe mainstream husiness. For thc corporation to live, it must be willing to see busi- ness units die. If tbe corporation doesn’t kill them off itself, competitors will.

Tbe key to prospering at points of disruptive ebange is not simply to take more risks, invest for

tbe long term, or figbt bureaucracy. Tbe key is to manage strategically important disruptive tech- nologies in an organizational context wbere small orders create energy, wbere fast low-cost forays into ill-defined markets are possible, and wbere over- bead is low cnougb to permit profit even in emerg- ing markets.

Managers of established companies can master disruptive tecbnologies witb extraordinary suc- cess. But wben they seek to develop and launcb a disruptive tecbnology tbat is rejected by important customers witbin thc context of tbe mainstream business’s financial demands, tbey fail – not be- cause they make tbe wrong decisions, but because tbey make tbe right decisions for circumstances tbat are about tqj)ecomejiistory. ^ Reprint

THE. MIGHT OF

“Good evening, lady and gentleman.

CARTOON BY H MARTIN 53

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