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Saturday, April 12, 2014

Why Consumer Tech Is So Irritatingly Incremental 04-12


Why Consumer Tech Is So Irritatingly Incremental

In the late 1960s, Michelin introduced the radial tire into the U.S. market. This was no surprise to the top five U.S.-based bias-ply tire manufacturers (Goodyear, Firestone, Uniroyal, B.F. Goodrich, and General Tire). After all, it was hardly a new technology; the first radial tire patents had been filed more than 40 years before. And they’d all seen radial tires take over the European market.
But even though radial tires were far superior to bias tires in terms of durability, cost per mile, and safety – and could be sold for an attractively higher price — they presented a challenge to U.S. incumbents. The process used to manufacture them was completely different from the one they used to make bias-ply tires. To produce radials, the U.S. giants basically needed to start their companies all over again — practically nothing of what they knew about producing bias-ply tires could be reused. Almost none of their patents would be useful (the tire business was the second most research-intensive industry in the U.S after chemicals). And so, even with the price premium, Michelin was the only company that had figured out how to produce radial tires profitably at scale.
Long story short, Michelin took over 50% of the entire tire U.S. market in the first 18 months after their introduction. And the Akron Ohio-based bias-ply tire manufacturing industry, which by 1920 had produced more millionaires than Silicon Valley has produced until just recently, essentially vanished. This is the transformational and dramatic effect of a superior technology entering an industry.
Again and again this story repeated itself in the 19th and 20th centuries. Gas lamps gave way to incandescent lamps. Refrigerators replaced ice boxes. Propeller planes yielded to jet engines. Joseph Schumpeter documented this pattern in Capitalism, Socialism, and Democracy, coining the term entrepreneur, which he described as the person who, when successful, revolutionizes an industry through the process of “creative destruction” (creative for the superior technologies,destructive for all the established firms that would go out of business).
Tesla, Nespresso, and Geox are current successful examples of such high-end disruptions. But how common is this phenomenon today? How often have you seen a firm revolutionize an industry by creating a superior product using a new business model? Not nearly so often.
Superior technologies do not take over industries as frequently as they once did because consumers today are different from those of a few decades ago. In much of the 20th century, technological innovation produced products that had plenty of room for improvement, opening up opportunities for high-end disruption. This went on in most industries until about the 1980s. Before that, most cars, for instance, were notoriously unreliable, prone to rust, and unlikely to last past 100,000 miles. Television picture quality remained unsatisfactory as the technology evolved from vacuum tubes to solid state to digital to HD. As a result consumers learned to compensate. They learned to repair their cars or to recognize which brand of a particular product was currently best.
But as established firms’ efforts to improve their products (what we call “sustaining innovations” in disruptive innovation theory), together with some occasional high-end disruptions, made products and services cumulatively better year after year, so many became so good that consumers either could not appreciate the product improvements or were simply unwilling to pay for them. And so we find that even though tire manufacturers today can produce much better tires than radials, consumers find that radials work just fine and aren’t willing to pay more for these superior technologies. As a result most of these designs end up being discontinued; a good example is the Michelin PAX tire.
When an industry reaches this point, opportunities at the high end dwindle, and there’s far more scope for low-end disruptions – offerings that combine a technology with an new, incompatible business model to produce an offering that’s not better than the incumbent’s offer (since they don’t really need to be) but are instead radically simpler, far more convenient, or very much more affordable (the classical definition of disruptive innovation introduced by Clayton Christensen). Crest Whitestrips, for example, are radically more affordable and convenient than going to the dentist to whiten your teeth. Digital photography is far more convenient than developing film.
So many industries have in fact reached this point that, as things stand in the 21st century, we know very little about when a high-end disruption will succeed. Recent research suggests that they would work in industries where the following criteria are met:
  1. The majority of consumers are highly dissatisfied with the current products or services. This occurs today most commonly in highly regulated industries that are hampered in some way from improving their offerings (as was the case, for example, when AT&T held a monopoly over telephony in the U.S.)
  2. The industry is fragmented, which means that even the leading firms are limited in their ability to retaliate against upstarts.
  3. The new company is fully integrated from the beginning, which means that it does not outsource critical functional departments to keep its cost structure low. Rather, it has developed an entirely new business model to profitably exploit a new, superior technology.
  4. The new entrant uses a different distribution channel from the incumbents. This is perhaps the most important criterion, since it’s relatively easy for incumbents to use their market power to bar start-ups from established distribution systems.
The odds of meeting all of these criteria is relatively small. And so the odds of success of a new high-end disruption are correspondingly small. In fact, the rarity of a successful high-end disruption is the reason so many new and superior technologies that could do so much to help industries evolve and benefit customers never gain a market foothold.
Most entrepreneurs still think that just because their technology is superior it will inevitably be widely adopted in the marketplace. But consumers don’t work like that. Next time you come across an engineer aiming to commercialize a superior new technology, ask if his industry meets the criteria described above. If not, he’d do much better to focus on low-end disruption by encapsulating the technology in a product that is in some way simpler, more convenient – and seriously more affordable— than anything currently on the market. After all, technologies don’t dictate how they must be commercialized, managers do.

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