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Clayton Christensen, Shih Chintay

Disruptive Innovation – How Taiwan Can Win


Disruptive Innovation – How Taiwan Can Win

Source:Ming-Tang Huang

The Harvard business scholar who pioneered the concept of disruptive innovation considers the future of change in the global economy, and the opportunities that may lie in store.

Disruptive Innovation – How Taiwan Can Win

By Hsiao-Wen Wang
From CommonWealth Magazine (vol. 449 )

At the invitation of CommonWealth Magazine and National Tsing Hua University, Clayton M. Christensen, professor of business administration at the Harvard Business School, will soon visit Taiwan to share his insights on business innovation. In a warm-up for his arrival, Christensen joined Shih Chintay, dean of the NTSU College of Technology Management, in a transoceanic dialogue exploring the global trends in disruptive innovation, and Taiwan's unique role in it.

Following are highlights from that conversation.

Q: From your perspective, what have been the most successful disruptive innovations recently?

Christensen: I think the mobile telephony industry is now undergoing the most massive disruption of the last 15 years, because it has been made affordable and simple for huge new populations in Asia, Africa and Latin America.

Piggybacking on top of that are new waves of disruptive innovations that I think will be very important. One of them is mobile banking. In the developed part of Asia and in North America, we all have credit cards. But most people in the developing world don't have access to credit cards. So mobile telephony companies are becoming banks for customers who have prepaid relationships to transfer money from my account to your account. There are some countries in Africa where mobile telephony banking accounts for nearly 10 percent of their GDP.

And then healthcare built on the top of mobile banking. There's a lot of reasons I think history will show that mobile telephony will be a major disruptive innovation.

However, the longest-running disruption is recorded music. Because before Edison invented the phonograph (in 1878), a very limited number of people had access to high-quality music. You had to go to the finest concert hall in Europe or New York City to hear a band of artists playing a symphony. The development of the phonograph just distributed the ability to listen to music to a much larger population. It wasn't quite as good as the real experience, but it's better than nothing. Then waves of disruptions pioneered by Sony in Japan and Apple made very high-quality music available to everyone. That goes on.

Q: One of the characteristics of disruptive innovation is low cost, accessible by larger populations. Since you mentioned Apple, we are wondering if you consider Apple's iPad to be a disruptive innovation? It is not cheap.

Christensen: Well, you can only express disruptive innovation relative to someone else's business model. The smartphones are relatively disruptive to the notebooks. Apple started this wave with its iPhones, and then the iPad is the next step upmarket. So, relative to Apple, it's a sustaining innovation, but to notebooks, the iPad is a disruptive innovation.

I personally feel the iPad won't have a huge transformative effect on the industry, because the limiting technology for handheld devices to disrupt the notebook computer is the input technology: How do we put data in? And how do I get data out?

Shih: Of course the iPad has popularized the touch screen, and new input technologies like voice input. I don't know how much cloud computing will change the way of input, given the access to bandwidth is increasing. How do you solve the problems with bandwidth if you put everything in the cloud eventually?

Christensen: That's exactly right.

Q: Speaking of cloud computing, Taiwan's OEM and ODM manufacturers are worried that our added-value will become thinner and thinner. You once mentioned in your book that Taiwan's OEMs and ODMs seem like disruptive innovators relative to brands like HP or Dell. Still, Taiwanese ODMs and OEMs failed to capture a larger slice of this industry.

Shih: OEMs and ODMs in Taiwan are very worried about how to transform themselves, because Taiwan's so good at OEM and ODM, but the value has been squeezed, and profitability is low. People are really concerned about how we can change our business model. But in your book, we are low-cost providers with little value. So there must be something wrong. What should Taiwanese do? It appears that transforming into services will be very difficult.

Christensen: Yes, it will be. When there's a proprietary architecture that is expected to become modular or standardized, then as the industry goes through that transition, the profit of the value chain changes. One layer seems to be commoditized, then the next layer seems to become simultaneously de-commoditized. So in mobile handsets, as the handset becomes commoditized, the handset makers themselves will need to squeeze profit from what's de-commoditizing underneath. This is MTK – those guys just own that part of the world.

Finally, I think the OEM industry will want to take the next step forward to become branded manufacturers. Like Giant. Giant is a great example. They play in the world with a very good brand.

Shih: I hope more and more Taiwanese manufacturers will catch that point and create value for their customers. That's what we need to do.

Christensen: You guys are facing a very exciting future. One of my puzzles – if I could become young again and do one more PhD, the study would be why the waves of disruption have all come to North America from Asia. The first was Japan, and then Taiwan, then Singapore. Korea followed, and then India and China. Why didn't disruptive innovation come from Latin America or Africa? This is a very interesting puzzle.

Q: Why is it so difficult to remain successful? Let's take Asustek's Eee PC for example. Asustek was the harbinger of netbooks, but was soon surpassed by Acer, and Samsung is catching up quickly.

Christensen: The Eee PC is really in many ways a sustaining innovation in the stream of disruption to the NB computers. As a general rule, it's very difficult for products to become the source of differentiation, because products are copiable, especially modular products that are assembled by standardized components. If that's where you climb the value chain, it will be very difficult for you to differentiate yourself in a sustainable way.

Physically, in the organization where the differentiation exists, it's the way we integrate to provide the experience that's required by our customers to get the job done. That's a lot harder to copy.

To build the differentiation, you've got to sit in the customers' shoes. Look at the market through the lens of "What job do I got to do?" and the opportunities to build the differentiable product that will be very sustainable. But you can't do it if you think of your business in product terms.

Shih: If you just look at a company's products, you can't differentiate that much. But if you look at a company's core competence, the way they integrate, it will not be so easily replicable. You are talking about creating a product or services that aim at solving customers' problems, what they want to do, what they want to accomplish.

Q: Why do all the waves of disruption come from Asia? How would you describe their impact?

Christensen: The impact is making products and services that were previously expensive, complicated and restrained to a very few customers who needed skills to operate, simplified and affordable, so that a much larger population has access.

One of the problems of economic development is you get to a point where there is not a market, there is no one who does not yet have access. When that happens, disruptive innovation becomes very difficult. A very good example is green energy in the US today. In North America, almost everywhere has access to very low-cost, highly-reliability electricity from conventional resources. The advantage of the developing world is that there's a vast amount of non-consumption of electricity, so you can reach them with good enough solar panels. You probably won't use it in Taiwan, but in remote parts of Vietnam, the Philippines, and other parts of South East Asia, solar electricity is so much better than nothing. So it's one place for disruptive innovation to take place. It's another good example of how well-positioned Taiwan is to catch opportunities like this.

Shih: Stan Shih, founder of Acer, he used to say, "We will conquer the countryside before we get into the city."

Christensen: That's exactly right.

Shih: Maybe the shanzhai ["bandit" cell phones] from MTK is a very good example.

Christensen: Their mindset is so good, and they make it so easy and simple for any small company that can assemble their own handset to have their own features.

Shih: Taiwan's very good at producing very low-price commodities, particularly now with China added in this play, we can popularize the whole market, but the prices are dropping so rapidly. All the companies are struggling to make profits. That's the dilemma of this emerging market.

Christensen: It is the dilemma, but it doesn't need to paralyze the Taiwanese economy. It's critical for Taiwanese companies to realize what used to be beautiful business won't be beautiful business anymore. You just need to come down inside to the next level and be the supplier of the technologies that Chinese companies can use. MTK ships more than 450 million mobile chips per year. That's amazing. They are enabling the commoditization without being commoditized themselves.

Even though China is a major disruptor, Taiwan doesn't have to be victimized by it.

Q: What does it take to become a commoditization enabler? Like TSMC or MTK, what does it take to achieve that? Do we have to create a platform and become platform owners rather than just the platform participants we were in the Wintel age?

Christensen: Old successes don't just disappear, but they gradually change their characteristics. So it's very hard to simply walk away from your traditional strong business; it has to be phased out. The level in the organization above the business unit, which means the CEO, will need to initiate new business units that can compete with old good business. Quanta is a great example of that. The way Johnny Shih runs Asustek is a great example of that: you have to initiate from the CEO level to create new business units, so that start-ups in the organization can compete with old units in a new way.

When we say being innovative, of course, it's innovation in products, but it's the innovation of business models that will allow Taiwan to catch the next wave of growth.

Q: Big companies have learned disruptive innovations so well; will it be harder for smaller companies to become disruptive innovators?

Christensen: Just let me give you an analogy and talk about venture capital. As a general rule, technological problems are solved in an intuitive, trial-and-error research process. We call that realm intuitive development. But then little by little as patents become apparent, the development of new technologies moves into the pattern-recognition realm. It makes it a lot easier to teach people how to develop these products and services to solve technological problems. When the technology becomes even better understood, it move into a rule-based realm where you understand cause and effect perfectly, so you can develop software for some tech products. So this progression from intuitive-science realm, to pattern-recognition realm, to rule-based realm is almost characterized in every industry. So historically, the launching of business has been blending into intuition. It's trial-and-error.

What we are trying to do in research is to shift the creation of new business out of the realm of intuition, into pattern recognition now. There are really some patterns and kinds of strategies that will allow you to yield success. So the probability is that if you understand the patterns and launch your business, it's not a cook book yet, but the probability of your being successful, if you follow our research, is almost four times greater than if you do it in your own intuitive ways.

Shih: So commodity is one way Asia companies succeed, but another way is to integrate, like MTK is integrating all sorts of solutions. In your new book, The Innovator's Prescription, you are talking about simplifying structure and commoditizing it. If you look at the product, the other thing is to innovate your business model. You will create a value chain so that everyone can co-create value. It seems to me that the biggest challenge comes from how you create the value chain, the eco-system.

Christensen: The key is to integrate what helps you to provide the experiences to get the job done for the customers. If you understand the job, then you know what experiences you are going to provide. And if you have that sequence of insights (customer's job, experience, integrations), it will be terrific. If all you tried to do is to create proprietary integrations, then you only end up optimizing the performance of technologies. Then you become what Sony has become in the last 20 years.

Q: How do companies adapt in the new highly risky world?

Christensen: Of course, my big answer is that I don't know. It's hard to prepare for unpredictable things. As a general rule, Chapter 8 in The Innovator's Solution, "Managing the Strategy Development Process," I think, is probably the most important work we have ever written. It's that over 90 percent of new ventures have the wrong strategy when they launch. The difference between those who succeed and those who fail is NOT that they got it right the first time. That's the key cause of why big companies fail to innovate: because they have too much money, and they believe they have the right strategy. When the world is becoming more and more uncertain, give the innovators enough money to allow them to get into the market. That forces them to enter the market as fast as they can with minimum fixed investment, because when you are in the market, that's how you find the right strategy. Then you know what experience you need to provide, how you will integrate these experience for customers. Then you can scale.

Most of the time, you don't know the right strategy when you launch a new business.

Shih: So you must deliver to the market as soon as possible and get the feedback and adjust your strategy accordingly.

Christensen: That's right.

Q: How can we use your theory to solve the overcapacity in Taiwan's higher education market?

Christensen: Just like Toyota came in at the bottom of the market and moved up, universities move up as well. In the US the universities start with elite private schools, like Harvard, where only influential and wealthy people get exposed to higher education. The governments of each state set up state universities, so we have the University of Massachusetts, University of Utah, University of California. And then the next level is community colleges, two-year basic training schools that will give you general education and work skills. Then there are online universities.

When they set up the four-year state universities like the University of California, almost instantly, they all tried to move upmarket and tried to be like Harvard, instead of keeping low-cost. And almost instantly, colleges become four-year colleges, and try to be like state universities. The upmarket movement is just unanswerable.

In higher education, there has been no technology that enables low-price educators like community colleges or state universities to move up. If they want to move up, they have to replicate the business model of private universities. So disruption is not making higher education affordable, until now. I believe on-line learning to be a technological driver that will allow low-cost educators to move upmarket. We didn't have online learning before.

So, overcapacity in higher education will only probably get worse as every educator moves upmarket. If you do in higher education what MTK did in mobile telephony, then you can come inside to allow online universities in the Philippines, Indonesia, and Vietnam and China, to move upmarket to provide better and better education at lower and lower cost. It's a great opportunity.