Executive Thought Leadership

Disruption Offers Market Innovation

A Changing Telecommunications Landscape: Assessing the Opportunity—A 4-D Model for Change

Cisco System's Bill Nuti explains how market shifts in the telecommunications industry are forcing service providers to try a new approach. Amid the risk, there are great opportunities. Nuti explains a new model that can help you assess the opportunities.

Driven by the convergence of IP-based communication and traditional wire-line voice communication, the telecommunications industry is experiencing a major market shift. While traditional service providers have benefited from the growing demand for high-speed data services, that trend is about to change. Companies are quickly embracing a new network paradigm of "any-to-any" communication, which promises to challenge the traditional interexchange carriers and Regional Bell Operating Companies (RBOCs) unless they target emerging areas of market opportunity and seize them.

The significance of this shift is driven home in a new white paper, "Identifying Opportunities for Successful Innovation in the Telecommunications Industry: Separating Hype from Reality," by Professor Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth of Harvard Business School. Christensen and his colleagues suggest a model for service providers that enables them to use the very forces that challenge their current positions a tools that will help them emerge as winners in the new market landscape.

A Changing Telecommunications Landscape

Although voice has historically been the most important service in the telecommunications industry, the rapid rise of computing power and networking - helped by IP and the Ethernet - has turned the focus on future products to data transmission. Businesses are the biggest consumers of data transmission services, with many users demanding sophisticated service offerings such as high-speed Internet access on top of basic connectivity. Scores of new companies have arisen in the past 20 years to provide new products and services to meet this growing need, and the technologies introduced by these new players are sparking their own changes.

Among these catalyst technologies are wireless communication, voice over IP (VoIP) and content data networking (CDN). Wireless voice has exploded in the last decade, and wireless is now gaining ground in the areas of voice telephony and high-speed data transmission. On the networking side, VoIP has helped drive creation of a platform for the convergence of data, voice, and video on a single network. This convergence has enabled businesses to implement voice communications much more cost-effectively and to build new value-added services for reaching customers, such as IP call centers enabled by the Web equivalent of a dial tone. In the enterprise and small business markets, the need for high-speed data transmission for applications such as e-learning and cost-effective videoconferencing also offers significant opportunities for service providers to better understand the emerging requirements of this market. The complete convergence of voice and data in corporate networks still requires new features, capabilities, and replication of network services before it can emerge as "business ready," but it is improving quickly enough that widespread corporate deployment, and disruption of the status quo, is imminent.

Assessing the Opportunity

Service providers have several options for dealing with these and other innovations that promise to challenge their established influence.

• Ride the wave: Established companies' deep pockets give them the option of investing in new companies and technologies or setting up their own independent companies to compete with newcomers.
• Co-opt: A company with an established customer base can also try to co-opt a rising technology from another vendor by introducing it into its mainstream market and blocking that competitor's growing momentum. Though it's expensive, this tactic works particularly well in the telecommunications industry because its strict regulatory environment and high cost of entry give established companies a significant time advantage over newcomers.
• Block: Finally, service providers can use their influence and industry regulations to block disruptive technologies from entering the market altogether. While this may result in service providers maintaining their influence, it is not a great choice for the customers for whom the innovation represents a potential gain.

To understand how to respond to a potential competitive threat, a company must first understand what it is facing.

Christensen, author of The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, offers a four-dimensional model service providers can use to understand the forces changing their market and to make strategic decisions and investments to improve their competitive positions.

Dimension 1 - Disruption: Christensen offers a series of questions service providers can ask to understand what kind of change they face and whether it will truly affect the competitive landscape:

• 1. Does the change address a quantifiable opportunity to improve services, reach new customers or create new revenues?
• 2. Can the technology overcome the market and regulatory hurdles to move into the mainstream?
• 3. Does the advance create a new ecosystem or revenue model that cuts out the current leaders?

If the answer to each of these questions is "yes," then the competitive threat represents a disruptive change rather than a sustaining one. As Christensen describes in The Innovator's Dilemma, industry leaders often lose market opportunities during disruptive shifts because they respond too strongly, exceeding the needs of their mainstream customers. This kind of reaction is expensive and complex and allows companies with simpler, cheaper, more flexible technology to come in from below and take customers away.

For example, the introduction of the multiprotocol router was the pivotal disruptive innovation that turned the networking companies that dominated the age of the local area network (LAN) into fringe players and killed IBM's data transport businesses.

If a change does not meet the litmus tests for disruption, it is one of three types of sustaining innovation.

Dimension 2 - Discontinuity: A fundamental change that does not disrupt the existing revenue model is called a discontinuity. A discontinuity represents an opportunity for market leaders because it often requires the kind of business infrastructure and investment ability that small companies can't easily create. Discontinuous innovation, such as the telecommunications industry's move from analog to digital telephone service in the 1980s, is often difficult and expensive, but generally leads to massive improvements in customer experience.

Dimension 3 - Distraction: A distraction is a new technology, typically offered by an established company, which leads to a short-lived change in the competitive structure of a marketplace without fundamentally changing the industry structure. MCI's Friends and Family pricing structure was a distraction that led to the introduction of new products or pricing models without changing the industry in any significant way.

Dimension 4 - Displacement: Displacements are mainstream introductions that create new competitive landscapes. MCI used microwave technology and AT&T's own regulatory constraints on AT&T to enter the long-distance market in the 1970s. It then targeted a small group of AT&T's best customers with better prices and innovative models for bundling minutes, a model AT&T just couldn't duplicate.

The global telecommunications market is already changing, and service providers must seize the opportunity for new innovations that will serve customers. By using this model to better understand the nature of these changes and the opportunities they offer, today's leaders have the chance to determine their futures and ultimately ensure that they are tomorrow's leaders as well.

Are you a service provider? Read the Christensen white paper or take the 4-D Model test to find out the profile on your new service and how it is likely to survive or thrive given today's market forces.