Executive Thought Leadership

The Effects of Forces of Innovation

Clayton Christensen is an award-winning author and professor oinistration at the Harvard Business School, with a joint appointment in Technology and Operations Management and business and General Management. His research and writing interests center on the management of technological innovation, developing organizational capabilities, and finding new markets for new technologies. He and his associates recently developed a working paper, "Innovation in the Telecommunications Industry: Separating Hype from Reality."

iQ: In your 1997 book, The Innovator's Dilemma, you discussed a type of innovation that you termed "disruptive," which you said often caused well-managed firms to fail. How can companies identify a disruptive innovation?

Christensen: A disruptive technology is one that initially under-performs the incumbent's offering along some key product or service attribute, such as functionality, but offers greater convenience or a lower price. The disruptive technology will either take root in a new market outside of the incumbent's mainstream market with customers who value an innovation for its different characteristics or it will establish itself within a subset of the incumbent's customer base with customers that feel over-served by the current offerings and who can be satisfied with a cheaper, simpler product.

There is an important asymmetry in the motivation inherent in disruptive technologies: The owner of the disruptive technology is highly motivated to go after the mainstream market because it looks large and profitable. However, the incumbent avoids a disruptive technology's beachhead market, which looks relatively unprofitable to the incumbent.

The disruptor's success in this new market funds the technology's improvement. While observers often point to barriers that deflect the disruptive improvement trajectory, true innovators almost always find creative ways to circumvent perceived barriers. As technology improves, mainstream customers are "pulled" to it because of its relative flexibility or low cost. Shackled by their resource-allocation processes, incumbents typically march up market and cede increasing share to disruptive invaders.

iQ: You had not previously focused your research on the telecommunications services industry. What has your research into this industry uncovered?

Christensen: The telecommunications industry has certainly been transformed by important innovations such as the upgrade from analog to digital and the deployment of fiber. However, based on our models, not all innovations have the same impact on an industry. For example, while Cisco's router technology is a classic example of a disruptive technology within the enterprise market, we did not find any such disruptions in the service provider marketplace. In fact, we think we have uncovered a distinct phenomenon within the service provider market. Specifically, the two apparent paths of disruption in the industry-wireless and IP-do not appear to be killing incumbents. We think the high degree of interdependence in the telecommunications industry gives service providers both the ability and strong motivation to "co-opt" and implement potential disruptive technologies.

iQ: You have developed a new classification scheme of industry change, which you have termed the "4-D" model. Can you explain the model and how it can be useful to managers?

Christensen: The classification scheme is really meant to expand on our distinction between technologies that "sustain" incumbents and technologies that disrupt incumbents. Expanding these distinctions helps managers predict how different changes will unfold, giving them insight into how technologies can change the competitive landscape of an industry or the way profits are made.

The first question we ask is whether the technology meets a series of "litmus tests" that we have devised to identify disruptive innovations. If it does not, it is one of three different types of sustaining innovations-either a displacement, a discontinuity or a distraction-that incumbents have the ability to master. We segment these sustaining innovations by the degree of the change and where they occur in an industry's value chain.

iQ: People who analyze the telecommunications industry often point to the influence of regulation. You do not seem to specifically mention the effects of regulation in your research to date. How does regulation affect the disruptive forces?

Christensen: Regulation is always an important factor that affects industry dynamics. In general, regulation either encourages or hinders the fostering of innovation and influences where in an industry innovation might occur. We have developed two specific hypotheses about how regulation affects the forces of innovation. First, if regulation creates barriers that make the market for innovation inefficient, entrepreneurs will be forced to bring the potentially disruptive business models to incumbents. Incumbents' processes will attempt to "cram" the technology into their existing business model, snuffing out its disruptive energy. For example, the government's control over spectrum allocation stops firms from offering targeted services to potential beachhead groups of companies.

Second, regulation can artificially influence the structure of an industry. It can either "bottle up" or release emerging points of modularity, thus either preventing or accelerating the decoupling of vertically and horizontally integrated industries. It also can encourage specialists to pursue inappropriate opportunities where they have little chance of succeeding.

iQ: Specific to that, can you comment on the dramatic failure of many of the competitive local exchange carriers [CLECs] that sprung up after the 1996 Telecommunications Reform Act?

Christensen: Well, the act tried to unbundle the local loop and encourage the creation of a specialist marketplace for local telephone services. However, the local loop features an incumbent controlling a highly interdependent system. Any effort to force modularity on the system was doomed to fail, as a market of specialists would not be capable of managing those complex interdependencies. So for instance, companies that tried to offer DSL by going into the Regional Bell Operating Companies' [RBOCs'] central offices and using their facilities found it incredibly difficult to compete and ultimately failed. Because of its quality and reliability related issues, DSL is not good enough with too many unpredictable interdependencies for a specialist company to master. Incumbents understand their own network architectures and can consequently offer service more quickly with fewer concerns about the unintended consequences of reconfiguring their own central office facilities. This illustrates how portions of the Telecommunications Reform Act attempted to force modularity in an inappropriate place in the value chain.

iQ: What is the near-term outlook for service providers in the telecommunications industry? Do they face any imminent threat of disruption? Is this answer different in international markets?

Christensen: While there is tremendous uncertainty, in our working paper we detail a number of key factors that ultimately will influence how innovation shapes the industry. RBOCs appear to be well positioned to capitalize on many of the innovations and potential forces of change in the industry today. In fact, our research points to a high degree of interdependence in the telecommunications networks that would prevent the RBOCs from feeling disruptive forces in the foreseeable future. However, traditional interexchange carriers [IXCs] seem to be in much greater danger of disruption by new providers focused on pushing the IP-internetworking paradigm.

We think voice over IP [VoIP] has a tremendous amount of disruptive energy and could enable disruptive business models in areas ranging from the PBX market to advanced services such as call-center management and content networking. In fact, VoIP could lead to the decoupling of services from the transport media, in our frameworks a widespread modularization of the industry that would lead to the creation of a competitive market of specialist service providers.

Also, it is important to mention that, while we do not specifically analyze non-U.S. markets in our paper, we believe the tools we develop in our work should be applicable in any environment.

iQ: What is your advice to managers?

Christensen: Well, they really should read our paper. We hope it presents a clear analysis of the forces of innovation that have influenced and will continue to influence the industry. Also, we hope it will allow managers to update their "innovator's toolkit" within a framework that encourages a new common language to identify, better understand, and discuss the signposts signaling that the industry's future direction is about to diverge from its historical path. After managers have read our paper, we really encourage them to contact us with their feedback so we can kick-start this dialogue.