23-01-2016, 06:31 #1
[EN] Silicon Valley braces itself for a fall: 'There'll be a lot of blood'
Wannabe entrepreneurs are still piling in to San Francisco, but there’s a sense that time is running out on the exuberant startup world
Nellie Bowles | The Guardian
Friday 22 January 2016
A sharply dressed French investor is leaning against a doorway, arms folded and his expression slightly bemused. Philippe Suchet is considering the latest raft of hopeful new technology entrepreneurs that have presented at 500 Startups – a major hothouse for up-and-coming Silicon Valley talent.
There’s no shortage of enthusiasm and ideas in the valley, but Suchet is sceptical.
“Things have been frothy, and you see a lot of dumb money. The music’s going to stop and not a lot of people will have a chair,” said 48-year-old Suchet, a 500 Startups mentor who says he’s been seeing companies now with $10m valuations and no product. “There will be a lot of dead bodies. A lot of dead bodies. There’ll be a lot of blood.”
One of the founders walks by handing out his newly venture-backed meal replacement called Ample, whose label says: “Formula version 1.3 better because science.”
Suchet raises his eyebrows and nods.
The last few months have been hard on Silicon Valley startups, as a series of “down rounds” across the tech world chop established companies in half and stock collapses move billionaires back to millionaires. There’s a sense that San Francisco’s excess is peaking; investors asking for their money back, house-flipping seminars popping up across Facebook, and gold-flaked pizza signal the end of times.
But tonight was a party, an exuberant group of 125 founders presenting their brand new startups. Most had just moved to San Francisco, and each raised $125,000 in January 2015 as part of Dave McClure’s 500 Startups accelerator.
On the sixth floor of a nondescript modernish downtown office building on a rainy night, McClure’s latest 500 Startups batch presentations began.
“Being six in a two bedroom is uncomfortable, but it pays off in the end,” says a young woman whose new startup puts up Instagram ads for e-commerce sites. A panelist giving advice describes himself as having “lived a life of aggressive networking”.
This is McClure’s biggest single accelerator batch ever – 53 companies initiated at once for his four-month training program, each of which gives him a 5% stake. McClure is the closest to a startup mass production factory that there is – last year he invested about $60m in 600 companies, and this year he’s aiming to invest around $100m in even more.
“It’ll be smelly,” he says, looking around the crowded open-plan office.
The room has the sour, wet, warm smell of bodies and pizza. There’s a scruffy grey carpet with various stains. The ceiling’s exposed with fluorescent lights. It’s a minimalist decor, white walls, folding black plastic chairs. Behind the presenters is a large screen and two small posters that read: “Bullshit Free Zone” and “Complaining Is Not a Strategy”.
One beam has a poster of McClure as a genie coming out of a bottle with a falcon on his shoulder. There’s a small camera on a stick hanging from the ceiling to record the presentations. As is normal, all the startup founders are in casual wear and the VCs by their uniform suit jackets and dark jeans.
McClure watches from the floor. He’s in a black shirt that reads: “500 Strong.” When he doesn’t like a pitch, he shouts: “Buzzword bullshit!”
The startups are a good cross section of what gets seed funding in Silicon Valley.
There’s a company selling ad-blocking software for live-streaming videos, another promising to put all the financial advice you need on a sticky note and somehow monetize this. One woman presents an Airbnb management company. There’s a digital sewing stencils company. A founder says he “designs, builds and sells electric bikes as a service”, echoing the meme “software as a service” to describe his bike shop, and another who’s created “a marketplace to invest in your favorite poker players”. There’s Yodder, an on-demand acne prescription service: “Upload a photo, download a prescription. Remember, life’s already bumpy so keep your skin smooth.”
There are a lot of somewhat shady and questionably legal financial tech startups: one guy presents a company that gives “instant credit through your smartphone in 180 seconds minus the credit check.”
And then another that works as a middleman with bail bondsmen, referring to them as an “underserved industry”. “They’ve been a little demonized because they’re viewed as predatory – the payday loans, bail bonds guys”, the founder Jordan Kelley says. “We make high risk much lower risk but introducing a familiar, friendly brand: Romit.”
And finally an earnest guy in a dress shirt gets up to pitch Halolife, an e-commerce site for burial services.
“It’s a $20bn industry,” he says. “Everyone dies.”
Bedy Yang, a partner at 500 Startups, says everyone’s waiting to see what happens after demo day, when the companies start looking for funding: “There’s a fear that right after demo day we’ll know whether they can raise money or not. It’s almost like a thermometer.”
At the end of the night, founders sit at long communal work stations laughing about their new high rents and what drew them to San Francisco.
Bradley Deyo, a 24-year-old sharing a one-bedroom with his brother and co-founder, just went to an event in Sunnyvale and found a parking space that said “Venture Capitalist parking only,” he says, showing me a picture on his phone.
“That just doesn’t happen in Maryland,” he says. “When I saw that sign I said, ‘I’m in the right place’.”
23-01-2016, 07:07 #2
Jack Dorsey: from billionaire to millionaireJana Kasperkevic | The Guardian
Wednesday 20 January 2016
Jack Dorsey is no longer a billionaire, thanks to the crashing stock markets and his struggling tech empire.
As global stocks tumbled on Wednesday morning, so did Square and Twitter, the two tech companies he helped found. An hour and a half after the opening bell, Twitter had fallen 6% and Square was down 11%.
At $8.46 a share, Square has now fallen below the $9 price set when it went public in November 2015. Both Twitter and Square are down about 30% so far in 2016. Twitter is down 57% in the past 12 months.
Dorsey, who is currently attempting to juggle the top job at both companies, saw his worth fall with the value of Square and Twitter stock.
Official word that the 39-year-old entrepreneur has dropped out of the billionaires league came from Kate Vinton, a reporter who tracks the world’s wealthiest people for Forbes, compiler of the benchmark rich list.
“At the Forbes 400 in September, we pegged Dorsey’s net worth at $2.2bn, thanks in large part to Square’s $6bn dollar private valuation. His net worth dropped $800m to just below $1.4bn when the company went public in November at $11.20 a share. Now, with both companies struggling on the stock market, he’s fallen out of the three-comma club with a net worth of $944m as of 10:30 am,” she wrote.
On 5 October, Dorsey was reappointed as CEO of Twitter, a company that he cofounded in 2007. He was Twitter’s first CEO before he was replaced by Dick Costolo.
Costolo was ousted last June as the social media company struggled to grow its user base. It has continued to struggle under Dorsey, who will report the company’s latest results early next month.
23-01-2016, 08:53 #3
Another big fund has lost faith in Dropbox and cut its valuation by half
Mutual fund manager T. Rowe Price marked down its investments in several private tech companies in the fourth quarter of 2015, including cutting the carrying value of its stake in Dropbox by 51%.
Jan. 22, 2016
Another big mutual fund has cut the valuation of its holdings in Dropbox — this time by more than 50% — showing the declining investor confidence in the cloud file-sharing company.
According to The Information's Alfred Lee, T. Rowe Price marked down its holdings in Dropbox by 51% in the fourth quarter of 2015, the first time it's cut down its share value in the company.
The report said that the mutual fund valued Dropbox shares at $9.40 per share as of December 31, citing a portfolio holdings report released last week. That's down from the $19.10 share price it paid in its last funding round in 2014, when Dropbox was valued at $10 billion.
This is the latest in a string of write-downs Dropbox shares have faced lately. Previously, it was reported that Fidelity and BlackRock marked down its shares to $13.50 and $12.38 per share, respectively.
The report said that it's unclear what exactly prompted the markdown, but it could be due to a variety of reasons, including "new rounds of financing, the company's financial and operational performance, strategic events impacting the company," citing T. Rowe's representative.
As Business Insider has reported previously, Dropbox has been struggling to establish a business model that justifies its latest $10 billion valuation. Most recently, the company shifted gears toward the enterprise market, where its service would be sold to businesses instead of just regular consumers.
Dropbox wasn't the only company to see its shares marked down by T. Rowe Price in the last quarter. MongoDB lost 44% of its value, while Apptio and Evernote lost 25% and 20% of their share value, respectively, according to the report.
But some of the bigger startups, like Uber, Airbnb, and WeWork, all saw their stock value up or unchanged, the report said.
We've reached out to Dropbox for comment and will update this story when we hear back.
23-01-2016, 08:59 #4
Over the first three quarters of 2015, Uber lost $1.7 billion on $1.2 billion in revenue.
For perspective, during Amazon.com’s worst-ever four quarters, in 2000, it lost $1.4 billion on $2.8 billion in revenue. CEO Jeff Bezos responded by firing more than 15 percent of his workforce.
Uber currently pockets up to 30 percent of its drivers' fares, a figure that was 20 percent two years ago. Also, Uber continues to explicitly charge for the basic safety of its ride with a fee that has more than doubled from $1 to $2.50 in certain cities.
23-01-2016, 12:47 #5
Why Silicon Valley Should Bring Unsexy BackRana Gujral
Jan 1, 2016
Neckties embedded with QR codes. Pants that make drum noises. “Uber for medical marijuana.” These are just a few of the goofy startup ideas that have cropped up in Silicon Valley in recent years.
I can’t be the only one who’s disappointed with this. The Valley is the birthplace of game-changing innovations, like the microprocessor and the PC. It’s home to enough brainpower to take on the biggest problems of today, like world hunger and climate change. So why, in 2015, was it so myopically focused on silly wearables and more efficient pot delivery?
To me, the answer seems like an obvious one. Like middle-schoolers at a high-school dance, startup founders are trying too hard to be cool. And it’s not only hurting the world — it’s hurting the longevity of the entire tech industry.
So cool, it hurts
I know tech industry insiders want to be cool because I used to be like them. I started my career at big companies with famous names, like Logitech and Kronos. But I quickly grew disillusioned with the waste I saw in the corporate environment. I wanted to solve real problems, not just fatten a bottom line.
But that was before I joined with my partner, Stephen Kawaja, to found a startup that makes software for the least Silicon Valley of industries. In the eyes of Generation Y, actually making things — as opposed to apps — seems hopelessly unsexy.
A recent IndustryWeek salary survey found only 2 percent of 21-29-year-old respondents worked in manufacturing. Students interviewed called the sector slow and out of date. Most people associate factories with repetitive work and mindless conformity — like that disrupted by a sledgehammer-wielding Anya Major in the iconic 1984 Apple ad.
But just 150 years ago, factories were the Silicon Valley startup incubators of their time. Henry Ford’s Model T was every bit as disruptive as Uber (or Facebook or Google). How does a once-cool industry become so uncool — and yet still survive?
For one, by realizing that cool doesn’t matter that much in business.
Just take our customers, for example. Specialty chemicals have become an $800 billion industry, despite making what are frankly some of the most prosaic and least sexy products on earth. They’re behind the coating on a washing machine that makes it look shiny and new, the polymer added to concrete that makes it more flexible and less likely to crack, the glue that sticks the wood veneer to your desk securely enough to make it look authentic.
“Innovation” in this context is often incremental. It’s not about “disrupting” a whole industry — it’s about redesigning to improve performance by a mere 0.0001 percent.
But here’s the secret: That 0.0001 percent is ultimately more useful to the world than 10,000 pairs of DrumPants. To quote the tagline of German specialty chemicals company BASF: “We don’t make a lot of the products you buy. We make a lot of the products you buy better.” And customers are willing to pay a premium for those better products.
How many people are really willing to pay a premium for timpani in their khakis? My guess is, beyond the Silicon Valley bubble, not many.
More than a 1 percent problem
Already in today’s crowded startup ecosystem, a new company that can’t make inroads outside the Silicon Valley bubble is bound to fail. In a survey by venture capital database CB Insights, 42 percent of tech startup founders cited “a lack of market need for their product” as the main reason for their company’s failure. Just look at Secret. The VC-backed anonymous messaging service was a Silicon Valley darling — but folded last April, having failed to take off outside of the tech-industry fairyland.
That’s a trend that’s likely to accelerate in upcoming years. Most of today’s fast-growing tech companies are created by and for a small, affluent, urban population — the 1 percent. But these users’ share of the market is contracting. By 2020, four out of five smartphone connections will be in developing nations, where efficient pizza delivery is often less of a concern than access to clean drinking water. And woe to the tech company that doesn’t prepare itself for this change.
I’m not suggesting that startup founders drop everything and start to work on an app that somehow makes washers shinier. Nor am I suggesting that developers resign themselves to merely making incremental improvements to their existing products forever. What I am suggesting is that developers, startup founders and venture capitalists stop running headlong from every business opportunity that doesn’t have a catchy, easy “Uber for X” nickname attached.
Getting back to basics
Think about the roots of the computer revolution. They’re not in the flashy offices of venture capital firms. They’re in unsexy industrial labs like Bell Labs, where scientists invented the transistor in 1947. Or Xerox PARC, home to the world’s first Ethernet connection and its first Graphical User Interface (GUI). These were places where great minds worked hard to solve big problems, without pressure to rush new products to market or create early exits for VCs. And as they’ve declined, America has been left with a huge gap in our innovation infrastructure.
To move toward the future, the Internet really needs to get back to its roots — its unsexy, specialty-chemicals–like roots. It needs to turn its attention to real, practical problems that matter outside the urban, affluent 1 percent. And it needs to learn how to think big again.
The good news is that some tech companies are already showing the courage to do so. They’re stepping up to solve the real-world problems the Valley ignores. Bright, a solar panel installation and distribution startup, recently raised $4 million in seed money to expand its operations in Mexico, where power from conventional sources is often prohibitively expensive.
Veeva, a cloud-based solution for the life sciences industry, fills a much-needed technology space by tailoring data services specifically to big pharma and biotech. Aditazz designs and builds complex buildings like hospitals for 20 percent the usual cost by applying the same software and techniques used to automate microchip design. It’s these types of companies that will continue to see profits long after goofy wearables startups have faded away.
The question is only whether the rest of the Valley will ever catch up.
23-01-2016, 13:00 #6
2¢Juan Pablo Vazquez Sampere
A fundamental tenet of disruptive innovation is that established firms normally do not react to disruptors. And for a good reason. Generally, disruptors take over the least profitable customers of the industry, and as that happens, established firms usually redirect the resources they might have spent defending their low-value consumers toward their high-value consumers.
One of the most common misunderstandings about disruptive innovation is thinking that incumbents are either blind to the opportunity disruptors are creating or they are deliberately choosing to ignore it. It’s more accurate to say that they see it, but are unable to adopt the disruptor’s business model for some reason. Established insurance companies, for instance, had difficulty selling direct to customers over the internet because they could not risk alienating their own agents (and, worse, the independent brokers) who stood between them and their customers.
But not reacting at the business model level does not mean failing to react at the technological level. Very often incumbents do adopt a disruptor’s technology if it serves their best customers.
In many cases, what is gold for the disruptor is only the cost of doing business for an incumbent, which can now serve its best customers better — even if it does not earn much in the way of additional revenue or profits.
Juan Pablo Vazquez Sampere is a professor of business administration at IE Business School in Madrid.
25-01-2016, 10:03 #7
Defining and defending disruptive innovation
Better mousetraps aren’t the products that undermine and then eventually topple market leaders. It’s lousier mousetraps.
January 16, 2016
Clayton Christensen, the doctor of “disruptive innovation,” is about as celebrated as business thinkers get. Yet he was just back in the Harvard Business Review patiently trying to explain the big idea that made his career.
There wouldn’t seem to be much left to say about his theory of how new products or services knock out the leaders in a market. But it turns out he’d had a disruptive couple of years.
A colleague from Harvard blasted him in the pages of the New Yorker magazine. More recently the MIT Sloan Management Review published a review of his 77 case studies going all the way back to when Christensen’s classic book, “The Innovator’s Dilemma,” was first published in 1997. The authors decided that most of these cases don’t completely fit his theory.
To the skeptics in business this could be welcome news. Another management fad that started with a B-school professor has finally begun to wane.
It seems more likely, however, that as an idea disruptive innovation isn’t going away. And rather than rolling their eyes, executives need to make sure they first really understand it.
Maybe the biggest problem with disruptive innovation is the very popularity of the term. Back when his first book came out, Christensen’s work was groundbreaking stuff, but lately disruptive seems to be applied to just about anything new.
Christensen thinks the term’s been badly overused, although he did some of this muddying of the waters himself by jumping into fields such as health care and education.
As an idea it’s even become popular enough for TV sitcom writers to mock, as some of the funniest scenes in the first season of HBO’s show “Silicon Valley” took place at an over-the-top competition for technology start-ups called TechCrunch Disrupt.
Here’s the best part of the joke: It’s an actual event. The next TechCrunch Disrupt will be held in May.
Christensen, with two co-authors, tried to have a last word on disruption in the recent HBR article. But he managed to annoy his critics further when he dismissed the ride-sharing service Uber as a new business concept that clearly wasn’t disruptive.
If what the booming Uber is doing to the traditional taxi business isn’t disruptive, his critics wanted to know, what is?
I can certainly agree that it must be plenty disruptive to taxi company owners to see an unregulated competitor blow into town and completely upend their business. But that isn’t the kind of disruption Christensen’s been talking about.
He has it right on Uber. What it has done is go after the mainstream taxi customers with a better mousetrap.
The important thing to understand about what Christensen came to call a low-end disruption is that better mousetraps aren’t the products that undermine and then eventually topple market leaders.
It’s lousier mousetraps.
Christensen got onto this line of research by puzzling over why some of the most successful companies fell on hard times. He seems to be generous by nature, and he hoped to learn that it wasn’t just shortsighted or lazy executives running their businesses into the ground.
Something was happening to these companies and their generally savvy managers, he suspected, that they didn’t see coming or at least didn’t see coming in time.
Christensen eventually came up with lots of examples of this, from high-tech products to things like steel reinforcement bar and hydraulic excavators. He’s maybe best known for his early work describing the changes in the market for disk drives, the little devices inside electronics used to store data.
In disk drives, the leaders of the industry had big research and development budgets and were launching new and better products all the time. They were listening closely all the while to their best customers.
What the market leaders weren’t interested in doing, however, was introducing smaller and cheaper drives. The 8-inch drives were cheaper per megabyte of storage, with quicker access times. They were simply far better, so why build a cheaper, 5.25-inch drive? None of the big customers wanted them.
The customers who did buy the inferior products were customers the big players didn’t know about or didn’t want. But the suppliers of the smaller, slower drives kept improving their products until they started taking the market share of the mainstream providers.
The most important lesson is that the managers who ran the big successful companies didn’t do anything conventionally wrong, yet they still ended up losing their market to upstarts.
As for the real-world practicality of this teaching, examples are all around us. It took no time at all last week to come up with a back-of-the-envelope list of situations here with at least the potential for just this kind of disruption. A great example is in financial services, one of the key industries here in the Twin Cities.
Within a five-minute walk of my office in downtown Minneapolis are the headquarters of two Fortune 500 companies, Ameriprise Financial and Thrivent, in the business of providing financial advice through well-trained advisers. But in the past half-dozen years, at least a couple of hundred automated investment adviser services have been launched, the so-called robo advisers.
With robo advisers, the clients (and it seems odd to even use the word client) answer a bunch of questions about their goals and investment risk tolerance on an online form. Then some computer algorithms run, and out comes a personalized portfolio of investment funds.
The service from a robo adviser isn’t nearly as good as what clients can get from human financial advisers. As an innovation robo advising is not a better mousetrap, it’s a far worse mousetrap.
But they are cheaper. They seem easy to use. And they will get better.
25-01-2016, 10:10 #8
Fresh Insights From Clayton Christensen On Disruptive Innovation
Steve Denning | Forbes
Following the publication in this month’s Harvard Business Review of the article “What Is Disruptive Innovation?” by Clayton Christensen, Michael Raynor and Rory McDonald, I talked with Clayton about the evolving thinking on disruptive innovation.
Steve Denning: I was inspired by your call at the Drucker Forum last year to find common language to talk about the management issues that we all care about. In that spirit, I was hoping that we could talk about how to describe the different kinds of disruptive innovation going on in the marketplace.
Clayton Christensen: I’m glad you’re asking those questions, because I’ve learned a lot in the last year. Let me describe my current thinking. Some of this came from discussion with Professor Joshua Gans at the Rotman School of Business in Toronto who is writing a book on disruption, The Disruption Dilemma, which is to be published in March 2016. He shared an early draft of the book with me. It raised some questions about the theory of disruption. I told him it was a great book, although there were some things we needed to talk about. And so we had a wonderful discussion.
I explained to him that over the years, people had come to us with things that they had identified that couldn’t be accounted for by the theory of disruption. And we agreed that the theory couldn’t account for those things. In some cases, we extended the theory so that it could account for those things. In other cases, we said that the theory was not applicable to those kinds of innovations. Over twenty years, the theory has evolved and improved in response to people who have used it.
A Web Presence For Disruption
Christensen: Then Joshua said something that surprised me. He said, “I’ve been teaching strategy for 25 years, and an important part of the course in strategy has been disruption. I realize now that I have been teaching disruption theory as it existed in about 2003. So where do I go to get the state of the art in disruption theory?”
Then I realized: “He’s right! We have made all these improvements to the theory, but they have existed in papers or notes here in Cambridge or in my mind.” So I decided that we need to establish a web presence for disruption where the most current thinking on the theory can be found.
I envision that the website will be for people who are continuing to study the theory of disruptive innovation. To start, we will post improvements to the theory that are constantly happening. Ultimately we’d like the site to become a place where people can come and add to the theory and make it better. Even people who are critical of the theory will be welcomed with open arms so that they can make their suggestions. How can the theory be improved if people aren’t describing what it can’t do?
I’m very excited about this. There aren’t many website like it in academia for business, where people can build upon the work that other people have done.
Denning: Can you give an example of a recent improvement to the theory that might be included on this site?
Christensen: We’ve recently had an important insight about how the trajectories of technological improvement are different in different industries. In some industries the trajectory of technological improvement is very steep, like the disk drive industry where every eight years some firm was getting eliminated. In others, the trajectory of improvement is gentler, like in discount retailing. And finally in others, the trajectory is flat, as it was historically in higher education prior to online learning.
This has important implications for disruption. When it’s flat, disruption doesn’t occur. New technology and business models can bring significant change to an industry where disruption hasn’t yet occurred, as Airbnb is bringing to the hotel industry. Airbnb is a classic case of disruptive innovation. They started out at the low-end—targeting customers who couldn’t afford a hotel (or who couldn’t book one in a crowded market). It was a pretty crummy alternative to hotels. But over time, they have moved upmarket—going after nicer and nicer homes in wealthier areas.
I think that the difference between sectors in terms of the trajectory of improvements is an important insight and is the type we would share on this website.
The Case Of Uber
Denning: In the current Harvard Business Review article you describe Uber as a sustaining innovation vis-à-vis taxis, not as a disruptive innovation, because Uber doesn’t operate at the low-end foothold or a new market foothold as specified by the theory of disruptive innovation. But when I talk to taxi drivers, most of whom don’t read Harvard Business Review, they tell me, “Uber is really disrupting my business.” They are using “disrupt” in the sense of the plain English word “disrupt”. What then should we call what is happening in the market being served by taxis and Uber? Is it wrong to call it disruption? Should we tell the taxi drivers that they are not being disrupted after all, and that the industry is actually being sustained, not disrupted? Is that plausible, just as a matter of English language?
Christensen: It’s a very important point and these are complicated issues. Uber is negatively impacting their business and has ‘disrupted’ their industry in the colloquial sense by throwing it into disarray. But as we point out in our article, it has not disrupted the industry in the technical sense of the word. It’s very important that we discipline the use of the word. If every person can define what the word “disruptive innovation” means for them, then the word loses its meaning for all.
We decided to use Uber to make this distinction, and also to illustrate some of the theory’s core tenets. For example, that disruption is a theory of competitive response. It tells you: if I innovate in this way, then this is what I can expect incumbent competitors to do. If I introduce a sustaining innovation, incumbents will generally try to mount a defense and try to eliminate me. If it’s disruptive innovation, they are likely to ignore me or flee rather than fight.
A Theory Of Growth
Christensen: So the concept of disruption is about competitive response; it is not a theory of growth. It’s adjacent to growth. But it’s not about growth. So when we were discussing growth, we discovered that there are three types of innovations, only two of which we had caught in the theory of disruption.
One type of innovation are market-creating innovations, which are disruptive in the sense. These are innovations which transform products that are complicated and expensive into things that are so much more affordable and accessible that many more people are able to buy and use the product. You have to hire more people to make it and distribute it, sell it and service it. This is where growth comes from.
The second type of innovation are sustaining innovations. Their role in the economy is to make good products better. They are very important in the economy, because sustaining innovations keep margins attractive and they keep the market competitive and vibrant. They can improve profitability, and create some top-line growth through price increases, but they typically don’t create growth from new consumption, nor do they generally create jobs.
This was a surprise to me. Just imagine if I am a sales guy and I convince you to buy the Toyota Prius, the hybrid car. If I succeed in selling you that, you won’t buy a Toyota Camry. If I sell you the new version of the product, you won’t buy the old version of the product. So by their very nature, sustaining innovations replace other products and so don’t create aggregate new growth.
The third type of innovation, which we missed in earlier versions of disruption theory, concerns efficiency innovations. The purpose of efficiency innovations is to do more with less. This includes some of the innovations that have followed disruptive pathways to mainstream dominance. From a competitive point of view, they have the same impact, and incumbents can be eliminated. But their purpose in the marketplace is to increase efficiency. For example Walmart, had the effect on department stores of disruption because those stores weren’t able to respond. But from a growth point of view, they made retail much more efficient and resulted in net fewer jobs. And in the steel industry, mini-mills don’t create new growth, because they are an efficiency innovation.
It turns out that from the point of view of disruption and “The Capitalist’s Dilemma”, disruption worked in the mini-mills just like it worked in the disruptive disk drives. But in the marketplace, minimills didn’t create new growth because they were efficiency innovations.
So there are three types of innovation from the point of view of creating economic growth. We need to keep looking and see what’s really going on.
25-01-2016, 10:11 #9
More On The Case Of Uber
Denning: So how does Uber fit in these three categories of growth?
Christensen: There may be something about Uber that just doesn’t fit in any of three categories that I have just defined. There’s “Uber this” and “Uber that” and others on the way—UberBlack, UberX, UberHealth, UberEats, and so on.
Denning: So should we be calling Uber a case of disruption, even though it’s not disruptive innovation in the classic sense of innovations originating in low-end or new-market footholds?
Christensen: Relative to the taxi industry, Uber is a sustaining innovation; that is, it makes customers’ lives better. Uber targeted mainstream markets with a better service for existing customers, and it succeeded in serving them better than the incumbents. Not surprisingly, incumbent taxi companies are not happy about that and are motivated to respond, but so far haven’t been very successful.
That’s not to say Uber can never be a disruptive innovation. For example, some have argued that Uber might disrupt established automakers (starting as a “good enough” alternative to car ownership for some group of people), and Uber might choose to pursue this path. But currently, they represent a sustaining innovation relative to the taxi industry.
Denning: The taxis weren’t innovating or improving their service at all. They were caught flat-footed. They didn’t know how to respond.
Innovation From Above
Denning: Let’s look at some other cases. Some have suggested that luxury products at the high end can create havoc for cheap low-end products by raising customers’ expectations as to what is acceptable. Starbucks SBUX -5.08% and Apple AAPL +4.95%’s iPhone have been cited as examples. Arguably they have made cheap tasteless coffee and cheap clumsy mobile phones largely unmarketable. Is this disruption? If this havoc coming from above is not “disruption” in a classic sense, what should we call it? Is this yet another kind of disruption?
Christensen: Once again, here we have to discipline the technical use of the word “disruption” so it maintains its meaning. We have defined disruption as an innovation that begins on the fringes of established markets and eventually comes to dominate mainstream markets. And it turns out that innovations that enter at the high end of the market, like Tesla, simply don’t fit that definition. And if we try to force fit them then we lose what the concepts of disruptive innovation can explain. And therefore we need to have a different word that defines this phenomenon. We shouldn’t ignore the existence of this phenomenon—it is important and notable—but we also shouldn’t call it disruption.
There’s a theory from our research that better explains the success of these luxury products called Jobs-to-be-Done. The basic idea is that we hire products to fill needs that arise in our lives. Some of these needs—like the need to eat natural foods (in the case of Whole Foods) or to drive a futuristic car (in the case of Tesla)—were not being well-served by existing companies. In natural foods, for example, you had to go from one small “mom and pop shop” to another to cobble together the diet that you wanted. Whole Foods came in and nailed this job much better than these existing stores.
And while these companies did not enter their markets in a disruptive way, the forces of disruption have already begun to work on them. Now players underneath Whole Foods like Kroger’s are moving up-market in a dramatic way, competing with Whole Foods by offering more and more natural foods.
Denning: Would you see the iPhone in the same way?
Christensen: Yes, I would. I didn’t quite get the iPhone right, because I missed the trajectory that Apple was on. First, there was the iPod. It competed and disrupted the Sony Walkman. It was integrated with iTunes. It disrupted the traditional way of distributing music. Then Apple’s iPod was disrupted by Amazon, because the modularity made it very easy for customers to get any music they really wanted. So Apple went up-market to flee Amazon.
Then what happened was Apple said, “Right next to us, there’s the laptop. I bet that we could take this little device and disrupt the laptop. We could make it into something that is not just a phone. We could make it into a smart-phone that works like a laptop.” So it was intended to disrupt to the laptop. And that’s the way it happened.
What I hadn’t realized was that a firm could go in different directions, up-market or down-market, or to the left or right. Sometimes there’s a better way to grow than just staying in your part of the market.
The Case Of Google Maps
Denning: There’s another case that fascinates me: Google Maps. When Google Maps came out, it eliminated most of the market for navigation devices in one stroke. Within a year or two, it basically demolished the market for navigation devices. The incumbents had no chance. Google Maps is free. So the makers of navigation devices couldn’t defend themselves. Google Maps was global within a year.
Christensen: So true. Google Maps came in from the side. The incumbents didn’t see it coming.
Denning: It was like: “Boom! You’re dead.” So perhaps we need to find a place for those kinds of things in the theory of disruption?
Christensen: To my point earlier, the trajectory of technological improvement with Google Maps was extremely steep and so disruption was able to occur very quickly.
The Case Of Kodak
Denning: What about Kodak?
Christensen: It’s in the same realm, it’s hard for me to say that Kodak was disrupted. They really tried to save themselves. The CEO, George Fisher, had run Bell Labs. Then he became the CEO of Motorola. Kodak’s board asked him to take the helm at Kodak. Kodak was a chemical company. And then electronics hit them. Bam! Even when they could see it coming, there was something about it that prevented them from acting. They just couldn’t deal with it. We need to account for that.
Summary Of The Discussion
Denning: Let me try to summarize our discussion. There are different kinds of innovation. We have the classic pattern of disruptive innovation that originates in low-end or new-market footholds. That’s one pattern. But there are other patterns. We have the pattern with firms like Whole Foods, Tesla, and Apple’s iPhone coming in at a high level and then moving up-market even higher. In the case of Whole Foods, the “mom and pops” were acquired or marginalized, but some growth is created for incumbent grocery chains. And we have the case of competitors coming in from sideways, and coming in very rapidly, like Google Maps, demolishing the existing players because their trajectory of improvement is so steep that incumbents have no chance of defending themselves. Is that a fair summary?
Christensen: Yes, I think so. I might add that the theory of disruption is a theory of competitive response. Disruption is a process, not an event, and innovations can only be disruptive relative to something else.
Over the last twenty years, little by little, we have realized that we need additional theories to account for what’s going on. There are three types of innovations, which play very important roles in an economy. The role that market-creating innovation plays is growth. Sustaining innovations make good products better. Efficiency innovations eliminate jobs. That’s also an important implication.
And we need more opportunity to discuss on our evolving understanding of disruption. I am excited that in the coming year we will have a website on disruption where different views can be shared and evaluated.
Denning: Thanks, Clayton, for sharing these important thoughts.
25-01-2016, 10:34 #10
What Is Disruptive Innovation?
Clayton M. Christensen, Michael E. Raynor and Rory McDonald
From the December 2015 Issue
he theory of disruptive innovation, introduced in these pages in 1995, has proved to be a powerful way of thinking about innovation-driven growth. Many leaders of small, entrepreneurial companies praise it as their guiding star; so do many executives at large, well-established organizations, including Intel, Southern New Hampshire University, and Salesforce.com.
Unfortunately, disruption theory is in danger of becoming a victim of its own success. Despite broad dissemination, the theory’s core concepts have been widely misunderstood and its basic tenets frequently misapplied. Furthermore, essential refinements in the theory over the past 20 years appear to have been overshadowed by the popularity of the initial formulation. As a result, the theory is sometimes criticized for shortcomings that have already been addressed.
There’s another troubling concern: In our experience, too many people who speak of “disruption” have not read a serious book or article on the subject. Too frequently, they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do. Many researchers, writers, and consultants use “disruptive innovation” to describe any situation in which an industry is shaken up and previously successful incumbents stumble. But that’s much too broad a usage.
The problem with conflating a disruptive innovation with any breakthrough that changes an industry’s competitive patterns is that different types of innovation require different strategic approaches. To put it another way, the lessons we’ve learned about succeeding as a disruptive innovator (or defending against a disruptive challenger) will not apply to every company in a shifting market. If we get sloppy with our labels or fail to integrate insights from subsequent research and experience into the original theory, then managers may end up using the wrong tools for their context, reducing their chances of success. Over time, the theory’s usefulness will be undermined.
This article is part of an effort to capture the state of the art. We begin by exploring the basic tenets of disruptive innovation and examining whether they apply to Uber. Then we point out some common pitfalls in the theory’s application, how these arise, and why correctly using the theory matters. We go on to trace major turning points in the evolution of our thinking and make the case that what we have learned allows us to more accurately predict which businesses will grow.
First, a quick recap of the idea: “Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.