Tuesday, May 31, 2005

Top down Innovation

Photon Courier has an excellent discussion of "top down disruptive innovation." A recent article by Nicholas contrasts this with the "bottom up disruption" that lies at the heart of Clayton Christensen's work.

PC is dubious about Carr's thesis that incumbent firms often have an advantage in the race to exploit such disruptions. I think that he is on firm ground with those doubts. There are a lot of examples of failure and not many of success. While established firms might have an advantages in capital and brand recognition, they face huge barriers in terms of diseconomies of scale, procedures mindsets, and inappropriate metrics.

In most large firms it takes a lot of effort to keep everyone focused and working efficiently. Chasing innovation is frequently seen as a distraction. For example, Xerox's Palo Alto Research Center (PARC) is famous for its lost opportunities. PARC invented the graphical user interface, icons, the mouse, and multiple overlapping windows. It even created Alto, a personal computer with capabilities unmatched by rivals for many years.

Yet Xerox never became a serious player in the PC revolution. Its greatest innovations were copied by Apple and Microsoft. In the Macintosh they solidified Steve Job's status as a seer and visionary. In Windows they earned Bill Gates billions.

The problem for Xerox was that it was focused. Every day 125,000 employees put their shoulders to the work of building, leasing, and servicing huge photocopiers. They were good at it. But the corporation did not have the will and energy to undertake the expensive and risky effort of exploiting their technological breakthroughs in fields outside of corporate duplication services. Their size was a barrier.

Even PARC's most profitable product--the invention of the laser printer--earned Xerox billions through licensing agreements, not the sales of Xerox branded products.

Every firm can be seen as an ecosystem. Within that system certain types of managerial and technical talent flourish and others are culled out. In many (most?) cases, the talent in an incumbent firm has been cultivated for purposes other than exploiting disruptive innovations.
It is easy to say that Xerox missed the boat and should have seized the opportunities PARC offered up. But seizing opportunites is easier said than done. Even if the strategy is right, implementation is hard. And the risks can be higher than one expects.

In the 1980s Sears set out to become a financial services powerhouse. They acquired Coldwell Banker realtors and Dean Witter brokerage. Then they spent a full year debating how to integrate their new divisions, what to call the financial services subsidiary, how to advertise it. Not only did this slow down the growth of the Sears Financial Network, it also preoccupied senior management at a time when discounters like Wal*Mart and specialty retailers like The Gap were undermining the core franchise of the Sears stores.

Sears was "right" about the attractiveness of financial services. But business ain't Jeopardy where getting an answer right earns money automatically. The integration of thought and action is vital. The fate of that union hinges on culture, size, leadership, and structure.

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