No, Steve Jobs Did Not Solve the Innovator’s Dilemma

by Krishna on October 28, 2011

From the Harvard Business Review blog by James Allworth:

To disrupt yourself, for example, Professor Christensen’s research would typically prescribe setting up a separate company that eventually goes on to defeat the parent. It’s incredibly hard to do this successfully; Dayton Dry Goods pulled it off with Target. IBM managed to do it with the transition from mainframes to PCs, by firewalling the businesses in entirely different geographies. Either way, the number of companies that have successfully managed to do it is a very, very short list. And yet Apple’s doing it to itself right now with the utmost of ease. Here’s new CEO Tim Cook, on the iPad disrupting the Mac business: “Yes, I think there is some cannibalization… the iPad team works on making their product the best. Same with the Mac team.” It’s almost unheard of to be able to manage disruption like this.

The Innovator's Dilemma comes up when you have a product that is clearly inferior to your present product in the same market. The dilemma is that its current revenue stream does not make sense for you to allocate resources (time, money and personnel), while you have huge revenues coming from the existing product. And it is also possible that there might be several such inferior products and many of them will fail. So which one do you pick? Also, even if one product shows traction, it may be an irritant to other departments whose revenue and budgets it is eating into.

When you are running a large company, it is difficult to pick the right winners. That is where small startups come into the scene. For them, a small revenue stream may be enough to pay their bills and even have a decent lifestyle business. If the product improves to a point where it is better than the current market leader, then it can be a winner in the market. At any time, there may be many several startups with their own ideas, but only a few (maybe just one) will be good enough to overthrow the market leader. The market can pick better winners than managers at a large company.

So let us take the example of Apple. First, let us try to understand what kind of cannibalization is going on. This chart is from July 2011.

As you can see, there has been little effect on the Mac, and the iPad has been growing significantly. As I have mentioned before, the iPad is not a good Mac (desktop or laptop) replacement. At this juncture in time, it occupies a unique position between smartphones and laptops, because of its dimensions, and weight. The way the tablet is used as a consumption device (media, social networking) would make it distinct from a laptop which is heavily used for input.

The major categories of products that Apple sells belong to different markets: music players (iPod), phones (iPhone), tablets (iPad), laptops (MacBook), desktops (iMac) and servers (MacPro). Of course, there will be some bleeding. The iPod has lost some sales to the iPhone among people who own smartphones (one device instead of two). Some MacBook Pro sales have been affected by the MacBook Air. But each of these products still has its own distinct market, and the play is for people in those markets instead of getting people in existing markets to move.

There is the assumption in the article that Apple created these new markets. But there were music players before the iPod. Before the iPhone, we had very smart handheld devices from Palm, communication devices from Research in Motion, and attractive, successful phones such as Motorola RAZR. There have always been laptops and desktops, albeit not so beautiful as the original iMac. Have we already forgotten the failed Microsoft Tablet PC and need I talk about servers?

As Christensen himself points out, Apple has been good at the sustaining curve. It has come out with gorgeous products in existing markets. Its products have been profitable, but it has not necessarily displaced the market leader. For all kinds of reasons, the Mac is still under 15% of the personal computer market (excluding tablets). The iPhone, for all its success, has been overtaken by the fragmented Android phones and smartphone users are still a minority of phone users (not Apple’s fault, just the cost of wireless data). The iPad has had great sales, but it is threatened at the low end by the Amazon Kindle, B&N Nook and the zillion Android variants. So the jury is out on that.

The iPod is a different story and I think this is one major exception to the general Apple product trend. If you look at Apple’s iPod offerings, you see the $49 iPod Shuffle, the $129 iPod Nano, the $199 iPod Touch and the $249 iPod Classic. Price-wise, Apple has cornered the market. You don’t see this with other Apple products. Even though the iPhone can be obtained at lower prices, they are older versions, while all the iPods mentioned above are the latest versions. There is potential for cannibalization here. But Apple has been careful to distinguish the different models and move them along, although my feeling is that the iPod Classic is only a few months away from its grave.

I think the confusion for James Allworth is with the word “disruptive”. It is true that Apple has disrupted the existing market, but the usage of the word in Innovator’s Dilemma is entirely different. Disruptive refers to values. Apple enters a market that values good products with an even better, stunning product. There is nothing surprising about its success. The only difficulty is only in coming with a product that delivers on those values (easier said than done), but Apple has been able to deliver on design and technology.

On the other hand, a Chrome netbook is a disruptive product. It is clearly inferior to a system that runs a native operating system. The question is, in the long run, when all apps run from the cloud, how relevant is the native OS? And will the market reward you for the different set of values. Similarly, an SSD, obviously faster, but extremely pricey and has lower capacity. A bad choice in these days when everyone owns a personal full HD digital camcorder? Time will tell.

{ 5 comments }

Vinay Kulkarni October 30, 2011 at 3:32 am

You can call it whatever you want, but at the end of the day Apple (Steve Jobs) understood desirability and the innate but latent appreciation for beauty in form and function present in every human being better than anyone else. I have never seen so many people covet, cherish and enjoy an object (or a set of objects) as much as lovers and users of Apple products. When you take customer engagement with your products to the level of a love affair and pure delight, the results surpass anyone's imagination. Also, Apple has sustained the process of developing and releasing new products very well. We now have to see if Cook can continue where Jobs left off.

Krishna October 30, 2011 at 9:29 pm

Thanks for your comment, Vinay. Nobody is arguing with what Jobs has done, but the concept of the Innovator's Dilemma is quite different and we need to be careful how it is used.

James Allworth November 1, 2011 at 11:48 pm

Krishna

Thanks for your article, and the link to my piece. I also appreciate the caution with which you reference the dilemma.

The one thing I'd say that you've done that might give you a false impression is look at things after they've occurred, assuming that the Apple team had full insight into how they might play out. Nobody has a crystal ball - not even the Apple management team. They would have had no way of knowing how much disruption was going to occur. Putting a chart up showing cannibalization is misleading, because Apple didn't have that chart when they were making their investment decisions.

The thing that stops most companies is the mere threat of disruption or cannibalization - they won't even bother to invest if this is a risk.

Apple didn't let it stop them. The reason? They weren't motivated by profits, as was spelled out in the article. And why not? Well, it turns out that Jobs had read the Innovator's Dilemma and moved the priorities of the company back to its products.

Cheers

-- james

Krishna November 2, 2011 at 11:30 am

Thanks for your comment, James

That is a good point, i.e., not knowing what kind of cannibalization could happen. But you do have to remember that all companies do have their R&D section churning out products, some of which are even launched into the market. Even Microsoft invests in MS Office online. I think when Apple saw the traction that iPad received, they went all in. It is, of course, a new market.

Sunil kumar December 19, 2011 at 3:26 pm

Hi, ipad is like e-reader plus low-performance netbook. It is not a replacement to notebook. It is a replacement to netbook for most of the people. So this is a 'go' to apple. If you ask about macbook air(netbook) disruption, apple doesn't have choice but to enter the growing tablet market and embrace the shift.(as technology improves, tablets become PCs.) Disruption occured to notebooks, is a lot less than that occured to netbooks. The unexpected (a little) notebook disruption is not part of the strategy as it seems it is. As Christensen says, big companies leave the space for disruption as those markets are not profitable enough to enter. Apple always left the space(mid-end to android). That is why they are getting musled out of the markets they created. What Disruptive is, is the business model that the technology enables, not the technology itself(that is why theirs is SUSTAINING, not DISRUPTIVE). Their decision not to license out their OS is stopping the potential of their potential-technology. Actually, disruption is not the thing of established companies, since it may not suit to their already-defined business model, which is not a problem when it comes start-ups. Actually, christensen's disruption is the one that happens on a long time and sustains, unlike disruptions we talk about in general.

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