Clayton Christensen

Yesterday I attended the first meeting of the Forum for Growth and Innovation. It's an initiative where practitioners of Clayton's Christensen's theory of innovation can review new academic research before it's published.

The Forum has another goal: to disseminate and propagate key learnings and ideas. As a keen student of the theory and a blogger, I am eager to provide a gateway for you, my audience, to this management theory.

My modus operandi has been to discuss an industry or a set of competitors in great detail while occasionally stepping back and suggesting a cause for the patterns of behavior we are witnessing. More often than not, the causes are described very well by the theories in Christensen's writings.

There are cases where the theory does not seem to match. That's actually the most exciting part of this process. Exception (or anomaly) handling is what allows the theory to evolve and improve.

Yesterday's event focused on M&A. It's a cliché to say that M&A is a recipe for failure but there are recipes to follow that minimize the chance of failure. The forum debated these recipes and we were treated to the wisdom from those who learned the hard way what works and what doesn't. (For example, the ex-CEOs of Best Buy, Arrow Electronics and a senior executive who worked under Jack Welch at GE.)

What I came away with was a new respect for the counter-intuitive and contradictory nature of acquisition integration. What often makes sense on paper like synergies or new growth can quickly turn to a loss of the core business. Recipes for deciding what to integrate and what to keep autonomous are an active area of research.

For this and many other reasons, it's easy to understand why Apple is reluctant to make large acquisitions. The market discounts Apple's cash because it is expected to evaporate in a mis-guided acquisition (since that's what management has shown a propensity to do in most other large US companies.)

I've written about why I think Apple's cash is worth more than other companies' cash (e.g. Microsoft.) Apple's reluctance to make large acquisitions and no record of such should provide some hope.

However, I don't think that reluctance is simply a coincidence or a lack of suitable candidates for acquisition. I think it's more a result of the company's processes and priorities. As long as the team in charge is focused on the details of execution and integration, and as long as acquisitions are complex and fraught with unknowable risk and lack of control, I see no acquisition in Apple's future.

When I applied the modularity dichotomy to smartphone operating system there were several implications that came to light. One was the question of whether the market has reached the point where products were "good enough" and the speed of innovation became less important than price. Another was: will integrated vendors be able to hold on to a healthy share of growth against non-consumption?

Now I bring up another implication of modularity: the concept of "law of conservation of modularity".

Clayton Christensen illustrated this as follows[1]:

If you are writing a software application to run on top of a platform, are you permitted to modify the platform to make your application run better?

If the platform is interdependent, changing it could cause unintended side-effects and you will not be allowed to make them. If the platform is modular, changes are possible and you will have access to the code.

The reason is not not political. It's that in the case of interdependence, the application has to be suboptimized and conform itself to the platform so that the platform could remain optimized (to its goals). The platform needs to remain optimized is because it needs to keep improving (since it's not good enough).

In the case of modularity, the application can be optimized and the platform can conform itself to the application because the application needs to keep improving while the platform is good enough and does not.

Conformability is what constrains up-market progress.

This also holds in hardware architecture. This was plainly evident in the WinTel era. During that time the microprocessor and the operating systems had a proprietary and interdependent architecture even while Dell’s product has a modular architecture.

So the microprocessor wasn’t good enough. That meant that the desktop computer had to have a modular architecture to conform itself in order to allow this to be optimized because the line widths on the circuit were not good enough.

This is what is meant by conservation of modularity: one side or the other of an value chain boundary needs to be modular and conformable to allow what’s not good enough to be optimized. The key question is what's not good enough: the device or the platform (the whole or part?)

How does this apply today in the post-PC era?

If you think about it in a hardware context, because historically the microprocessor had not been good enough, then its architecture inside was proprietary and optimized and that meant that the computer's architecture had to be modular and conformable to allow the microprocessor to be optimized. But in a little mobile computer like the smartphone, it’s the device itself that’s not good enough, and you therefore cannot have a one-size-fits-all Intel processor inside of a BlackBerry or iPhone, but instead, the processor itself has to be modular and conformable so that it has on it only the functionality that the BlackBerry needs and none of the functionality that it doesn't need (hence the ARM modular architecture is dominant). So again, one side or the other needs to be modular and conformable to optimize what’s not good enough.

Now today (and, I believe for some time to come) in smartphones, or in any situation where logic gets embedded in a system it’s the device itself that is not yet good enough and, therefore, you cannot back off the frontier of what’s technologically possible. It has to be optimized with a proprietary interdependent architecture. That means that the processor and the operating system inside of a Smartphone has to be modular and conformable to allow that to be optimized.

In order for you to believe otherwise you have to convince yourself that smartphones, as a system, have reached the limit of what is technologically possible.

[1] The source is a presentation by Clayton Christensen at  Open Source Business Conference in 2004

This weblog could be read as a diary of the disruption of the mobile industry. There is lots of topical analysis and opinion, but sometimes I'll post on the "theory" which describes what's going on in a more abstract, and long-term, level. Theory is like a bullion cube: savory, but too concentrated to be enjoyed undiluted. For this reason, the most palatable way of administering theory is through example. So we kick off with an example of what happened to another technology industry as a result of the emergence of a disruptive technology.

The following is a draft article I wrote describing the "electronics industry" for POSTWAR AMERICA: AN ENCYCLOPEDIA OF SOCIAL, POLITICAL, CULTURAL, AND  ECONOMIC HISTORY. It is itself based on a presentation by Clayton Christensen at the Open Source Business Conference in 2004.

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The consumer electronics (CE) industry began in 1920 when radio broadcasting commenced in the United States. Radio technology sustained a growing electronics business throughout the 1930's and 1940's, however, the electronics industry underwent a major transformation after the war. The critical development came after 1948 when the transistor was first invented. The transistor and the subsequent development of solid-state semiconductors dramatically and profoundly changed the industry. The change the transistor brought was not just evident in measures of technical performance but also in the economics of the industry and the business models required of its participants

"Electronics" has a precise definition: technology based on the controlled flow of electrons. Prior to the transistor, the control of electron flow in a system was through a component called the electron tube (or vacuum tube). The tube in its simplest form is a gas-filled glass cylinder, much like an incandescent light bulb, with two electrodes or terminals inside. When the negative terminal is heated it emits a cloud of electrons which the gas inside the tube carries to the positive terminal. This device allows current to flow in only one direction since the positive terminal is not capable of emitting electrons. It is called a diode and is simply a one-way current or conduction valve. Hence the "semi" in semiconductor. Semiconductors can be designed into complex products that amplify, store and communicate; the core applications of CE devices.

The transistor is significant because it is a "solid-state" semiconductor. Solid-state means that it is composed of solid components, unlike tubes which required a sealed gas to operate. The consequence of this shift from gas to solid components completely changed the industry and created unforeseen growth, wealth and societal change.

NEW ECONOMICS

The invention of solid-state semiconductors allowed new economies of production: components were smaller, cheaper and could be produced with a process closer to printing than to assembly manufacturing. Because of the subsequent advances in assembly, the cost of electronics products decreased even as quality and reliability increased. Power requirements and physical dimensions were also reduced, allowing greater portability.

These implications might have seemed foreseeable to the engineers and businessmen of the 1940s who first looked at a transistor, but what happened is something completely unexpected: almost all the companies dominant in the electronics industry in the 1940s and 1950s who spent huge fortunes to perfect the transistor for their products went out of business or withered away to insignificance. New, giant CE companies emerged in Japan who perfected new product categories rather than challenge the incumbents and their existing products.

The emergence of Japan as a powerhouse of CE has been debated as a motivation for changing US industrial policy toward a more interventionist model. Transistor technology was seen as a strategic national defense asset and the innovations and production associated with it were not to be allowed out of US control. Additionally, American politicians argued the case that it was US taxpayer-funded defense, educational and space efforts which produced these innovations, hence they "belonged" to the United States government, and future innovation will similarly need taxpayer funding. Unless something is done, Japan would dominate American industry.

What happened in fact was far more mundane. The transistor disrupted the industry. Small upstarts were able to take the invention, wrap a new business model around it that motivated the current players to ignore or flee their entry. They thus successfully displaced the entrenched incumbents even though the incumbents were investing heavily in the technology and the entrants weren't.

THE INDUSTRY THAT EMERGED

The postwar half-century began with the radio as the center of the CE world. It ended with the television dominant, alongside a whole galaxy of mobile devices.  All employed the transistor, which itself underwent dramatic increases in power and equally dramatic decreases in size. Some of the significant breakthroughs along the way are listed in Table below. Note in the table the absence of any companies which dominated the CE industry before the transistor (RCA, GE, Zenith, Westinghouse, Philips, Magnavox, Curtis-Mathes, ITT, Packard-Bell, Philco, Siemens, Sylvania, Western Electric).[3]

• 1957 Sony TR-63 Transistor Radio. Portability enabled privacy which allowed young people to listen to Rock-n-Roll.
• 1960 Sony portable TV. Made a second television in the bedroom possible.
• 1962 Sony CV-2000, first home videotape recorder. The concept of "time-shifting" was born.
• 1970 Olympus Zuiko Pearlcorder Microcasette recorder. Audio recording became a discrete affair.
• 1972 Pulsar Quartz Digital Watch. Quartz meant cheap but accurate watches for everybody.
• 1972 HP-35 Pocket Electronic Calculator. The end of the slide-rule.
• 1976 Atari Pong Game. A new use for TV: interactive games.
• 1976 JVC HR-3300 VHS VCR. Mass-market cartridge-based video recording. Video rentals took off.
• 1977 Atari 2600 Game Console. Game cartridges added a new category of content consumption.
• 1979 Sony Walkman. Portable high fidelity music for your ears only.
• 1980 Sony Boom Box. Portable high fidelity music for you and your neighborhood.
• 1983 Sony CDP-101 CD Player. Loss-less audio reproduction for all.
• 1984 JVC Camcorder. Home videos were born.
• 1986 Motorola Bravo Pager. Contact somebody even if they are not near a phone.
• 1996 Toshiba SD-3000 DVD Player. Loss-less video reproduction for everybody.
• 1998 Nokia 5100 mass-marketed phone. Easy to use, customizable cheap mobile phone.
• 1998 Diamond Multimedia Rio. Mobile digital compressed music consumption.
• 1999 Tivo Series1 Digital Video Recorder. Skip commercials and freeze real-time video.
• 2001 Apple iPod. All your music with you all the time.

DISRUPTIVE IMPACT

When the transistor was introduced in the late 40s and early 50s, most designers considered it inferior to existing vacuum tube technology as far as performance was concerned; transistors could not handle the power that was required to be used in the main CE products popular at the time, notably, the big tabletop radios and floor standing televisions. The transistor could not amplify sound as well as a tube, but it was small, solid, and used low power. Therefore, RCA, Zenith, and Westinghouse looked at the transistor as a electronics component with great potential, but one needed to be improved to match the tube as an amplifier before it could be used as a substitute.

Every CE company was required to receive a license for the transistor from its creator AT&T, before they could put it in their products. But they took out these licenses in order to experiment with the new technology, hoping they themselves could improve it sufficiently for use in the CE products.  Altogether, these CE companies spent an aggregate $2 billion (in today’s dollars) trying to make solid-state electronics good enough that they could make popular high-end CE products with them.

And while tube companies were trying to fit the transistor into large products, other companies, especially in Japan, were developing the first transistor-based products.  One critical one was a transistor hearing aid, first marketed in 1952. While hearing aids were a tiny market in comparison to radios and televisions, it was a market that valued the miniature size and low-power requirements of the transistor. In 1955, Sony introduced its first pocket radio. The sound quality and reception of those radios was very poor relative to the "console" systems available in living rooms. But Sony chose to sell the pocket radio to teenagers. Teenagers were delighted to have a product that was inexpensive and that they could carry with them, allowing them to listen to the rock and roll music their parents may have disapproved of.

Thus, a booming new market emerged based on a hitherto neglected feature that transistors made possible: portability. Meanwhile, the existing big American CE companies felt no need to change their business plans because the new products, in their opinion, were going to new customers not existing customers. Had Sony tried to sell its pocket radio to the parents, the product would have been judged to be inferior because they had the alternative of a high quality vacuum tube radio in their homes. Then in 1959, Sony introduced its first portable television, and again, the portable television was marketed to a whole new cohort of consumers who could not afford expensive, tube-based consoles. Since the alternative for these consumers was no TV at all, they were willing to accept a product with a somewhat inferior picture and reception.

By the 1960s, solid state electronics had become capable of handling the power required to make larger CE products, making it possible for the big American CE companies to incorporate solid state electronics in the big home products area that they dominated.  And, indeed, by the end of the decade all of the products for the mainstream living room market were using solid-state semiconductors. However, they were largely being made by Japanese companies. The Japanese perfected the semiconductor components through their foothold markets to such an extent that the American offerings were not nearly as good. The venerable vacuum tube companies were doomed.

THE CYCLE REPEATS

The table ends with four company names that are distinctly non-Japanese. The phenomenal process of innovation-based disruption is under-way again. This time, the incumbents are the same Japanese companies that used the transistor to disrupt the previous incumbents while the new entrants are small companies focused on microprocessor-enabled digital media or communications. In a cruel irony, the incumbents framed the innovation of digital media products as not good enough for the living room while the entrants saw it as good enough for a new, non-consumptive mobile or time-shifted usage. The existing customers saw the digital products as inferior while the new customers saw portability as a fair trade-off for quality.

A future article will discuss how the telecom industry saw voice mobility as sustaining but data mobility as disruptive.
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REFERENCES

1. Electronics (2nd Edition), Allan R. Hamley, Prentice Hall, August 3, 1999.
2. The Innovator's Solution, Clayton M. Christensen, Michael E. Raynor, Harvard Business School Press, September 2003.
3. "The Top 100 Gadgets of All Time", Chris Null, Mobile PC, March 2005.
4. Sony, John Nathan, Mariner Books, April 2001.
5. The Road Ahead, Bill Gates, Nathan Myhrvold, Peter Rinearson, Viking Press, November 1995.