The second issue of disruption is concerned with resources, process and values. This explains why incumbents cannot respond effectively to disruptive innovators. Every company that becomes good at what it does develops a collection of assets and capabilities that makes it more efficient and/or more effective than its competitors. Its resources, including its people, its technologies, its information and its brand are the basis on which its capabilities are built. Business processes are how the business encapsulates its knowledge into repeatable structures that confer competitive advantage. Values are much more than just the beliefs of the company - they are the decision criteria that the business and everyone in it uses to make decisions about which products to create, which opportunities to pursue and which customers to target. These values depend on the size of the company and its asset base - innovations that appear to have a small market are unattractive to a large business looking for growth opportunities, while opportunities must cover the financing cost of the companies assets. Targets for return on capital, return on investment and similar key performance indicators (KPIs) are the yardsticks by which opportunities are measured. These values are why large companies completely miss disruptions - because the potential for an entirely new market cannot be known in advance.
As incremental innovations eventually make the performance of any product exceed the needs of the majority of the market, value chain evolution describes how the majority of the profits move elsewhere in the value chain. Companies choose whether to be vertically integrated or to specialise, with suppliers and distributors providing the remainder of the value chain. Whether vertical integration or ‘componentisation' works best depends on whether the performance of the product underperforms or outperforms the needs of the majority of customers. One example of this in action is the case of the IBM PC. IBM's skills are as an integrator, taking components and using its engineering skills to integrate them into a better computer than their rivals. In this market IBM' engineering skills allowed them to create better, more powerful computers at a time when this is what customers valued highly. This was how IBM became the masters of the mainframe computer world. However, they were subsequently blindsided by the disruptive departmental minicomputers of Sun and Digital Equipment. IBM then saw an opportunity to create a small computer that businesses could use for stand-alone tasks. This computer was the IBM PC. The way IBM did this sowed the seeds of its own exit from the biggest market for computers that ever existed. IBM decided to use components from elsewhere as it always had done. However, to reduce the cost of manufacture of the PC, IBM defined a set of standard interfaces with the idea of buying standard components from multiple sources at lower cost.
The interfaces were good enough to allow anyone to make an equivalent computer - what weren't good enough were the components such as the processor, memories, disk storage and operating system. This meant that the best components commanded a premium. Unfortunately for IBM, the standardised design meant that computer manufacture became an assembly task, something that IBM was not good at. IBM's processes and values were not designed for pile-it-high, sell-itcheap mass manufacture and it struggled. IBM had to compete at the margin with other assemblers for whom assembly was a core skill. IBM succeeded for some time by developing improved interfaces, but eventually Compaq, then HP and finally Dell forced IBM out of the desktop and subsequently the more complex laptop markets. If Thomas Watson walked back into IBM today he would see a company he recognised, with largely the same resources, processes and values as in his day and doing roughly the same type of things - making the biggest and best computers, developing complex software and providing IT consultancy.
Our website is not responsible for the information contained by this article. Articleinput.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
Note: This article was sent to us by: Jeremy Frank at 01182010
1. How to use technology in business
All articles are property of their respective authors. Please read our Privacy Policy!
© 2009 ArticleInput.com.