China As One Massive “Disruptor”

The Innovator’s SoluctionIf you want to understand China’s potential impact on global industries, I encourage you to read “The Innovator’s Solution,” by Clayton M. Christensen, a Harvard Business School professor, and Michael E. Raynor, a Director of Deloitte Research. Several years ago, I came across “The Innovator’s Dilemma,” Prof. Christiansen’s earlier book on the subject, and became intrigued with his theories about why even very well-established companies often lose to upstart companies with “disruptive technologies.” I was immediately struck with the applicability of his analysis to China. A conversation with him recently at a conference in Madrid convinced me of its usefulness in explaining why China is potentially such a large change agent.

The “Innovator’s Solution” is available in English and Chinese and is now required reading for all of ASIMCO’s top managers. While I cannot possibly do the book justice in a short space, following are its key points.

Christensen first became interested in this subject when he noticed how frequently established companies, known for the quality of their respective managements, failed to capitalize on new industry trends and, as a result, lost their leadership positions to upstart companies which did. Managements which had been lauded while they were building dominant industry positions suddenly came under heavy criticism for falling asleep at the switch. Had good managers turned into incompetent ones overnight, or was something else at work? After extensive research, Christiansen concluded that these managements were doing exactly what they had been trained to do, and that following management principles taught at such esteemed institutions as the Harvard Business School had actually made them vulnerable to companies with what he termed “disruptive technologies.”

In their book, Christiansen and Raynor list 75 separate examples of companies or institutions where this has occurred. Some of the most familiar include: Dell attacking Compaq, IBM and Hewlett-Packard as a low-end disruptor in personal computers; Sony’s use of transistors in consumer electronics to disrupt once powerful companies such as RCA, which used vacuum tubes; and Toyota entering the U.S. market with cheap subcompacts, and then moving up to high end models like the Lexus, to ultimately unseat General Motors as the world’s largest car company.    

Why do established companies lose to those with disruptive technologies? “The Innovator’s Solution” describes the following dynamic:

1. Managers are trained to try and increase gross margins by constantly developing better and better products which they can sell for higher prices to their best customers. (IBM kept making more sophisticated computers which they could sell for more money to their best customers.) This is referred to as “sustaining technology.”

2. As products with sustaining technology steadily improve, they soon have capabilities which exceed the needs of most consumers. Because these highly capable products become increasingly expensive, they are out of reach for a large population of potential consumers. (Before personal computers, consumers wanted access to computer technology, but didn’t need the sophistication required by an industry user, and couldn’t afford the price of industry grade computing technology.)

3. Companies with disruptive technologies make simple, more convenient products that sell for less money and appeal to a new and less demanding set of customers. (Radios made by RCA which used vacuum tubes were expensive, bulky and stationary. Using transistor technology, which it incidentally licensed from RCA, Sony was able to make small, cheap transistor radios which became a huge hit with teenagers. This first product catapulted Sony to leadership in the consumer electronics industry, passing RCA in the process.)

4. While managers in companies with sustaining technology will fight to the death to defend their positions in established markets, they run away from battles where disruptive technologies offer lower-priced, lower-margin products and sell to new customers.(IBM successfully fought off AT&T in the computer industry, despite the billions of dollars which AT&T spent, but decided that it wanted little part of the personal computer business. IBM eventually sold its personal computer division to Lenovo, a Chinese company.)

5. Disruptive technologies, once they take hold, migrate up and attack the established markets. (Toyota entered the U.S. market with subcompacts like the Corona, and then moved up to high end cars like the Lexus.)

With rising affluence, many Chinese consumers are now purchasing passenger cars in all price categories. However large this group, though, it still only represents a small part of the total China market. In addition to this class of consumers, there are literally hundreds of millions of people with much lower incomes who cannot afford even the lower-priced models, and who represent a large, untapped universe of potential buyers. Like the teenagers in the 1950’s before them who merely wanted a simple, inexpensive radio which they could carry around, this large group of potential Chinese consumers want the functionality of an automobile, but can’t pay the going rate for the existing product and don’t care if the product is not perfect. This is why local car companies will have such an advantage over their foreign rivals over the long term. Chinese assemblers instinctively understand the potential and the requirements of this segment of the Chinese market.

As noted in the book, the best way to establish a new market or business is to compete with “non-consumption” by enabling  a whole new population of people to begin owning and using a product by making it simpler, more convenient to use and cheaper. China has proven that it can make products cheaper, and the country’s hundreds of millions of people who want to join the ranks of the consuming class represent the largest army of non consumers in the world. Whether it’s automobiles or any other consumer product, China’s large population of non consumers is fertile ground for up and coming disruptors.    

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