The Innovator’s Dilemma: Capitalizing on Disruptive Innovation w/ Shawn O’Malley (MI376)
(00:00) aspiring companies are biased toward breaking into a market and because they have comparatively nothing to lose they're willing to risk it all with disruptive Innovations established companies though have everything to lose and across all their value networks people's decisions are biased toward focusing on what has generated success so far in catering to existing customers needs value networks are a subtler way to describe organizations it's less that incumbent companies explicitly value the wrong things and more that they are (00:28) implicitly biased toward preserving and menting the status quo not trying to flip everything upside down with disruptive [Music] innovation hello before we dive into the video be sure to click that subscribe button so you never miss an episode show us some love by giving a thumbs up and sharing your thoughts in the comments your support really means everything to us so as I outlined at the top of the show I want to go through the innovator's Dilemma today and reflect on how the book's lessons fit into the world as we see in 2024 and how (01:02) investors should think about the impacts of disruptive technology in the book's preface Clayton Christensen Begins by saying that two questions shaped his research for the book firstly why is Success so difficult to sustain and secondly is successful Innovation really as unpredictable as the data suggests when you look back on business history there are so many instances of companies that were at one point the best in class only to fall to the middle of the pack or the back of the pack a decade or two later what Christen found was both (01:31) unsettling and unintuitive the factor causing this lag effect where industry leaders were eventually surpassed by new competitors simed in part from the ill effects of the conventional wisdom often taught in business school that is that companies should always listen to and respond to the needs of their best customers and that you should focus Investments on those innovations that promise the highest returns in practice Christenson says these two principles SE the seeds of every successful company's ultimate demise that is why why it's (02:00) called the innovator's Dilemma doing the right thing is often actually the wrong thing explaining this Paradox is the book's purpose the term disruptive innovation is thrown around all the time in Tech and finance circles yet it traces its roots to Clayton Christenson and the innovators dilemma who coin the term to describe the sort of technological changes that fuel the creative destruction that drives progress forward and is so synonymous with capitalism The Venture Capital industry is built up largely around (02:27) investing in disruptive Technologies but even among the best and most experienced VC investors their success rates are only 10 to 20% the vast majority of innovative startups will fail and VCS have embraced that by hedging their bets across a number of companies christenson's research finds that disruptive innovation is inherently unpredictable no one can know where it will come from next and even VC's most in touch with new technologies fail to reliably foresee which bets will work and which will lose but the book and (02:56) christenson's research set the foundation for changing that Dynamic empowering investors to recognize the Fingerprints of company's best position to change the world with their disruptive Innovations companies can fail for many reasons from bureaucracy to tired management inadequate resources short-term decision-making and plain old bad luck but these are not the types of companies that are studied in the innovators dilemma instead the book focuses on companies with the most envious track records you might say (03:22) those who for a period of time had every Advantage going in their favor until eventually they did not it seems unfair that great companies who knew their customers intimately and thoughtfully tended to their every need could soon be left by the wayside taken out of business by some new competitor who came on their radar almost out of nowhere but this is the exact thing that we've seen happen recurringly across the last century few companies if any are truly immune to such potential disruptions either whether a firm competes in (03:49) building Cutting Edge Electronics or something as boring as chemical processing the potential for disruptive innovation to emerge is always there I don't say that to strike fear into you and make you paranoid about your portfolio of companies being displaced by new technology but it is something we should take seriously I'm guilty of this myself but it's really easy to look back on history and think that it was obvious that certain companies would be displaced and it's even easier to get trapped by inertia and the status quo and look (04:17) around at today's best companies and think they will be around indefinitely that is just not reality though many of the companies profiled in the innovator solma were the Undisputed tight ends of their industry they were the best of the best and they were so for long periods of time it was unimaginable to any sensible investor that they could be displaced Blockbuster is an easy example that probably everybody can relate to but also consider seirus robu Cirus had a pristine reputation for retail excellence and it pioneered Innovations (04:47) critical to retailers today like Supply Chain management catalog retailing and even credit card sales at its peak cus accounted for a breathtaking 2% of all retail sales in the United States Excellence seemingly came naturally to Sears and the company was perceived as always making the right strategic moves competitors spoke with reverence about Sears it was truly a beloved American brand but based on Sear's reputation today though you'd be forgiven for wondering if I was even talking about the same company I actually had to (05:15) Google whether Sears was still operating today I remember going there as a kid but I haven't been for years founded in 1892 Sears entered bankruptcy 127 years later in 2019 as of April 2024 only 11 Sears stores remained in operation but as recently as 2007 Sears was valued at $23 billion at the time the innovator's Delma was published in the 1990s serus was already clearly in Decline promising turnarounds that never manifested while sales continued to fall the peak of seirus clout in the 1960s is the exact time when it was ignoring the rise of (05:51) discount stores that would undercut its business to saying nothing of the emergence of Amazon in the 21st century which is what put the final nail in the coffin for the company despite its huge head start with credit cards and retailing Sear's lead was usurped by visa and Mastercard at a time when the company's management was still praised for its prowess it was a similar story for Xerox these are not isolated failures of iconic brands that disastrously imploded rather these are just well-known illustrations of what (06:19) has happened to thousands of smaller companies in the last century as we talk about the book it's important to distinguish between what Christensen refers to as sustaining Innovations and disruptive Innovations sustaining Innovations are more like incremental improvements new developments from companies meant to improve upon the status quo that is not to say that the improvements cannot be significant but they don't fundamentally invent a new category of product instead they improve the performance of existing products in (06:45) line with the desire of company's most important customers most technological advances are sustaining Innovations and Christensen found that sustaining Innovations rarely precipitate a great company's downfall instead the emergence of disruptive innovation that brings forth a very different value proposition is most often the cause of great company demise disruptive Technologies are usually valued on the fringes at first by early adopters just look at Tesla the company was conceived in 2003 and didn't sell its first car until 2008 its sales (07:17) for years were only to wealthy Tech focused consumers intrigued by the company's novel electric vehicles combustion engine vehicles have improved hugely over time but these were all mostly sustaining Innovation since a gas powered car today is still inherently the same thing as a gas powered car from 1980 but electric vehicles are structurally different types of vehicles they're something new and different so electric vehicles are a disruptive innovation to gas powered cars the iPhone is another example of this (07:46) whereas Blackberry dominated the cell phone market in the mid 2000s Apple created the smartphone market when it released the iPhone the iPhone changed the status quo it wasn't just a cell phone it was something entirely different any new iteration of flip phones were sustaining Innovations whereas the iPhone was a disruptive innovation that changed people's habits and took the industry in a New Direction going back to the Tesla example success with wealthy and adventurous early adopters including celebrities like (08:14) George Clooney who were willing to pay $100,000 for the first model Ena Tesla to scale bring down costs refine its technology and begin to manufacture more affordable vehicles that help bring the company mainstream a decade or so later but Tesla couldn't have started by selling affordable EVS to the public because no one was interested in them it had to focus on appealing to atypical car buyers to build its reputation yet it was gaining traction and the disruptive new technology of electric vehicles under the nose of the major car (08:44) makers While most car makers have responded now with their own EVS they are by no means guaranteed to earn back the market Shure they already lost to Tesla nor is it even likely they won't continue to lose market share to Tesla while electric vehicles were once underperformers unwanted by by any sizable customer group they're now a fast growing chunk of all cars on the road desired by customers across demographics that move from the fringes the mainstream is common with many disruptive Technologies I think this is (09:12) a really good illustration of the types of case studies Christensen goes over in the book there is an incubation period with disruptive Technologies before they go mainstream and Tesla is a really tangible example of that on top of that while disruptive technology is incubating existing industry leaders tend to overlook the promises of new technologies since businesses are working so well and since so many new technologies ultimately fail but all it takes is one company like Tesla to break through and suddenly you're playing (09:38) catchup from a position of weakness it's funny because at the end of the book Christensen actually reflects on how EVS are a potentially disruptive technology just waiting to be taken mainstream so he very much foresaw what Tesla would do a decade before it happened past examples of disruptive Technologies include things as important as the personal computer as well as Innovations like the small off-road motorcycles by Honda Kawasaki and Yamaha that disrupted companies like Harley-Davidson and BMW which made powerful over the road (10:08) motorcycles what's interesting about disruptive Technologies is that customers initially don't want them typically however as their advantages become clear customers preferences can change quickly to the surprise of existing Market players industry leaders accustomed to listening to their most profitable customers can Overlook disruptive Technologies since they first get adopted on the fringes by customers who are either less profitable on the margins or who make up a negligible share of overall revenues as a result (10:35) more entrenched companies can seldom make a business case for investing in the disruptive Technologies they might identify until it's too late even more challenging is that there's an illusion of CEOs having lots of control over corporate resources but in reality companies financial resources come from customers by way of what they purchase and from investors who approve of a company's business plans companies that survive then become extremely Adept at catering to investors and customers interests which makes them very (11:04) efficient at killing off things that customers don't want at the moment again the problem is that disruptive Technologies aren't taken seriously until they're mainstream so CEOs are pressured to allocate Capital toward proven initiatives which leaves them behind the curve on disruptive innovation on top of this is that industry leaders are big companies and big companies to maintain their target percentage growth rates need to go after big opportunities since disruptive Technologies create new markets that are (11:30) at first small and have unknown potential investing in them may not move the needle enough until as I've said it's too late and someone else is a first mover advantage in the New Market one solution that Christensen proposes is that companies spin-off subsidiaries devoted to experimenting with disruptive Technologies so that their operations are more sheltered from the pressure of addressing customers current but ephemeral preferences which we'll discuss later in this episode in the first section of the book (11:57) Christenson does a case study on on the hard drive industry with companies competing to make devices that store data for computers these used to be pretty huge discs but they have obviously shrunk over time so just keep in mind that this book is from the late 1990s as you try to imagine the types of computers we're discussing the technology surrounding disc drives has just evolved incredibly rapidly over the years as is true with much of the Computing industry biologists like to study mice or fruit flies when trying to (12:25) better understand Evolution because they have short lifespans relative to humans many generations can be produced quickly in the same way Christenson says the hard drive industry makes for a great case study on business Evolution because the field has evolved so fast while this has been a nightmare for the managers of these companies to deal with it makes for fertile research ground the first hard drive was actually developed as early as 1950 and was the size of a large refrigerator holding 50 24in discs but it could only store 5 megabytes of (12:55) information by 1995 the computer hard drive Market had grown to $18 billion and along the way the industry's structure and makeup of competitors underwent a handful of facelifts in the 1970s 129 new firms entered the hard drive market and 109 of them failed by the mid1 1990s all of the industry's leaders were firms that had begun as startups just 20 years or so prior this was an industry with an extremely high mortality rate at least in part due to the unfathomably high rate of technological change from 1978 to 1993 (13:29) the size of a 20 megabyte hard drive shrink by 35% per year that breathtaking Pace has continued to this day now you can get a 2 terabyte hard drive for your macbo pro for less than 50 bucks for context a terabyte is 1 million megabytes so a two terabyte hard drive sores 100,000 times more information than a 20 megabyte hard drive I know I'm throwing a lot of numbers around but the point is that hard drives are exponentially better than they were just a few decades ago and the same was true in the 1990s hard drives that improved (14:00) to an almost unimaginable degree relative to the 1960s and 1970s a chart of the cost per megabyte for computer storage over time would slope dramatically downwards as storage has just gotten cheaper and cheaper in 1956 a terabyte of dis storage would have cost an estimated $87 billion in today's money today a terabyte of dis storage costs around $11 when looking at the Relentless pace of change in the hard drive industry Christensen formed what he calls the technology mudslide hypothesis that is to say trying to cope with technological (14:34) changes was akin to trying to climb an uphill mudslide you have to scramble with everything you've got to get up it and even if you stop for a moment to catch your breath you get buried after further research though he realized this was wrong technological change is not what fundamentally caused companies that were once industry leaders to lose market share in fact industry leaders have often been quite good at pushing forward technological improvements Intel improved the processing speed of its computer chips by almost 20% per year (15:02) from 1979 to 1994 a mark of disruptive Innovations is that it can be difficult to make an Apples to Apples comparison with the status quo if laptops were suddenly invented today and all we had previously were desktops the industry leaders in making desktops might have been very skilled at pushing ahead with improvements in the areas that matter to desktop users but with laptops there are just other metrics to measure performance by the variables that matter most are different what matters more for example with laptops is convenience ease (15:32) of use and portability the point being industry leaders may be straight A students in their class but disruptive Technologies introduce a new grading curve you might have the most powerful desktops but that doesn't mean you're position to create the most appealing laptop if you've never had to focus on creating a portable computer before going back to the disc drive industry the reason Christenson thinks the mudslide hypothesis is flawed is because most advancements were sustainable Innovations not disruptive Innovations (16:00) industry leaders like IBM were actually quite Innovative it's just that these Innovations were sustaining in nature and not disruptive the difference being the industry leaders were the best at giving customers what they wanted or at least what they thought they wanted disruptive Innovations are instead what customers don't realize what they want no one in 2004 could have told you that they wanted an iPhone because no mainstream consumer could Envision that they had no idea it was a possibility if you asked them what they wanted they (16:27) would have said things like you know more cellular coverage easier texting maybe even unlimited free texting but no one would ever requested an app-based touchscreen phone with just a home button in volume buttons where its role as a phone was almost secondary to everything else it could do or think about Google as another illustration of this encyclopedia branica was probably brilliant at incorporating customer feedback into improving their books by all measures they dominated the search for information and customers were happy (16:54) with their products but that's only because they didn't know the alternative they did not realize that a completely different reality was possible where search engines would be available to instantaneously distill down the entire world's known information sources at their fingertips obviously I'm oversimplifying things but I think you get the idea a disruptive innovation imagines a whole new way of doing things that rewrites the status quo the most refined and easy to use encyclopedias could never compete with Google and thus (17:23) encyclopedias and the companies that produce them got left behind it's not even that the industry leaders of the old techn ology became passive arrogant or complacent though rather at least in the hard drive industry they were held captive by customers current needs customers wanted one thing until suddenly they wanted something else it's not that industry leaders and producing hard drives in the 1980s didn't have the resources or expertise to produce the types of hard drives being made by new and disruptive competitors it said they (17:49) didn't think that it was worthwhile to invest in these potential markets because they were already competing fiercely over the largest customer segments I think you can probably make a fishing analogy here to better understand it the presiding leaders in the hard drive industry were fishing in the biggest pond using a technique that had long work for them as they continued to sack up the most fish they looked around and saw people trying to fish with new types of rods and bait and much smaller ponds as others toiled with (18:16) unproven fishing techniques and sparse ponds they kept refining their usual fishing process and it kept working people would occasionally try their rods and bait out in the big pond but their attempts never really worked until one day one of those people who had been fishing in the small pond with a new type of Rod and bait came to the big pond and started taking all the fish all of a sudden the incumbents were left scrambling trying to recreate what had worked for this one Innovative fisherman it's probably not a Perfect Analogy but (18:42) I think it's helpful for imagining how incumbents get displaced up until that moment countless others had tried to compete with various unique approaches in the big pond and none of them had paid off so of course the incumbent and successful fishermen wanted to keep focusing on what was working for them again I don't think that's laziness or even stupidity if anything that's just being pragmatic focusing on what works is certainly not a mistake in many cases The Dilemma comes from simultaneously knowing that someone could come in with (19:11) a new fishing technique that completely derails your own while also recognizing that the vast majority of new techniques will fail so you can't know what will work besides the strategy you've already been following yourself there are also instances in the study where fears of cannibalization were obstacles going back to the fishing analogy any time spent fishing in a smaller pond with fewer fish is time not spent fishing in the biggest pond that is to say at various points leaders in the hard drive Market were hesitant to (19:41) embrace disruptive but less proven products because they were concerned doing so would cannibalize their bread and butter products where the fishing analogy falls apart is that disruptive Technologies create new markets that may or may not cannibalize existing markets it would be more akin to discovering how to ice fish fishing in Frozen ponds is a new market that expands the universe in which you can fish as opposed to competing with your existing fishing operations that isn't true in all cases but there are (20:09) definitely instances where disruptive Technologies aren't entirely cannibalizing unfortunately the fear of cannibalization can be a self-fulfilling prophecy in some cases when it comes to explaining why companies are able to capture market share early on as they hit the scene with their own disruptive Innovations only to become secure as an incumbent and get displaced by a newcomer down the road people usually point to managerial organizational and cultural shortcomings those are all valid explanations but they don't explain things in all (20:39) instances Christensen proposes an alternative explanation based on what he calls value networks a value network is the context within which companies identify customers needs solve problems react to competitors and strive for profit the idea is that corporate outcomes are path dependent in a way companies pass decisions and their corresponding trade-offs shape the structure of the company its values and its competitive positioning in a way value networks are an attempt at reverse engineering a company to understand its (21:07) biases aspiring companies are biased toward breaking into a market and because they have comparatively nothing to lose they're willing to risk it all with disruptive Innovations established companies though have everything to lose and across all their value networks people's decisions are biased toward focusing on what has generated success so far in catering to existing customers needs value networks are a subtler way to describe organizations it's less that incumbent companies explicitly value the wrong things and more that they are (21:36) implicitly bias toward preserving and augmenting the status quo not trying to flip everything upside down with disruptive innovation for example the research and development department is an internal value Network at most companies and it creates value when R&D Personnel interact with other departments who create new products that increase the company's profitability building off the company's past products and research will shap the type of new products it develops in the future as in if a car manufacturer has built up 20 (22:04) years of research and development around improving internal combustion engine cars shifting away from that to get engineers and project managers to suddenly prioritize the development of electric vehicles can be a gargantuan effort it's possible but it wouldn't come naturally at all to the company once it has set down a certain pathway and if there was interest in designing an EV the R&D Department might show those plans to marketing who might tell them that the EV Market is too small to focus on selling to and then with the (22:32) marketing team's forecast for how many EVS could be sold the company's Financial analysts would conclude that a new EV program would be too expensive relative to the expected sales they could generate so they'd Nix allocating any more resources to moving forward with EDS and that would be a sound and logical decision because the company is built around creating value from selling gas powerered vehicles so of course no one throughout the organization will think unproven EVS are an attractive opportunity that is until Tesla proved (23:00) that there is a large and profitable addressable market for EVS but at that point the incumbents were already behind another example of a value network is to think of the web of external relationships influencing a company maybe your company makes gourmet chocolate chip cookies to sell at retail stores the company has established relationships for sourcing all its ingredients and distribution partners for its products and it knows that certain grocery stores have carved out room to sell its products past decisions (23:26) on who to say Source sugar from create an Institutional inertia if things are working for the business it's not going to suddenly change sugar suppliers from the other direction in selling the in products if the Cookie Company knows that retailers have space for its type of cookies at a given price point that pressures them not to dramatically change the recipe branding or pricing because that might risk rocking the boat and losing that shelf space that it has already carved out in its stores Buy Low sell High Buy Low sell (23:58) High it's a simple concept but not necessarily an easy concept right now High interest rates have crushed the real estate market prices are falling and properties are available at a discount which means fundrise believes now is the time to expand the fundrise flagship funds billion dooll real estate portfolio you can add the fundrise flagship fund to your portfolio in minutes by visiting fundrise. (24:23) com Millennial that's f n d r i.com Millennial carefully consider the investment objectives risks charges and expenses of the fundrise flagship fund before investing this and other information can be found in the funds perspectus at fundrise.com Flagship this is a paid advertisement so there is pressure from multiple directions to not really do anything too disruptive there might not be a ton of disruptive innovation in the cookie industry but you can imagine how these networks of supplier relationships Distributors customers and so on can (25:00) exert their influence on companies that bias their decisions another way to say all of this is that incumbent companies in a market build up networks of relationships built around supporting what has worked for them and what has satisfied customers everything is configured to keep the boat chugging along in a certain direction it's like a big shipping vessel and there's a lot of momentum going in One Direction disruptive companies come in and force a change of direction that incumbent companies aren't prepared for because (25:28) everything they have done for years is oriented around the ship sailing North suddenly the ship must now sail suddenly the ship must now sail South and it takes a tremendous amount of effort to get that boat turned around while disruptive innovation is slower moving in some Industries than others it is everywhere if you don't believe me just look at the excavation industry for moving Crush Rock while disruptive innovation unfolded over a longer time Horizon of almost 20 years the invention of the hydraulic press was just as (25:56) disruptive and hard to fend off for incumbents in the ex avation business as any change in Computing from the 1830s to the 1920s excavation equipment was steam powered as it boom in building Railways and waterways took off excavation equipment was vitally important the transition to gasoline powered excavators was by all means a disruptive innovation and the mechanics of excavators intrinsically changed these gasp powered excavators were cheaper more efficient and more powerful than virtually all steam shovels yet the industry leaders and (26:28) excavation were able to orchestrate a transition to this new technology without too much friction instead the later disruptive innovation of hydraulics is what left them blindsided by the 1970s only four of the industry's past 30 major companies had survived and embraced Hydraulics which extend and lift the buckets that dig into the ground the new industry leaders were the newcomers who embraced hydraulic technology but just a few years earlier hydraulic excavators operated only in narrow niches they were much less (26:56) flexible than the more common types of excavator ators at the time and they didn't have nearly as Long Reach or as much turning radius because their reach and capacity was so limited hydraulic excavators were of little use for mining General excavation or for sewer contractors the industry leaders in industrial excavators Soo market for Hydraulics and new companies specializing in hydraulic excavation focus on building products that could be attached to the back of trucks and sold to Farm Workers and then small residential (27:27) contractors began purchasing the hydraulic excavators to dig narrow ditches for water and sewer lines in the streets for new houses under construction because small housing projects never had the budget to bring in giant excavators they were always dug out by hand before but now the smaller hydraulic powered ones were the perfect size to help out with that hydraulic excavators were soon an essential ingredient to the post World War II housing boom that enabled Suburbia to sprawl out around major cities these new (27:54) users of excavators were much much different from the traditional customers might want excavators for big Urban projects or for mining however it was not that leading excavator producers at the time were ignorant of hydraulics in fact it was actually the opposite some of the companies were quite excited about Hydraulics and wanted to test them out but they bumped up against the fact that their largest customers had no use for these smaller excavators incumbents tried to build hybrid designs that captured The Best of Both Worlds but (28:22) eventually they gave into the pressure of their established customers and lost interest in Hydraulics since it didn't seem like there was a very large market for them the emerging disruptors who began building out hydraulic excavators for Farm use and small residential products filled a void that industry players had intentionally left open where the new entrance in the excavation industry took the promise of hydraulics as a given the uncomment took their primary customers needs as given and thus Overlook the potential of (28:49) hydraulics but it's not just a story of losing out on growth opportunities once it became clear that Hydraulics were safer and more reliable all customers began demanding them even though other types of excavators still had advantages like being more powerful in other words not only did the disruptive technology of hydraulics initially catered to new types of customers but as the technology proved itself and was refined it stole market share from all excavators including customers who previously saw Hydraulics as inferior leaving the (29:18) incumbents who had adhered to that customer feedback left in the dust the incumbents did not fail because they couldn't see any merits of hydraulics nor because they couldn't produce them they made the choice to focus on improving upon the existing products that their customers wanted hoping to steal market share from their Rivals who were all doing the same to do anything else would have been borderline Reckless by using precious resources to invest in products that their customers had told them they didn't want the (29:43) Dilemma is that customers didn't know they wanted Hydraulics until suddenly they did the change didn't literally happen overnight but in terms of the corporate life cycle and business's ability to dramatically reorient themselves toward producing new types of products the change might as well have been over overnight not investing in Hydraulics was logical all the way up until the moment it wasn't so how can companies manage disruptive innovation if disruptive Innovations often emerge from less profitable Niche areas of a (30:11) market and may even be initially rejected by the largest customer segments how can companies avoid the Trap of continuing to improve primarily upon their most popular products rather than looking elsewhere it really is a vexing problem I'd say everything in an established company might be oriented against moving towards smaller unproven and less profitable markets where disruptive Innovations are likely to emerge from imagine that you worked at one of the major car manufacturers in 2006 you'd be taking considerable career (30:39) risk if you pushed a project related to electric vehicles nobody wants to be associated with failed projects because that can set their career back so at different levels of the organization managers make decisions that filter out ideas seen as less credible even if you really believed in the promise of electric vehicles you'd have to convince the engineering team of that so they'd spend the time building a proper prototype and even then you might have a prototype for a product that the marketing and sales team don't want to (31:06) sell if they work on commission no salesperson is going to waste their time selling something as unproven as an electric car when they could continue earning huge bonuses from selling this year's most popular gas powerered cars so at multiple levels people following their own incentives such as what is the least risky to their career or what is likely to earn them the most money push aside ideas like seriously moving forward with electric vehicles especially if you look around and none of your major competitors are (31:30) prioritizing EVS either and while Executives higher up think they're the ones making the most important strategic decisions they may not realize just how many ideas are being filtered out that don't ever reach them serious plans for an affordable EV might never have even made it to their desk yet as we know this was the exact time that Tesla had little to lose a lot of conviction in the promise of Eves and was thus preparing to fundamentally change the automotive industry in christenson's study he did find some patterns among (31:58) companies that have successfully defended themselves from attacks via disruptive innovators companies that successfully dealt with disruptive Innovations were those that could identify which customers were interested in a given disruptive product they also tended to establish smaller subsidiary companies Focus solely on disruptive innovation where the operations were just separate enough that they could get excited about disruptive opportunities even if they were small in scale for the parent company just as important these (32:24) companies plan to fail frequently but quickly to minimize costs when looking for for promising disruptive Technologies Google is probably most famous for doing this since they have a pretty large division of their company devoted to just exploring moonshot bets they've accured something like $37 billion in operating losses over the last decade from investing in a range of speculative ideas yet they have largely seen that as a cost of doing business to disrupt themselves before someone else does Google's investments in whmo and (32:52) its self-driving cars are a pretty good illustration of this this unit has also invested in everything from Quantum Computing and robotics software to contact lenses that measure your glucose levels of course when things don't pan out it's really easy to point fingers and call these bad Investments but at the same time if you want your company to not only survive but thrive in the coming decades you have to use your advantages to lean into disruptive bets that will mostly fail with the hope that just one breakthrough can be a (33:18) GameChanger like at Google by take away from reading the innovator simma is that it's particularly important to carve out a subsidiary focused on disruptive Innovations as much as possible with Google's moonshot bets you wouldn't want that disruptive subsidiary to be biased At All by the parent company you'd want the culture operations and decision makers to be as independent as possible with really only funding coming from the parent company and as long as sufficient financial resources are being provided those biases can be minimized too Google (33:48) though is a hugely profitable multi-trillion dollar company meaning it can Embrace filled bets on disruptive technology in ways that other types of companies might not be able to your average min Manufacturing Company May face more structural limitations for example if a manufacturer of tires for cars is structured around producing high-end products that have higher gross margins but greater overhead costs the company would be completely organized around making those premium products trying to switch over production lines (34:14) to produce a new type of disruptive Tire with lower profit margins risk pushing the company in a less profitable Direction while also risking that the adjustments could cause it to lose its competitive advantages for those higher end tires that is why if Poss possible it's so important for subsidiary companies focus on disruptive technology to be completely independent it's not just so the subsidiary can succeed but also so the focus on exploring disruptive Technologies doesn't literally disrupt the company's main business perhaps for (34:43) a manufacturing company that would mean setting up new production lines warehouses and supply chain relationships that are completely separate from the parent company that would be an expensive and maybe even impractical option in the short term but may very well be critical to the organization's long-term success this is actually similar to what IBM did to take advantage of the rise of desktop computers at a time when it was primarily a leader in large mainframe computers which are like massive Central Computers that could be used by an (35:10) entire organization to take advantage of this rise and personal Computing IBM created an autonomous organization based in Florida intentionally far away from the company's New York headquarters and that subsidiary proved a major differen maker in enabling IBM to survive While most of its peers collapsed this subsidiary was free to procure its own components from any Source sell through its own channels and Forge a cost structure built around the personal Computing Market Christensen concludes that companies must boldly be leaders in (35:41) commercializing disruptive Technologies and that they should match the size of the independent subsidiaries they spin off to the size of the addressable Market they're focusing on these disruptive technology focused subsidiaries also don't have to be built from scratch they can be acquired at the risk of turning into a bloated conglomerate the there is precedent for companies making strategic Acquisitions of smaller peers focused on being disruptive innovators Johnson and Johnson at various points for example (36:06) has had hundreds of such subsidiaries on which it relies on to push forward with a range of Novel Medical Treatments it was also a really interesting anecdote about Honda from the book about how they sort of stumbled into a disruptive innovation that created a new product Market thanks to their willingness to continue funding yet to be profitable expansions in the aftermath of World War II Japan was an imposs a damaged country and Honda came to specialize in designing powerful but cheap little motorbikes that could (36:33) navigate its cities becoming a beloved product across Japan Honda sent three employees to California hoping to convince dealerships to sell their bikes dealers were hesitant to sell these unproven products and when some finally did the bikes flopped because they couldn't hold up on highways driving at high speeds for long periods frustrated with their failed efforts Honda's executive who was overseeing the expansion into North America took his bike out to ride around the Foothills outside of Los Angeles and while riding (37:02) others asked him where he'd gotten such a durable little bike that was so perfect for off-road riding Honda's bikes were never meant for off-road riding and it was a category of products that didn't even really exist yet but as more and more people asked him about how they could get a Honda bike to ride in the Foothills Honda pivoted away from their longtime strategy of selling bikes for Highway use in the US and instead embraced the emerging market for off-road bikes which they quickly became a leader in after that initial success (37:28) Honda had the foundation to dive back into designing affordable bikes for use on highways which they became so effective at doing that they nearly drove Harley-Davidson out of business you could imagine an alternate reality where Honda's Executives back in Japan refused to trust their employees on the ground who told them that people wanted to use their bikes offroads and instead Nix the product and focus on pouring money into making bikes for Highway use as they said they stumbled into what proved to be a disruptive innovation (37:55) that created a new type of market for motorbikes yet their willingness to invest in speculative expansions generally and trust their employees operating independently on the ground enabled that success to occur the lesson for me is that having enough leeway with your investors as well as not blowing your budget on new ideas too quickly gives time for companies to iterate and incubate Innovations a company with a worse performance track record might have felt more pressur to abandon the expansion into the US after it didn't initially (38:24) work because they had insufficient credibility with investors such that that failure might have spurred a sell-off in the stock that panicked management another takeaway for me is that no one can know what the demand for disruptive Innovations will look like Honda sat on disruptive technology with its bikes for years and didn't even know it its management both in Japan and those working in the US on expansion had a completely different concept for how their bikes would be used motorcycle dealers didn't want them because they (38:50) had a different vision for how they might be used too and motorcycle dealers also didn't want them because they had a different vision for how those bikes might be used it took many months of people asking for Honda's bikes to be used off-road before it dawned on Honda's us team that this is where they should be focusing and if you had asked the average motorcycle owner most would have said they had no use for Honda's tiny and unreliable bikes for drive around highways since that is where most people rode motorcycles at the time I (39:17) hope you can see the theme here which has been true with many disruptive Innovations competitors customers dealers suppliers and even the company producing The Innovation itself may not understand how and to whom this new technology will be most appealing when listening to management talk about disruptive Innovations from within their own company or from competitors I would highly discount what they say because as Christenson shows in the book they have a terrible track record in anticipating future demand for disruptive technology (39:44) companies may be able to reliably predict sales for proven products that have been around for years but by definition they cannot understand the impact of disruptive Technologies in real time at least not before a mainstream use case has been accepted and by that time the technology is no longer considered disruptive overall I think the innovator dilemma is a useful book to read but it wouldn't be my top recommendation to the average person it's very much an academic book based on case studies from three four five and six decades ago it (40:13) is by no means Light reading but the book itself has been so impactful some of its key ideas have lived on and been explored further in the years since it was first published I did try my best to use some analogies that are more relevant in 2024 but they may not perfectly Capt capture Clayton christenson's points as outlined in the case studies he did originally if you are a manager at a medium to large siiz company it would actually be a pretty useful book to read all the way through if you haven't already but for stock (40:40) investors I think my synopsis of the key ideas here is all that's really needed to glean the most relevant information so it's not a book I'd say you should drop everything and read still the innovator Salma is fascinating to think about because there really is a paradox where great companies can simly do everything right and then simply get displaced it's also informative to learn that these companies are not displaced simply because their management isn't hardworking or intelligent enough or because of employee incompetence as (41:06) we've talked about relying too closely on customer feedback can actually be what blinds companies hence the Paradox of innovation while it is critical to listen to customers feedback on sustaining Innovations companies that survive disruptive attacks are able to recognize when to Discount customer feedback on potentially disruptive Technologies although disruptive Innovations are infrequent for most Industries they do occur enough that any company hoping to survive for decades must have a plan for dealing with them I (41:33) know that as a stock investor this book really enhanced my understanding of competitive Dynamics between companies and the nuances of how Corporate values structures and incentives can lead companies to dismiss the disruptive Technologies more often embraced by new competitors managing Innovation is something all types of companies must do well to survive and that includes some degree of investment in speculative Technologies and ideally independent subsidiaries that can focus solely on certain Innovations to ultimately (41:59) support the parent company I think this has become a lot more common since this book was first published but it's still a relevant message and a reminder for investors To Tread cautiously if you're looking at companies that don't seem to have any in-house processes for incubating disruptive Innovations if they aren't disrupting themselves eventually someone else will do it for them with that I hope you enjoyed today's episode and I'd like to leave you with a quote on Innovation before we end things today as a great entrepreneur Henry Ford put it (42:29) quote I'm looking for a lot of people who have an infinite capacity to not know what can't be done that's all for today folks I'll see you again back here next week hey guys this is your Millennial investing host Shan Ali when I first started learning as a value investor I had no idea what direction to go in there's just so much to try and wrap your head around but it's never too late to get smarter about Stock Investing from the ground up after spending years interviewing and studying the best stock investors as a company at the investors (43:00) podcast Network I've worked to distill those learnings into a simple course for you why did I do that so I can help you master the principles of excellent lifelong investing I was a fan of the investors podcast for years before I joined the team and I always wanted a course that broke down the most important insights from a decade of interviews with leading investors the course is great for both beginners and pros from studying what the Legends actually do to small practical ways to build your wealth over time I'll take (43:29) you through 10 different sections covering the basics of what a stock actually is and how stock markets work to strategies to optimize your retirement savings picking great companies what to look for in ETFs how much you should invest and how to monitor your Investments plus so much more by the time you're done you'll be ready to invest in the stock market learning plenty of tricks from the pros along the way to access the course and begin learning how to invest like the Legends just visit the investors podcast (43:57) pod.com slet started with stocks that's the investors podcast.com SLG getstarted withth
stocks and for a limited time you can use code mi15 for a 15% discount at checkout that's mi15 when checking out monster focus is on what can be accomplished by drinking their products and letting the product speak for itself there's actually very little Capital tied up in the operations of the business since monster beverage is a holding company for each of different brands from the top down Monster beverage's job is primarily to manage (44:32) and Market these different brands to Consumers what's also attractive about this business is that once a hit drink has been successfully brought to Market there aren't really any incremental updates needed technological companies essentially have to upgrade their offerings every quarter or every year yet that's not really the case in the beverage industry
2024-11-07 02:43
