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'Disruptive innovation' is nonsense? Not ALWAYS, actually

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Worstall on Weds If the theory of disruptive innovation is wrong then why do companies act as if it's true?

Proof is rather in the pudding after all.....

The latest topical shouting match in my corner of the economics-meets-tech world is an essay by Jill Lepore in the New Yorker. All this talk of “disruptive innovation” is just that – talk – and the theory itself doesn't actually hold out in the real world. So, Yah! Boo! And all that really.

The real point of this essay by a Harvard professor is the usual one of such essays: to show that all those who are not Harvard professors are stoopid, so there.

Leave aside the “angels on pins” aspect of her argument and the problem with the dismissal of the disruptive innovation argument is that it does in fact explain a great deal of our world. There's a truthiness to it which makes it still relevant.

Newbies always kill off established businesses

For example, we know very well that large companies, well established in their industries, are a great source of innovation over time. Using William Baumol's definitions for a moment, innovation means the continual advancement, by incremental steps, of a product or technology. However, they're not a great source of invention: those great leaps to another way of doing things entirely. Those are (almost) always the province of new entrants to the markets: either new firms or those moving from one marketplace to another.

It's thus a standard assumption, an assumption well backed by masses of empirical evidence, that large companies do increase productivity in those small steps. Yet the major advancements come not from the development of extant businesses but from the entry of new ones into the market and the decline of the old. Or, as we might put it, the upstarts clubbing the oldies to death with their new inventions.

Given this, there's obviously an interesting theory to be constructed about disruptive innovation. The one we've actually got, the one that Lepore is arguing against, is that these new products are initially worse than those they are replacing in many manners. But consumers see something there that extant technology doesn't provide and thus it replaces the old.

Practical examples? Well, if you must...

There is explanatory power there: in 1895 the car was clearly inferior to the train, the dominant transport technology, for actually getting somewhere. But the car offered the opportunity to get anywhere, which is what was so disruptive.

I suspect that a truly useful fact about this disruption is that, almost by definition, it won't come from the incumbents in the market. Not because of any economic woe, just because of the incentives faced by the managers and shareholders of said incumbents. One of the three great management books of all time, Up The Organisation (the other two are Parkinson's Law and The Peter Principle, those three contain more good sense about management than an entire Business School faculty) had it as “pissing in the soup”. Why would you pursue a product or technology that is simply going to compete against your own highly profitable current products?

You might, of course, if you see that others are coming to steal your lunch using that new technology but by then it's often too late, as Kodak found out with digital photography.

So this version of the theory tells us that it won't be the record player manufacturers who create iPods, won't be (until late in the game) Microsoft that releases a free operating system and so on. There are examples that prove (as in the exact sense, to test) this. It shouldn't have been IBM that released the PC. They did, but almost as a guerilla project and without thinking through the effect it was going to have on their core business.

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