When the good technology loses

The following is a very quick translation of an op-ed I wrote for Aftenposten, Norway’s largest serious newspaper. The occasion is that Clayton Christensen is coming to speak here on January 24, and I am emceeing the event. The argument shouldn’t be news to anyone (I hope), but the examples may be. The companies are all Norwegian, so forgive me if you don’t get the reference (Norsk Data, for instance, was a minicomputer company much like Prime, Digital or Data General, and lost out to PCs much like they did.)

When the Good Technology Loses

Espen Andersen, January 2006
(published in Aftenposten)

What does the videoconferencing company Tandberg, the telecommunications provider Telenor and the record company EMI have in common? They all face new competitors who make products worse than their own, products their best customers don’t want, and which they couldn’t make money on if they started making them. And these new competitors may threaten their future existence.

Tandberg might be the best example of the three at this point: The company makes excellent products for all kinds of video conferences, with large and bright screens, reliable connections and advanced features. The company has an international sales organization and invests heavily in continued development of their technology. I have used their products for years myself, to do cross-Atlantic teaching, and it works admirably well.

Half a year ago, I tried some new technology: A free program downloaded from the Internet, and a little ball camera with a microphone to connect to my laptop. It didn’t work as well as Tandberg’s equipment – the picture was choppy and slow, and the sound had skips and occasionally echoes. But it worked well enough for a personal conference. The price was not thousands of dollars, as with Tandberg’s equipment, but about $80. I bought this new equipment not from a helpful sales person with specific knowledge, but in a plastic package from a self-service shelf. In a supermarket.

To Tandberg, these new competitors aren’t even worth the name. They make awful technology compared to Tandberg’s. Tandberg’s best customers – international companies who see videoconferencing as an alternative to expensive and time-consuming air travel – does not want this cheap and bad technology. To them, the quality of the videoconference experience itself – not the fact that it is possible – is what matters. And should Tandberg decide to go for the new technology, they would make less money, even if they capture a dominant market share.

To Tandberg, the choice seems simple: Give the customers what they want, make excellent products, and serve a profitable and still growing market. But Tandberg’s stock price has fallen lately, and the CEO has been changed. The Chairman of the Board rejects questions about the new competition, saying that there will still be a market for trucks even though everyone can by a moped. And so far, he has been right.

Technology marches on, however. Internet gets faster, the small digital cameras better, computers more powerful, and software easier to use and with more functionality. In a year, the supermarket cameras will be at least twice as good, and videoconferencing on the home computer sharper and faster. If Tandberg continues like before, they will respond to this competition by creating even better products for their best customers – and gradually start losing their not so attractive customers to cheaper, inferior technology. The company risks marginalization because they make good products for good customers and make good money. They risk losing not despite, but because they do things right.

Tandberg is not alone in having this challenge. Telenor is challenged by IP telephony, EMI and other record companies by music distribution on the Internet. Newspapers are beginning to notice that debates, news distribution and eventually ad revenues are migrating to Internet’s blog aggregators and discussion forums. And Norwegian banks have for a number of years been challenged by the Internet bank Skandiabanken, whose prices are lower than traditional banks, but who has no physical facilities – and, in some dimensions, worse service.

The description of this process – the theory of ”disruptive innovations”, i.e, innovations that makes a company’s current business model irrelevant – is created by Harvard Business School professor Clayton Christensen. The Economist has characterized this theory as one of the few really good ideas to come out of the nineties. Since Christensen (who will be speaking in Oslo on January 24, 2006) published his seminal book The Innovator’s Dilemma in 1997, he has continued researching how this phenomenon comes up – and how companies should react to it. His excellent research and powerful theories have turned him into a guru both to academics and practitioners, and have deeply influenced strategy for both for those companies threatened by and threatening with new, disruptive technology.

So, what should a company such as Tandberg do? One alternative is to continue as before, betting that a small but very quality-conscious customer segment will remain. That was the strategy of the minicomputer company Norsk Data, and that company is not around any more. The company can try to keep the new technology out by trying to create barriers to entry, such as collaboration with competitors and lobbying politicians for protection. This is what the record companies do – and what the publishing industry soon will be doing. It works for a while, until the protection is seen as against society’s interests and removed.

Another alternative is to create a subsidiary that pursues the new technology – in other words, to out-compete oneself before someone else does. This seems to be the strategy of the telephone companies: Telenor is now offering ”broadband telephony,” for instance. It can be a great strategy, but may run into internal obstacles because knowledge, processes and, not least, values argue against it. Which product- or market manager would want to pursue less good customers with worse products? Just as Norwegian banks, who overprice their Internet services, trust their customers to change banks slowly, and hope that Skandiabanken will not be able to upgrade its net services and then encroach on their more profitable segments.

A fourth alternative, perhaps the one with the most likelihood of success in Tandberg’s case, is to move the company’s main activity to other parts of the value chain. Clayton Christensen uses a sports metaphor here, and talks about trying to get not to where the ball is, but where it will be. When a product or service is good enough, customers will focus on price and responsiveness rather than functionality, and production moves to the lowest cost provider. Product profitability remains only where there is still room for performance or functional improvement. Instead of making video conferencing products, Tandberg can move closer to the customer, and start to arrange video conferences. Or they can move backwards, concentrating on creating technology – better compression algorithms, for instance – which can be licensed or sold to those that continue to make the products.

If a company wants to survive a disruptive innovation, it must be able to tolerate a short-term decrease in profits and market share to create the foundation for long-term profitability. This requires strong management who are not forced to manage solely to quarterly results. Management also needs to convince or force the company’s producers – be they technologists, journalists, or bankers – to make products or services that can meet the new competitors on their own turf, even though the products may not be as good, in the traditional sense. When the new way of doing things be
comes as good as the old way, all the customers will move over. At that point, the company better be there as well.

Nothing is as practical as good theory. The best technology rarely wins, but thanks to Clayton Christensen and his theories we know a little more about why. What remains to be seen is to what extent companies (such as Tandberg and Telenor) and industries (such as the record companies, the publishers and the newspapers) can turn the theories’ prescriptions into practice.