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IBM and Apple: Catharsis

IBM did not invent personal computing but their “PC” became synonymous with the category. Having entered the market in 1981, the IBM PC quickly became the top selling brand. From 1984 to 1993 IBM sold more PCs than any other vendor, conceding the spot to Compaq which remained on top only until 2000. No PC vendor remained at the top of the sales leagues longer than IBM. HP had the second longest run but that run was broken last year as Lenovo (who acquired IBM’s PC business) surged.

Screen Shot 2014-07-16 at 4.19.11 AM

As the graph above shows, the period of time when IBM was dominant was characterized by far lower volumes. In 2004, the year IBM exited, they sold about 10 million units. ((as the graph shows, if we consider Lenovo as taking over from there, they did a very good job extending the legacy.)) It was a decent performance but one that did not keep up with the Dell and HP/Compaq race to the bottom in pricing and subsequent rise in volumes.

However, throughout its position of strength, IBM was a reluctant PC maker.

Airshow is coming to Tokyo

I will be conducting our 10th Airshow event in Tokyo on Thursday, 17 July 2014.

Airshow

The purpose of Airshow is to:

  • Understand how data can be used to persuade through an appeal to logic as well as through empathy.
  • Understand the basics of “data cinematicism” including the techniques analogous to cinematography and direction.
  • Understand story development techniques including how to facilitate the audience’s entry into the story.
  • Learn how to build a cinematic presentation.

The method we devised borrows heavily from the techniques of cinematography and screenwriting to impart meaning to the audience beyond the literal words spoken or images shown on screen. These techniques are demonstrated with “feature presentations” and then deconstructed in interactive lectures. Throughout we also weave Aristotelian rhetorical tips and present from the Asymco repertoire of stories.

See Airshow Tokyo event page for more information. Registrations are available. Students may register for academic discounts.

Innovation and the Future of Mobile, with Horace Dediu

Will Sherlin writes:

Horace Dediu joins us for the 22nd episode of “The Innovation Engine” podcast to discuss innovation and the future of mobile – what the post-mobile world will look like; how Apple, Google, and others are shaping the mobile experience of the future; and the next frontiers of mobile after health and fitness.

In this episode of the podcast, Horace talks about why mobile and smartphones will no longer be thought of as synonymous in the very near future. He discusses how soon-to-be released products like Apple’s HealthKit and Google Fit, combined with the revolution in wearables, will continue to drive change in industries like health care and will put more power than ever in consumers’ hands.

Horace also shares his thoughts on “The Disruption Machine,” Jill Lepore’s New Yorker article that criticizes Clayton Christensen’s theory of disruptive innovation. While he believes there is some merit to the notion that disruption is overused, Horace says the article overlooks years of research and writing since that has helped refine Chrinstensen’s theories. He wrote a post for the Asymco site titled The Disruption FAQ in response to the article if you are interested in reading more of his thoughts on the matter.

Other highlights from the conversation include:

  • What we learned about the Apple New Product Process, or ANPP, from Leander Kahney’s book Jony Ive: The Genius Behind Apple’s Greatest Products
  • Some of the reasons why health care technology lags behind consumer technology, and why that means we are just beginning to scratch the surface of what will be possible in personal health care
  • Other “white spaces” in the marketplace that Horace sees as ripe for disruptive innovation, including education and transportation
  • Why Horace says software, not technology, is the thing with the power to truly transform industries

via Innovation and the Future of Mobile, with Horace Dediu.

The Critical Path #118: The Cook Doctrine

We reflect on why the narrative on Apple has changed post-WWDC and analyze both the evolution and consistency of Apple’s culture. Furthermore, what elements of that culture/process/priority setting can be copied? In other words, what does it take to be great?

via 5by5 | The Critical Path #118: The Cook Doctrine.

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This month’s featured dashboard is Phaser. It’s a dashboard that shows the latest data from the popular HTML5 Game Framework including forums posts, active users, and recent GitHub commits.

252_Jul07_Asymco

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Late late majority

Seven years after the iPhone was launched, 70% of the US population is using smartphones. Smartphones existed before the iPhone so the category is older than seven years but as far as adoption goes this is nearly the fastest ever.

The CD Player reached 55% in seven years and the Boom Box about 62%. If measuring the period between 9% penetration and 90%[1] the smartphone in the US will have a lifespan of about 9 years starting in 2008. Before this period, the product was largely experimental and participating vendors[2] mostly failed. After this period most products will be “commoditized” with decreasing margins and increasing consolidation.

The rapidity of growth is all the more remarkable given the penetration is at the individual, not household level. The total user base is therefore over 270 million rather than the 115 million usually targeted by consumer technology, nearly 60% more purchases. This is also remarkable because the product has a shorter lifespan of use (two years) than is typical for other consumer technology products[3]

We are therefore now in the “Late Majority” phase of the US market. This is not a surprise. The inflection point in the market occurred in mid 2012 so we’ve been in this phase for two years already. It’s not therefore controversial to predict two years of continuing though decelerating growth.

Screen Shot 2014-07-08 at 7-8-2.39.27 PM

As Geoffrey Moore explained, the marketing of technology products needs to be varied as we get into different phases of the market. Innovators (first 2.5%) need to be sold on the premise of novelty itself. Early adopters (next 13.5%) seek status and exclusivity. Early majority (34%) seek acceptance and Late Majority (34%) seek pragmatic productivity. Laggards (last 16%) seek safety.

One aspect of this adoption cycle that is misunderstood is the role of pricing. The assumption is that pricing matters more as adoption increases. This is misunderstood because pricing always matters and therefore it never matters. Pricing is one of many elements of marketing mix and at any time there are product choices across a wide spectrum of pricing. Pricing is also a signal which can be elaborately obfuscated through bundling and unbundling.

One way to illustrate this is to consider how Apple products behave in the late phases of markets. Apple products have notoriously firm pricing.

Screen Shot 2014-07-08 at 7-8-2.38.26 PM

The revenue per unit of Macs, iPods, iPhones and iPads remains stubbornly consistent. This is not to say that each unit sold is the same price. The company tweaks “the mix” of mid, low and high products to keep the average selling price constant. But fundamentally the average remains constant which means that regardless of market phase, Apple retains its margins.

So as we look forward to the last two years of growth for smartphones, how will Apple fare?

Notes:
  1. which I consider the “economically attractive” period of growth []
  2. Palm, BlackBerry, Nokia []
  3. e.g. TVs, Refrigerators, Radios, etc. []

Competing effectively against your most potent competitor

New market disruptions take root in non-consuming contexts. For instance, mobile phone photography began not because early phone cameras were good. They weren’t good at all but good enough when a camera was not within reach. The quality was poor but the photo taken would not have otherwise been taken, making a lousy photo better than no photo.

The result is that the total number of photos taken this year will be ten times higher than the total number of photos taken before the advent of mobile phone cameras.[1]

This rush to use the phone as a camera has meant that phone makers are keen to improve their product (so as to compete effectively with it against each other) and as a consequence they overtake the incumbent camera makers in quality as well as quantity.

The same phenomenon was experienced by fixed component “Hi-Fi” audio products. The quality of mobile music was poor but it was convenient and convenience translated into consumption and consumption translated into quality improvement and eventually the evaporation of usage of the traditional category.

Now consider how ad dollars are getting spent. The following chart shows the eMarketer forecast for ad spending mix across different media in the US.

Screen Shot 2014-07-02 at 7-2-8.12.01 PM

It would appear that the “Mobile” media is competing effectively against the other media types, especially the non-Mobile digital (i.e. PC-based experiences).

However, if we look at the absolute spending forecast the picture shows that Mobile is responsible for most of the growth in the overall spending.

Notes:
  1. The total number of photos taken in 2014 is likely to be around 880 billion. Prior to 2000 the total number of photos ever taken is estimated at 85 billion. []

Apple: Lessons in Self-Destruction. Richard Gutjahr’s blog

My thanks to Richard Gutjahr for taking time to talk about self-disruption. I met Richard as the Master of Ceremonies at the Censhare FutureDays event in Munich. He interviewed me for his blog and posted the results as a video and sound file. Richard is a journalist (Berliner Tagesspiegel, Frankfurter Allgemeine Zeitung) and TV personality (news presenter for Rundschau night).

Horace and I have met at a conference in Germany a few weeks ago. During a break, we were talking about the future of Apple. Horace made a statement, which I found quite intriguing: In order to remain innovative, it is not enough to reinvent yourself again and again. Apple must be the one to destroy its own business.

Hour-long conversation including audio and video: Apple: Lessons in Self-Destruction.

 

Sponsor: Tab Dump

Before you analyze, you need the facts, or, put another way, the first step to understanding the tech world is to know what’s actually happening.

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Every weekday, former Nokia analyst and tech journalist Stefan Constantine clears out his RSS reader and publishes a list of the most important world and tech news stories.

The best thing about this list is that it’s numbered, so you know when it’s over. It’s alphabetical, so you can jump to your favorite company. And it’s short. Each Tab Dump shouldn’t take more than 15 to 20 minutes to read.

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The Disruption FAQ

Q1. What is disruption?

Disruption happens when the strong are defeated by the weak. More precisely it’s when those with unconstrained access to resources have them taken away by those with minimal or no resources. It’s a phenomenon that is in contrast to sustaining competition where the strong get stronger.

Q2. How can disruption happen? Don’t the strong always have an advantage over the weak?

The strong can be defeated when the fight is unfair. More precisely, “strength” is only a perception based on convention or historic precedent. The entrant may be weak in resources but may be strong in a way that is not seen as conventionally useful or valuable such as agility or a willingness to learn.

Q3. What makes a fight unfair?

A fight is unfair if the opponents fight according to different rules. This is also called asymmetric competition. Asymmetry is an important concept in game theory, economics and military science.

Q4: Is there a way to know disruption is about to happen?

Disruption theory is an attempt to reliably identify winning challenges. It includes a method of analysis of “the setting” of the fight and “the weighing” of the fighters. In other words, it measures whether the challenger is sufficiently asymmetric and whether the incumbent is flexible enough in their likely response. If there is insufficient asymmetry the theory would suggest the challenger will lose, and vice versa.

Q5: How often does it happen?

In some industries it happens quickly and in some industries slowly and in some never at all. Determining the cause of the rate of disruption is an important research topic. We can hypothesize that industries which show frequent disruption also show a high degree of wealth creation. The inverse is also true: industries that don’t get disrupted don’t create much wealth.

Q6. How do incumbents react to asymmetric challenges?

This quote (mistakenly attributed to Gandhi) describes it best: “First they ignore you, then they laugh at you, then they fight you, then you win.” The main test of asymmetry is to ask whether a challenger’s entry is ignored (or welcomed) by the incumbents. Most asymmetric challenges are not taken seriously because they initially benefit the incumbent. The side-effect is that it lulls them into a sense of security resulting in a lack of response. Challengers have the child-like advantage of rapid growth and learning while incumbents are encumbered by their size and lack of flexibility.

Q7: Why don’t challengers respond in kind?

Mainly because they don’t feel that they need to. The newcomer is either not seen as a threat or welcomed because the customers they obtain that are not seen as valuable. In some cases the business model of the entrant is contrary to that of the incumbent. In other words, the challenger makes money in a way that would cause the incumbent to lose money. Often the challenger is actually invisible because she misdirects attention. They may be seen as competing in one market with a certain set of competitors but their effect is in another market which never had to deal with a challenger.

Q8: If there are different ways disruption can be observed, doesn’t that mean there are different types of disruptions?

Yes. When a competitor challenges with a cheaper product that seems to perform poorly and has low margins and the incumbent accepts the entry because it allows them to concentrate on more profitable customers then this is called a “low-end disruption”. Here the asymmetry is in cost structure. The entrant has lower costs and accepts lower profit margins and may “make money” in new or different ways.

When a competitor misdirects attention by selling a product that draws usage from existing customers and adds non-consuming new customers because it enables new uses, then the incumbent feels no pain from the entry because they don’t sense a reduction in customers. We call this a “new market disruption“. The challenger gains a foothold and grows/evolves, eventually capturing customers exclusively. Here the asymmetry is in the basis of competition and measurement of “performance”. The new product does not actually do the same thing as the incumbent product or does a subset of valuable tasks poorly while excelling at menial tasks. The entrant may be highly profitable but they are not taking profits away from incumbents because they “grow the pie”, capturing value by fulfilling unmet needs.

Disruption can also happen to professions and institutions when less skilled individuals are enabled to perform complex jobs or when professionals can establish good enough services that used to take institutional support. This is called professional services disruption.

Technological change is often (but not always) the core enabler in creating disruptions. The analogy is that technology is a weapon that allows asymmetric combat but the combatant is the disruptor, not the weapon[1].

Q9: It sounds like the trick to spotting disruption is in perceiving when the fight becomes “unfair” and an outsider advantage is gained. Does the theory make this easy?

It makes it possible but not easy. Understanding when a basis of competition changes and where competition is shifting is still very difficult. It is notoriously difficult to sense when it’s happening to you because you are working toward a strategy with assumptions that have been tested and proven to be correct. In other words, you, your colleagues, your competitors and everyone you’ve ever met knows the rules of the fight. Insider status makes you an expert, your knowledge is far beyond a lay person’s and you have a track record of winning. Hubris and pride makes it difficult to accept a challenge from an ignorant outsider.

Furthermore, an outside analyst who is not suffering from these psychological weaknesses may not have the means to measure change because they don’t have access to market metrics. So you can’t typically hire a consultant to help you spot it. This is where the theory helps. If you are a practitioner then you can use the theory as a lens to see the patterns in the operating data.

The proper application of the theory requires domain knowledge or deep reading of weak signals. It’s best employed by incumbent operating managers analyzing their own industry. It’s a tool that can be used to overcome the perception of incumbent invulnerability. It is not a tool that can be used by armchair generals. They can pick up the lens but, not having any data to look at, they have have no patterns to recognize. (This last point is disputed. See comment.)

By the way, entrants don’t benefit much from it either because they act disruptively by instinct. They enjoy the freedom of having nothing to lose.

Q10: How long does this take? Isn’t a shift in competition natural over a few decades?

The speed of disruption is changing rapidly. It used to take decades but now it takes years and in some software industries it could be happening in less than one year. When it used to take decades it did not matter much because the “victims” of a disruption usually could spend a career in the firm being disrupted and would not have to adjust their behavior or assumptions. The consequences would have been felt by future generations. The rate of disruption today is so rapid that many careers and lives and families are having to deal with the consequences, sometimes more than once. Estimating the acceleration and scope of disruptive change is a great research topic.

Q11: Is the theory complete? Can’t we just write an app for it?

It’s not complete. It cannot be encoded as a deterministic algorithm. It’s not even likely that expert systems or neural networks or machine learning can help. This is because perception of change in competition is a skill informed as much by intuition as by data and rules. If the theory is developed further, through a process of theory building, then it might become an app.

Q12: If the theory is not complete, then isn’t it useless?

A theory is not useless if it’s imprecise or difficult to use. Data that would make conclusions precise is often missing or unavailable. The theory relies on weak signals and explains what used to be unexplainable. Many sciences developed from empirical analysis similar to where we are with disruption theory. Theories benefit from development.

Q13: Is the theory being developed further?

Yes. There is a process for theory building which has been ongoing for over a decade where many researchers, students of disruption and practitioners are contributing.

Q14: Can the theory be applied outside of business competition?

Yes, institutions can be disrupted as can individuals. Possibly even economies and states. This is because a growing technological base and communications enable asymmetries of ever-greater scope and speed. The research needed to establish how this happens is under way. However it’s important to know the limits of the phenomenon. Incumbents are getting wiser as they wield the theory and some “settings” show resistance to change and thus prohibit technological cores to be utilized disruptively. The study of these anomalies is essential to the process of theory building.

Q15: Is disruption a force of nature? Has it always existed? Will it never end?

Oral traditions suggest that people have been aware of disruptive forces for all of history. We feel it in the school playground and in many personal relationships. It’s in the Bible and the classics that predate it. It’s visible in all cultures. Disruption theory as applied to business and government is only an extension of this causal individual behavior into complex systems. It’s possible that awareness of it might cause the behavior to change, or, put another way, that if you observe and understand the phenomenon, that knowledge could cause it to stop happening. But the systems involved are vast and learning curves are long. Enlightenment may take a few lifespans.

Update:

Here are questions which have been added based on reader feedback. Please feel free to suggest others in the comments.

Q16: Isn’t Disruption just evolution of business models?

Business models evolve, but if the evolution sustains an existing incumbent then it’s not a disruption. If an evolution is  adopted by an entrant who then proceeds to strip the assets and profits from an incumbent then it’s a disruptive change. The key question is why do some changes get adopted and not others.

Q18: What have been the major improvements in the theory since its introduction in 1997′s The Innovator’s Dilemma?

From Clay Christensen’s work alone: New Market Disruptions, Professional Disruption, Value Chain Evolution Theory, Jobs to be Done Theory. The Innovator’s Solution including how to respond with autonomous self-disruption, the role of acquisitions, the study of Healthcare and Education as targets of (and anomalies to) disruptive change. The process of theory building. The Capitalist’s Dilemma and how economies create incentives and disincentives to disruptive innovations.  Many other contributions from researchers too numerous to cite here.

Q19: What industries cannot be disrupted

Industries which experience no disruptions are “anomalous” in that the theory suggests that technological progress forces change and technologies have proliferated in almost all industries..  Industries or institutions which have remained largely undisrupted include Energy, Education, Government, Healthcare, Airlines and Hotels. The study of these anomalies continues and explanations identify conditions that prevent growth. Dependencies on regulation, infrastructure, and absence of technological core enablers caused some of the atrophy to date. However signals of change are appearing in all these industries and paths to disruption are clearly possible.

Q20: How is it possible that companies which were claimed to be disrupted are still around and some which are claimed to be disruptors have vanished?

Being disrupted does not mean ceasing to exist. Being disrupted is a loss of a specific encounter, but not necessarily a terminal loss. Being a disruptor is a win in a specific encounter and not a guarantee of immortality. Indeed many disruptors come to be disrupted and the theory suggests sustainable growth requires self-disruption. Also a disrupted company can be re-configured post-disruption into another entity or can muddle along with limited value indefinitely. Sometimes they can rise up and become disruptors again.

Notes:
  1. See David vs. Goliath: using a projectile allowed David to overcome Goliath but only when wielded skillfully []