I am reading the book, The Innovator's Dilemma, (1997, revised 2011, Harper Business and Harvard Business School Press) primarily for my work in the biotechnology space, but I quickly saw that it had some investing ramifications. The author, Clay Christensen, has a website here, and a book chapter is available here. The book starts with a case study of the computer hard disk drive market, going back to the 1960's. For computer geeks, it's actually a pretty good read about the technology and how innovations occurred over the years.
In summary there are two types of innovations:
- Sustaining technologies
Sustaining technologies are described as incremental improvements demanded by the main current customers of the dominant companies within a sector. In technology this would mean things like more memory, faster memory, larger storage capacity, etc. Large, dominant companies do this quite well because they have existing customers who already want these changes, along with all the barriers to entry keeping a new competitor from easily being able to do this.
Disruptive technology is not as intuitive, at least to me. It serves new markets - usually unanticipated markets. (And markets that the category killers usually don't want to serve, due to lower margins or lower short-term sales forecasts in the new category). In the disk drive example used throughout the book, an example of disruption was smaller hard drives. The existing customers, such as mainframe and minicomputer manufacturers like International Business Machines (IBM), did not want or need smaller drives, which cost more per megabyte and the space savings was not consequential to them. Thus, the previous dominant drive makers failed to introduce smaller drives until it was too late, because their customers did not want them. Obviously, smaller hard drives did serve new customers, such as desktop and then laptop computers. But surprisingly, it was newer companies such as Seagate Technology (STX) and Western Digital Corp. (WDC) that served these markets, and not the formerly dominant companies.
Another interesting observation is that dominant companies tend to miss the inflection point by several years after new competitors move into disruptive technologies. Examples of this include hard disk drive companies that waited several years before introducing newer, smaller drives for the laptop market. By then, it was too late for many of them. It wasn't that the dominant companies didn't know that smaller drives were being introduced or that the small laptop market at the time existed, it's just that they earned much more profits at the time by serving their large customers in the older markets. As a result, they starved the engineering teams of resources to develop smaller drives, or they killed projects after prototypes had been developed.
Is Apple a Sustainer or a Disrupter?
I believe the concepts in this book have huge implications for Apple (AAPL), but not in the obvious way. As I read the book, I can think of sequential disruptive technologies that Apple has introduced, including:
- Macintosh (mouse)
Many aficionados would describe Apple as a disruptive technology innovator. I disagree. On further analysis, none of these were truly breakthrough technologies. In other words, they were incremental improvements in design and packaging of products already on the market by other producers. For example, desktop computers had been around prior to the Macintosh, including mouse-based pointing devices. MP3 players were introduced in the late 1990's far ahead of the iPod. Smart phones were out years ahead of iPhone, such as Blackberry and Palm Treo. Even the iPad wasn't entirely new, as e-readers such as Amazon's (AMZN) Kindle had been out, and Microsoft (MSFT) had released tablet versions of Windows previously (Apple itself had the unsuccessful Newton in the mid-1990's).
I won't go into the competitive advantages of Apple's products since their sales figures and premium pricing speak for themselves. The point of writing this is to point out that Apple may be more of a sustaining technology company rather than a disruptive company.
Actually the main point of the book, The Innovator's Dilemma, is that category-killer companies usually fail at successfully introducing disruptive technologies. Some commentators have written that Apple has broken the curse of the innovator's dilemma. I would argue instead, that Apple is extremely successful at introducing new incremental sustaining improvements to technologies that have been introduced by others. (Interestingly enough, I have seen the same thing written about Microsoft!) Maybe this is the best strategy for success after all. According to Christensen, companies are more profitable and more predictable during the sustaining technology phase.
The question for Apple investors is whether Apple will miss the turn at a future disruptive technology. Christensen might say that the odds are against them, but Apple could always end up being the exception that proves the rule.