KatipunanBGN© (formerly
KatipunanForum)
Building a Culture of Innovation through a
Philippine Technology Diaspora
©
Conquering from the Bottom
with Disruptive Innovations
by Tina Laforteza (MIT Philippine Brain Gain Connection)
MBA
Class of 2004
One way
that small firms and startups can take over an established industry is through
the use of disruptive innovations, by first
serving
the low-margin segments and building its capabilities to gradually compete in
higher-margin segments of an industry.
This was my main takeaway from a
presentation I recently attended at MIT Sloan featuring Clay Christensen, a
professor from
presentation at http://video.hbs.edu/cle/christensen_modules/,
however I will attempt to highlight his salient points, with the objectives
of the KatipunanBGN
in mind, and add a few reflections.
Start by Meeting Low-End Market
Needs, then Move Up
Consider
industries where technology grows faster than the needs of customers, and where
products of more advanced technology
bring
higher profit margins. Christensen uses
the steel industry as an example. In the
steel industry, there is a wide range of products
ranging
from the low-end rebars, rods and angles, to the
high-end I-beams and sheet steel. Minimills entered the playing field making
low-end
products from scrap steel, more cheaply than the large integrated mills. Because the minimills
were driving down prices of
these
products, the large steel mills stopped making these products and concentrated
instead on the higher-margin structural and
sheet
steel products. However, fueled by their
earlier successes, over time the minimills improved
their technology and thereby the
quality
of their steel products. Eventually they
became capable of competing head-on with the large mills in the high-end
product
markets.
Sony is
another good example of coming in from the bottom. One of Sony’s earliest products included a
lousy pocket radio that catered
to the
low-end market of easy-to-please teenagers.
This product and the business it generated, however, fueled Sony’s
growth into one
of the
world leaders in consumer electronics.
A Live Example: How Color-Kinetics
Competes in the Lighting Industry
Also
presenting together with Prof. Christensen was George Mueller, chairman and CEO
of Color Kinetics, a company described as
“the pioneer of intelligent LED-based illumination systems --
a disruptive technology that’s increasingly shaping the future of the $40
billion
global
lighting industry.” George’s company is
based on the technology of low-energy-consuming light-emitting diodes with
which it
produces
lighting products for special lighting installations such as for landmarks,
signs, and aesthetic interiors.
Apparently this is a
niche
markets not played by giants such as Philips and GE, who nonetheless still
dominate the bigger conventional white light segment
since LED
is currently too expensive to compete in this area. However, George claimed that at the rate
that LED technology is advancing,
he
predicted that in a few years his company should be able to produce LED-based
at a cost low enough to compete with conventional white
light.
The Analogy of Low-Cost Labor
The
and
design and engineering firms as examples – labor-intensive but low-value-adding
tasks such as encoding and drafting are done in Philippine
offices
of big multinational firms. This is all
fine in that it provides jobs for Filipinos, but while wages remain low, the
quality of life of these encoders
and
draftsmen will not improve. But is there
an opportunity here to “disrupt” the industry from below?
Conceivably,
these programmers and engineers can eventually improve their own skills and
capabilities by learning what they can from their
employer
firms (who are usually generous enough to provide ample training), then start
their own software or design firm and perform more value-adding, front-end
design. Perhaps they can start out by
catering to smaller customers instead of big companies that their previous
firms served
and therefore
not compete in the same space. They
would offer cheaper services that are just suitable for the needs of smaller
customers.
Eventually,
as their successful projects and earnings accumulate, they would be able to
improve their own capabilities and grow, perhaps with
the aid
of innovative business models and strategies, until they become big enough to
compete with the big software and design firms.
With many
American companies outsourcing a lot of their manufacturing to countries like
locals
would take the foreign technology and know-how and use them to produce their
own, cheaper goods, is a serious concern that I have often
heard
company managers voice. Big companies
who are cognizant of the threat of new entrants sometimes purposely continue
the production of
their
low-end products even when they are unprofitable to the company, just to keep
other low-cost producers from taking over that segment of the market.
But what
foreign firms regard as a threat we can regard as an opportunity. The key is that we do not stop at being
satisfied with receiving these outsourced, low-paying jobs, but that we take
advantage of them, and, perhaps together with our own business and
technological innovations,
become a
major player in the industry.
Identifying Opportunities
In summary,
disruption can occur in industries where companies are developing products
faster than the market can absorb. Over
time these companies tend to cater more and more to the high end of the market
where fewer customers are but where the profit margins are higher. Consequently they start to neglect the
usually bigger customer segments that do not demand goods of as high quality
and are still willing to
pay (less
of course) for lower-quality goods.
These lower-end markets present an opportunity for one to enter the
industry even while not yet
currently
capable of producing high-quality, integrated products.
With this
in mind, let us ask: is an opportunity somewhere for Filipino entrepreneurs to
employ this disruptive strategy to their advantage?
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