Clayton Christensen, Harvard Business School Professor and author of the The Innovator's Dilemma and The Innovator's Solution is talking about innovation and open source. He contends that startups fail for knowable reasons. He lists some questions every startup must answer.
- How do we beat the competition?
- Which customers should we target?
- What products will our customer want to buy?
- How should we distribute to and communicate with our customers?
- Which things should our company do and what can our suppliers do?
- How can we avoid commoditization?
- Who should be on our management team?
- What is the best organizational structure?
- How can we know when to change course?
- Whose investment capital will help and whose might hurt?
The "disruptive technologies model" shows that technological improvements in products out paces the customer's ability to utilize or absorb the improvements. These kinds of technological improvements are usually brought about my established companies for their customers. Disruptive technologies start out so bad that they are not good enough for the mainstream market. The trajectory, however, causes the new technology to overtake the established technology. Further, since the existing customers are over-served y established products, this creates an opportunity for a disrupter to provide a "good enough" product at a cheaper price. Established companies almost never bring about disruptive change.
The problem is that management in the established company is faced with the a simple choice: "should we make incremental improvements to our high margin products that our customers tell us they love or should we invest a lot of money in low margin products none of our customers want?" Put that way, management chooses the existing product and the known technological improvements. Most existing giants start out with disruptive technologies, but as they become established, they stop innovating because their customers don't want innovation. He gives numerous examples.
Clayton makes the observation that integrated firms have the advantage when products aren't good enough. The example he uses is the early days of mainframe computers when IBM had a huge advantage because engineers, manufacturing, and software development had to interact everyday, multiple time per day. Eventually systems migrate to modular architectures from integrated architectures. When that threshold is crossed, focused firms have the advantage because they beat competitors with speed, responsiveness and customization. A later example of an integrated architecture losing to a modular architecture is the lose of market by Apple to the IBM PC.
You can't position a firm to be at a specific place in the value chain, because by the time you get there, it will be gone. You have to position the form for where the market is headed. Attractive profits are typically earned in the stages of value-added in which non-standard integration of components occurs. Once the industry moves from an integrated architecture to a modular architecture, the money is made not by the integrator, but by the maker of the subsystems and components.
Clayton introduces the "law of conservation of modularity." The idea is that either the integrated system or the subsystems need to be modular and comfortable in order to optimize performance for the other. He uses Microsoft OS and Linux as examples. Applications in Microsoft are suboptimized in order for the OS to be optimized (this is a result of closed source) whereas in Linux, the OS is suboptimized via an open and modular architecture in order to optimize the application (i.e. being able to change code in the OS to optimize application performance).
In Clayton's world, "modular" implies "suboptimal" or "inefficient." You can't make money on the modular layers in the value-added chain (they're the integators). You make money at the borders to the modular layers. Another way of looking at this is that no one is going to make money on SOAP, you're going to make money on the parts that talk SOAP, the services.
Tim O'Reilly, who Clayton recognizes in the audience and asks to comment, says that Mac OS X is an example of this. FreeBSD is the modular layer in the value-added chain that Apple has put a layer on top of, added value, and is making money there. Clayton says that Motorola and Nokia should supply chip sets and software to Chinese manufacturers who can battle it out in the integrator, commoditized space.
Startups can become established by competing against non-consumption. The example is the transistor radio. It wasn't good enough for anyone who could afford a table-top tube radio. But teenagers embraced it because their option was no radio at all. This allows the startup to avoid the demanding technical hurdle of competing with established products that are better than customers actually need.