Much of the same logic would apply, Malthus reasoned, to a human population living in a country with a fixed supply of agricultural land. Falling living standards would slow population growth as death rates increased and birth rates fell; ultimately incomes would settle at the subsistence level. The variables that stay constant in this equilibrium are:.
If conditions change, then population and incomes may change too, but eventually the economy will return to an equilibrium with income at subsistence level. We know that over the centuries before the Industrial Revolution, improvements in technology occurred in many regions of the world, including Britain, and yet living standards remained constant. In the figure, things on the left are causes of things to the right.
Beginning from equilibrium, with income at subsistence level, a new technology such as an improved seed raises income per person on the existing fixed quantity of land. Higher living standards lead to an increase in population. As more people are added to the land, diminishing average product of labour means average income per person falls. Eventually incomes return to subsistence level, with a higher population. Why is the population higher at the new equilibrium? Output per farmer is now higher for each number of farmers.
Population does not fall back to the original level, because income would be above subsistence. A better technology can provide subsistence income for a larger population. The Malthusian model predicts that improvements in technology will not raise living standards if:. Then in the long run, an increase in productivity will result in a larger population but not higher wages. The downward-sloping line in the left-hand figure shows that the higher the population, the lower the level of wages, due to the diminishing average product of labour.
The upward-sloping line on the right shows the relationship between wages and population growth. When wages are high, population grows, because higher living standards lead to more births and fewer deaths. At a medium population level, the wage of people who work the land is at subsistence level point A.
The wage is higher at point B, where the population is smaller, because the average product of labour is higher. The line in the right-hand diagram slopes upward, showing that when wages on the vertical axis are high, population growth on the horizontal axis is positive so the population will rise.
When wages are low, population growth is negative population falls. At point A, on the left, population is medium-sized and the wage is at subsistence level. So if the economy is at point A, it is in equilibrium: population stays constant and wages remain at subsistence level. Suppose the economy is at B, with a higher wage and lower population.
As the population rises, the economy moves down the line in the left diagram: wages fall until they reach equilibrium at A. The two diagrams together explain the Malthusian population trap. Population will be constant when the wage is at subsistence level, it will rise when the wage is above subsistence level, and it will fall when the wage is below subsistence level. The economy starts at point A, with a medium-sized population and wage at subsistence level. A technological improvement for example, better seeds raises the average product of labour, and the wage is higher for any level of population.
The real wage line shifts upward. At the initial population level, the wage increases and the economy moves to point D. As population rises, the wage falls, due to the diminishing average product of labour. The economy moves down the real-wage curve from D. At C, the wage has reached subsistence level again. The population is higher at equilibrium C than it was at equilibrium A. Imagine that the population growth curve in the right panel of Figure 2. Explain what would happen to living standards describing the transition to the new equilibrium.
The major long-run impact of better technology in this Malthusian world was therefore more people. The writer H. So we now have a possible explanation of the long, flat portion of the hockey stick. Human beings periodically invented better ways of making things, both in agriculture and in industry, and this periodically raised the incomes of farmers and employees above subsistence. The Malthusian interpretation was that higher real wages led young couples to marry earlier and have more children, and they also led to lower death rates.
Population growth eventually forced real wages back to subsistence levels, which might explain why China and India, with relatively sophisticated economies at the time, ended up with large populations but—until recently—very low incomes. As with our model of innovation rents, relative prices and technological improvements, we need to ask: can we find evidence to support the central prediction of the Malthusian model, that incomes will return to subsistence level? We get a different view of the vicious circle by taking Figure 2. The lower part of the figure shows the causal linkages that led to the effects we see in the top part.
The Black Death, labour supply, politics, and the wage: A Malthusian economy. In this figure, we examine the Malthusian economy that existed in England between the years and , highlighted above. The bubonic plague of —50 was known as the Black Death. It killed 1. This decline in the population had an economic benefit for the farmers and workers who survived: it meant that farmers had more and better land, and workers could demand higher wages. Incomes rose as the plague abated. By the middle of the fifteenth century, the real wages of English building workers had doubled.
Our model of Malthusian economics helps to explain the rise and fall of incomes between and in England. The decline of the number of people working on farms during the Black Death raised agricultural productivity according to the principle of diminishing average product of labour. Farmers were better off, whether they owned their land or paid a fixed rent to a landlord. Employers in cities had to offer higher wages too, to attract workers from rural areas.
The causal links in Figure 2. But when the population recovered in the sixteenth century, labour supply increased, lowering wages. Based on this evidence, the Malthusian explanation is consistent with the history of England at this time. The cause-and-effect diagram that we created in Figure 2. In the seventeenth and eighteenth centuries, the wages of unskilled workers relative to the incomes of land owners were only one-fifth of what they had been in the sixteenth century. Real wages also rose sharply following the Black Death in other places for which we have evidence, such as Spain, Italy, Egypt, the Balkans, and Constantinople present-day Istanbul.
We have focused on farmers and wage earners, but not everyone in the economy would be caught in a Malthusian trap. As population continues to grow, the demand for food also grows. Therefore the limited amount of land used to produce the food should become more valuable. In a Malthusian world, a rising population should therefore lead to an improvement in the relative economic position of landowners.
This occurred in England: Figure 2. And the income gap between landowners and workers increased. In the seventeenth and eighteenth centuries, the wages of unskilled English workers, relative to the incomes of landowners, were only one-fifth of what they had been in the sixteenth century. Nassau Senior, the economist who lamented that the numbers perishing in the Irish famine would scarcely be enough to do much good, does not appear compassionate.
But he and Malthus were right to think that population growth and a diminishing average product of labour could create a vicious circle of economic stagnation and poverty. However, the hockey-stick graphs of living standards show they were wrong to believe that this could never change. They did not consider the possibility that improvements in technology could happen at a faster rate than population growth, offsetting the diminishing average product of labour.
The permanent technological revolution, it turns out, means that the Malthusian model is no longer a reasonable description of the world. Average living standards increased rapidly and permanently after the capitalist revolution. As we saw in Figure 2. Between the end of the sixteenth and the beginning of the eighteenth century, although wages rose there was relatively little population growth.
Then, around , the economy moved to what appears to be an entirely new regime, with both population and real wages simultaneously increasing. Escaping the Malthusian trap. Note: Labour productivity and real wages are five-year centred moving averages. In the eighteenth century, the Malthusian relationship persisted. In the nineteenth century, the economy appears to become a non-Malthusian regime, with real wages rising while population was increasing.
The story begins with technological improvements, such as the spinning jenny and the steam engine, that increased output per worker. Innovation continued as the technological revolution became permanent, displacing thousands of spinsters, weavers and farmers. In the s, higher productivity and low wages led to a surge in profits.
Profits, competition, and technology drove businesses to expand. The demand for labour went up. People left farming for jobs in the new factories. The supply of labour fell when business owners were stopped from employing children. The power of working people increased as they gained the right to vote and formed trade unions. These workers were able to claim a constant or rising share of the increases in productivity generated by the permanent technological revolution.
The story of the permanent technological revolution demonstrates that there are two influences on wages. Britain had escaped from the Malthusian trap. This process would soon be repeated in other countries, as Figures 1. According to Malthus, with diminishing average product of labour in production and population growth in response to increases in real wages, an increase in productivity will result in a larger population but not higher real wages in the long run. Based on the information above, which of the following statements is correct?
The escape from the Malthusian trap, in which technological progress outstripped the effects of population growth, took place following the emergence of capitalism. Consider the three basic institutions of capitalism in turn:. Testing this model against historical evidence shows that it could help to explain why the Industrial Revolution occurred in Britain in the eighteenth century.
We showed how the Malthusian model of a vicious circle, in which population growth offset temporary gains in income, could explain stagnation in living standards for centuries before the Industrial Revolution, until the permanent technological revolution allowed an escape due to improvements in technology. Thomas R. An Essay on the Principle of Population. Library of Economics and Liberty. London: J. Johnson, in St. Mike Davis. London: Verso Books. Joel Mokyr. The gifts of Athena: Historical origins of the knowledge economy , 5th ed.
David S. Why not China? Gregory Clark. A farewell to alms: A brief economic history of the world. Kenneth L. The great divergence: Europe, China, and the making of the modern world economy. The American Economic Review 80 May : pp. Joseph A. The American Economic Review 39 March : pp. Ten Great Economists. London: Routledge. Capitalism, Socialism, and Democracy. The Journal of Economic History 69 04 November : p.
The unbound Prometheus: Technological change and industrial development in western Europe from to the present. Gregory Clark, an economic historian, argues that the whole world was Malthusian from prehistory until the eighteenth century. James Lee and Wang Feng.
Population and Development Review 25 1 March : pp. Thomas Robert Malthus, A Summary View on the Principle of Population. William H. Plagues and peoples. Unit 2 Technology, population, and growth Themes and capstone units History, instability, and growth Global economy Inequality Innovation. Question 2. The average wage in was about the same as that in in nominal terms pounds.
The average real wage was more or less constant between and This is a graph of an index of real wages. The index is approximately in , but this does not tell us what the money wage was. The wages graphed are real wages, so are adjusted to take account of changes in prices. Whilst the graph looks fairly constant between and compared to the rapid increase since , the average real wage actually almost doubled and then halved again between and look at the scale on the vertical axis.
In , the real wage index was approximately By , the index had increased by roughly six times that value, to more than History, instability, and growth Global economy Innovation. The amount you pay your landlord for the use of an apartment. The amount you pay to hire a car for a weekend. The extra profit that a successful innovator makes on bringing a new product to the market before its competitors.
The extra profit that a firm makes when it doubles in size and there are no changes to costs or the price for each unit of its output. This is the rent as used in everyday language. Economic rent is something you would like to get and not something you have to pay. An economic rent is what you earn above the next best alternative, which in this case may be the additional earnings compared to subletting the land to someone else at the same rate.
This particular form of economic rent is called an innovation rent, where profits are made in excess of those offered by the next best alternative due to the adoption of new technology. This would be the normal profit you can earn in return for hard work. An economic rent is what you earn over and above the next best option, for example working really hard in another job.
From the graph, what can we conclude? Technology D is more energy-intensive than technology C. Technology B dominates technology D. Technology A is the cost-minimizing technology at all prices of coal and wages. Technology C can sometimes be a cheaper technology than A. Technology D uses more workers and less coal, and therefore is more labour-intensive than C. Technology B uses fewer workers and fewer tonnes of coal than technology D to produce the same amount of cloth, so it dominates D. Technology A would be costlier than B, D or E if the price of coal were much higher than the wage level.
Technology C is dominated by A as it uses both more workers and more coal than A. Therefore it can never be a cheaper technology than A. Based on this information, what can we conclude? Isocost HJ represents all points that can produce metres of cloth at a particular price ratio. At these prices, N and B are on the same isocost line. These two combinations of inputs cost the same. The price ratio is equal to the slope of an isocost; since isocosts MN and FG have the same slope, we can infer that they represent the same price ratio.
MN is higher than FG, so represents higher total costs. Isocost FG has a slope of -2 replacing two tonnes of coal with one worker leaves the total cost of production the same , while isocost HJ has slope An isocost represents all combinations of workers and tonnes of coal for which the total cost of production is the same.
Along isocost HJ we know that at point B 4 workers and 2 tonnes of coal the technology can produce metres of cloth. If a technology were available to produce at another point on the line it would not necessarily produce metres of cloth. History, instability, and growth Inequality Innovation. View this data at OWiD. Which of the following is true? The flatter isocost line HJ for s Britain indicates higher wages relative to the price of coal.
The increase in wages relative to the cost of energy in the s is represented by the outward shift of the isocost line from HJ to the parallel isocost line going through A. Had the wage level fallen together with the falling energy costs due for example to cheaper transportation , then s Britain would definitely have stayed with technology B. The comparison between isocost line FG and the parallel isocost going through B suggests that an innovation rent was earned in s Britain when firms moved from technology B to A.
A flatter isocost line indicates lower wages relative to the price of coal. An increase in the level of wages relative to the cost of energy would lead to a steeper isocost line. The relative price matters, not the absolute level. So if wages fall, but by relatively less than the energy costs so that the price ratio still increases, then technology A may still be the better choice. The comparison between these two lines shows that that the cost of producing is lower at A than at B.
Therefore, firms adopting technology A enjoy some profit in excess of that which they earned with the alternative: an innovation rent. We can ascertain that: In a year with exceptionally good weather conditions, the production function curve will be higher and parallel to the curve above.
A discovery of new high-yielding crop seeds would tilt the production function curve higher, pivoted anti-clockwise at the origin. In a year of bad drought, the production curve can slope downwards for large numbers of farmers.
What is innovation? definition and meaning - rekoworamo.ml
If there is an upper limit on the amount of grain that can be produced, then the curve will end up horizontal for large numbers of farmers. Zero farmers means zero output. Therefore, all curves must start at the origin, and cannot shift upwards or downwards in a parallel manner. Such a discovery would increase the kilogrammes of grain produced for any given number of farmers except zero ; this can be represented graphically as an anti-clockwise pivot in the production function curve.
A downward-sloping curve implies decreasing output as the number of farmers increases. This would only be the case if the additional labourers have negative effects on the productivity of the existing labourers, which we normally rule out. An upper limit implies that additional farmers would not yield any additional kilogrammes of grain, which would be represented graphically by a flat production function past the upper limit.
History, instability, and growth Innovation. What can we conclude from this information? According to the Malthusian model, the fall in the population due to the bubonic plague would have led to an increase in the average productivity of workers, causing the observed rise in the real wage post-plague. The doubling and halving of the real wage index over years from around is contrary to the Malthusian model.
The fall in the relative wages of the unskilled workers in the seventeenth and eighteenth centuries was one of the factors that led to the eventual shooting up of the real wage in the nineteenth century, seen in the graph. In the Malthusian model, fewer workers means higher average productivity, increasing output per capita. Given that their bargaining power did not remain constant but actually increased, workers claimed a larger share of this output and real wages rose. The response of established firms to disruptive strategic innovation: Empirical evidence from Europe and North America Ph.
Responses to disruptive strategic innovation. Chesbrough, H. The role of the business model in capturing value from innovation: Evidence from Xerox Corporation's technology spin-off companies. Industrial and Corporate Change, 11 3 , Christensen, C. The innovator's solution : Creating and sustaining successful growth. Boston : Harvard Business Press. Dharani Priya, G. A study on sustainable competitive advantage by managing service quality at a multi speciality corporate hospital, Chennai.
Prabandhan : Indian Journal of Management, 9 7 , Dierickx, P. Asset stock accumulation and the sustainability of competitive advantage. Management Science, 35 12 , Dosi, G. Technological paradigms and technological trajectories. Research Policy, 11 3 , Technical change and economic theory. Ghemawat, P. Distance still matters: The hard reality of global expansion. Harvard Business Review, 79 8 , - Gilbert, C. Govindarajan, V. Disruptiveness of innovations: Measurement and an assessment of reliability and validity. Strategic Management Journal, 27 1 , The usefulness of measuring disruptiveness of innovations.
Ex post in making ex ante predictions. Journal of Product Innovation Management, 23 1 , Gupta, D. Prabandhan: Indian Journal of Management, 2 5 , Hamilton, W. The evolution of corporate capabilities in emerging technologies. Interfaces, 22 4 , 13 - Hang, C. Developing disruptive products for emerging economies: Lessons from Asian cases. Research Technology Management, 53 4 , Hart, S. The great leap : Driving innovation from the base of the pyramid.
Henderson, R. Underinvestment and incompetence as responses to radical innovation: Evidence from the photolithographic alignment equipment industry. Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms. Hippel, E. Lead users: A source of novel product concepts. Management Science, 32 7 , Hogan, J. Being successfully disruptive. Medical Device Technology, 16 5 , Itami, H. Killing two birds with one stone profit for now and learning for the future.
Long Range Planning, 43 , Kahneman, D. Prospect theory: An analysis of decision under risk. Econometrica, 47 2 , Choices, values and frames. American Psychologist, 39 4 , Khanna, T. Successful new-growth builders know-either intuitively or explicitly-that disruptive strategies greatly increase the odds of competitive success. Because disruption happens whether we want it or not, this chapter should also help established companies capture disruptive growth, instead of getting killed by it.
First, in every market there is a rate of improvement that customers can utilize or absorb, represented by the dotted line sloping gently upward across the chart. Factors such as traffic jams, speed limits, and safety concerns constrain how much performance we can use. Copyright terms and licence: All Rights Reserved. Reproduced with permission.
See section "Exceptions" in the copyright terms below. Figure In reality, there is a distribution of customers around this median: There are many such lines, or tiers, in a market-a range indicated by the distribution curve at the right. Customers in the highest or most demanding tiers may never be satisfied with the best that is available, and those in the lowest or least demanding tiers can be over-satisfied with very little.
Second, in every market there is a distinctly different trajectory of improvement that innovating companies provide as they introduce new and improved products. The more steeply sloping solid lines in Figure 1 suggest that this pace of technological progress almost always outstrips the ability of customers in any given tier of the market to use it. This happens because companies keep striving to make better products that they can sell for higher profit margins to not-yet-satisfied customers in more demanding tiers of the market. To visualize this, think back to when people first started using personal computers for word processing.
Typists often had to stop their fingers to let the Intel chip inside catch up. As depicted at the left side of Figure 1 , the technology was not good enough. The third critical element of the model is the distinction between sustaining and disruptive innovation.
A sustaining innovation targets demanding, high-end customers with better performance than what was previously available. Some sustaining innovations are the incremental year-by-year improvements that all good companies grind out. Other sustaining innovations are breakthrough, leapfrog-beyond-the-competition products. Because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors have powerful motivations to fight sustaining battles.
And they have the resources to win. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products. But disruptive technologies offer other benefits-typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers footnote 3.
Once the disruptive product gains a foothold in new or low-end markets, the improvement cycle begins. When that happens, the disruptors are on a path that will ultimately crush the incumbents. This distinction is important for innovators seeking to create new-growth businesses. Whereas the current leaders of the industry almost always triumph in battles of sustaining innovation, the odds at disruptive innovation heavily favor entrant companies footnote 4.
Disruption has a paralyzing effect on industry leaders. With resource allocation processes designed and perfected to support sustaining innovations, they are constitutionally unable to respond. They are always motivated to go up-market, and almost never motivated to defend the new or low-end markets that the disruptors find attractive. We call this phenomenon asymmetric motivation. Minimills, in contrast, melt scrap steel in electric arc furnaces-cylinders that are approximately twenty meters in diameter and ten meters tall.
Steel is a commodity. You would think that every integrated steel company in the world would have aggressively adopted the straightforward, lower-cost minimill technology. We can explain why something that makes so much sense has been so difficult for the integrated mills. Minimills first became technologically viable in the mids.
Because they melt scrap of uncertain and varying chemistry in their electric arc furnaces, the quality of the steel that minimills initially could produce was poor. In fact, the only market that would accept the output of minimills was the concrete reinforcing bar rebar market. The specifications for rebar are loose, so this was an ideal market for products of low and variable quality.
As the minimills attacked the rebar market, the integrated mills were happy to be rid of that dog-eat-dog commodity business. Because of the differences in their cost structures and the opportunities for investment that they each faced, the rebar market looked very different to the disruptee and the disruptor.
It was the least attractive of any tier of the market in which they might invest to grow. So as the minimills established a foothold in the rebar market, the integrated mills reconfigured their rebar lines to make more profitable products. In contrast, with a 20 percent cost advantage, the minimills enjoyed attractive profits in competition against the integrated mills for rebar-until , when the minimills finally succeeded in driving the last integrated mill out of the rebar market.
Historical pricing statistics show that the price of rebar then collapsed by 20 percent. As long as the minimills could compete against higher-cost integrated mills, the game was profitable for them. But as soon as low-cost minimill was pitted against low-cost minimill in a commodity market, the reward for victory was that none of them could earn attractive profits in rebar footnote 6. Worse, as they all sought profitability by becoming more efficient producers, they discovered that cost reductions meant survival, but not profitability, in a commodity such as rebar footnote 7. Soon, however, the minimills looked up-market, and what they saw there spelled relief.
If they could just figure out how to make bigger and better steel-shapes like angle iron and thicker bars and rods-they could roll tons of money, because in that tier of the market, as suggested in Figure 2 , the integrated mills were earning gross margins of about 12 percent-nearly double the margins that they had been able to earn in rebar. That market was also twiceas big as the rebar segment, accounting for about 8 percent of industry tonnage. As the minimills figured out how to make bigger and better steel and attacked that tier of the market, the integrated mills were almost relieved to be rid of the bar and rod business as well.
It was a dog-eat-dog commodity compared with their higher-margin products, whereas for the minimills, it was an attractive opportunity compared with their lower-margin rebar. So as the minimills expanded their capacity to make angle iron and thicker bars and rods, the integrated mills shut their lines down or reconfigured them to make more profitable products. With a 20 percent cost advantage, the minimills enjoyed significant profits in competition against the integrated mills until , when they finally succeeded in driving the last integrated mill out of the bar and rod market.
Once again, the minimills reaped their reward: With low-cost minimill pitted against low-cost minimill, the price of bar and rod collapsed by 20 percent, and they could no longer earn attractive profits. What could they do? Continued up-market movement into structural beams appeared to be the next obvious answer. Gross margins in that sector were a whopping 18 percent, and the market was three times as large as the bar and rod business.
Most industry technologists thought minimills would be unable to roll structural beams. Although you could never have predicted what the technical solution would be, you could predict with perfect certainty that the minimills were powerfully motivated to figure it out. Necessity remains the mother of invention. At the beginning of their invasion into structural beams, the biggest that the minimills could roll were little six-inch beams of the sort that under-gird mobile homes.
They attacked the low end of the structural beam market, and again the integrated mills were almost relieved to be rid of it. It was a dog-eat-dog commodity compared with their other higher-margin products where focused investment might bring more attractive volume. To the minimills, in contrast, it was an attractive product compared with the margins they were earning on rebar and angle iron.
So as the minimills expanded their capacity to roll structural beams, the integrated mills shut their structural beam mills down in order to focus on more profitable sheet steel products. With a 20 percent cost advantage, the minimills enjoyed significant profits as long as they could compete against the integrated mills. Then in the mids, when they finally succeeded in driving the last integrated mill out of the structural beam market, pricing again collapsed. Once again, the reward for victory was the end of profit. The sequence repeated itself when the leading minimill, Nucor, attacked the sheet steel business.
Its market capitalization now dwarfs that of the largest integrated steel company, US Steel. Bethlehem Steel is bankrupt at the time of this writing. This is not a history of bungled steel company management. Or should we invest to strengthen our position in the most profitable tiers of our business, with customers who reward us with premium prices for better products?
The executives who confront this dilemma come in all varieties: timid, feisty, analytical, and action-driven. In an unstructured world their actions might be unpredictable. But as large industry incumbents, they encounter powerful and predictable forces that motivate them to flee rather than fight when attacked from below. That is why shaping a business idea into a disruption is an effective strategy for beating an established competitor.
Disruption works because it is much easier to beat competitors when they are motivated to flee rather than fight. The forces that propel well-managed companies up-market are always at work, in every company in every industry. Whether or not entrant firms have disrupted the established leaders yet, the forces are at work, leading predictably in one direction. Indeed, when we use the term technology in this chapter, it means the process that any company uses to convert inputs of labor, materials, capital, energy, and information into outputs of greater value.
Every company has technology, and each is subject to these fundamental forces. We must emphasize that we do not argue against the aggressive pursuit of sustaining innovation. Several other insightful books offer management techniques to help companies excel in sustaining innovations-and their contribution is important footnote 8. Almost always a host of similar companies enters an industry in its early years, and getting ahead of that crowd-moving up the sustaining-innovation trajectory more decisively than the others-is critical to the successful exploitation of the disruptive opportunity.
But this is the source of the dilemma: Sustaining innovations are so important and attractive, relative to disruptive ones, that the very best sustaining companies systematically ignore disruptive threats and opportunities until the game is over. Sustaining innovation essentially entails making a better mousetrap. The theory of disruption suggests, however, that once they have developed and established the viability of their superior product, entrepreneurs who have entered on a sustaining trajectory should turn around and sell out to one of the industry leaders behind them.
If executed successfully, getting ahead of the leaders on the sustaining curve and then selling out quickly can be a straightforward way to make an attractive financial return. A sustaining-technology strategy is not a viable way to build new -growth businesses, however. This advice holds even when the entrant is a huge corporation with ostensibly deeper pockets than the incumbent. For example, electronic cash registers were a radical but sustaining innovation relative to electromechanical cash registers, whose market was dominated by National Cash Register NCR.
Electronic registers were so superior that there was no reason to buy an electromechanical product except as an antique. Yet NCR survived on service revenues for over a year, and when it finally introduced its own electronic cash register, its extensive sales organization quickly captured the same share of the market as the company had enjoyed in the electromechanical realm footnote The attempts that IBM and Kodak made in the s and s to beat Xerox in the high-speed photocopier business are another example.
These companies were far bigger, and yet they failed to outmuscle Xerox in a sustaining-technology competition. The firm that beat Xerox was Canon-and that victory started with a disruptive tabletop copier strategy. In the end, it was the disruptive personal computer makers, not the major corporations who picked a direct, sustaining-innovation fight, that bested IBM in computers. Airbus entered the commercial airframe industry head-on against Boeing, but doing so required massive subsidies from European governments.
An idea that is disruptive to one business may be sustaining to another. Given the stark odds that favor the incumbents in the sustaining race but entrants in disruptive ones, we recommend a strict rule: If your idea for a product or business appears disruptive to some established companies but might represent a sustaining improvement for others, then you should go back to the drawing board.
You need to define an opportunity that is disruptive relative to all the established players in the targeted market space, or you should not invest in the idea. If it is a sustaining innovation relative to the business model of a significant incumbent, you are picking a fight you are very unlikely to win.
Take the Internet, for example. An important reason why many of them failed was that the Internet was a sustaining innovation relative to the business models of a host of companies. Prior to the advent of the Internet, Dell Computer, for example, sold computers directly to customers by mail and over the telephone. This business was already a low-end disruptor, moving up its trajectory. For Dell, the Internet was a sustaining technology. The theory of disruption would conclude that if Dell and Gateway had not existed, then start-up Internet-based computer retailers might have succeeded in disrupting competitors such as Compaq.
But because the Internet was sustaining to powerful incumbents, entrant Internet computer retailers have not prospered. A disruptive business model that can generate attractive profits at the discount prices required to win business at the low end is an extraordinarily valuable growth asset. When its executives carry the business model up-market to make higher-performance products that sell at higher price points, much of the increment in pricing falls to the bottom line-and it continues to fall there as long as the disruptor can keep moving up, competing at the margin against the higher-cost disruptee.
When a company tries to take a higher-cost business model down-market to sell products at lower price points, almost none of the incremental revenue will fall to its bottom line. It gets absorbed into overheads. This is why established firms that hope to capture the growth created by disruption need to do so from within an autonomous business with a cost structure that offers as much headroom as possible for subsequent profitable migration up-market. Moving up the trajectory into successively higher-margin tiers of the market and shedding less-profitable products at the low end is something that all good managers must do in order to keep their margins strong and their stock price healthy.
Standing still is not an option, because firms that stop moving up find themselves in a rebar-esque situation, slugging it out with hard-to-differentiate products against competitors whose costs are comparable footnote This ultimately means that in doing what they must do, every company prepares the way for its own disruption.
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Many of the most profitable growth trajectories in history have been initiated by disruptive innovations. In reality, there are two different types of disruptions, which can best be visualized by adding a third axis to the disruption diagram, as shown in Figure 3. The vertical and horizontal axes are as before: the performance of the product on the vertical axis, with time plotted on the horizontal dimension. The third axis represents new customers and new contexts for consumption. Our original dimensions-time and performance-define a particular market application in which customers purchase and use a product or service.
A value network is the context within which a firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers. These perceptions, in turn, shape the rewards and threats that firms expect to experience through disruptive versus sustaining innovations footnote The third dimension that extends toward us in the diagram represents new contexts of consumption and competition, which are new value networks.
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These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used-enabled by improvements in simplicity, portability, and product cost. Different value networks can emerge at differing distances from the original one along the third dimension of the disruption diagram. In the following discussion, we will refer to disruptions that create a new value network on the third axis as new-market disruptions. In contrast, low-end disruptions are those that attack the least-profitable and most overserved customers at the low end of the original value network.
When Canon made photocopying so convenient, people ended up making a lot more copies. Although new-market disruptions initially compete against non-consumption in their unique value network, as their performance improves they ultimately become good enough to pull customers out of the original value network into the new one, starting with the least-demanding tier. Because new-market disruptions compete against non-consumption, the incumbent leaders feel no pain and little threat until the disruption is in its final stages.
In fact, when the disruptors begin pulling customers out of the low end of the original value network, it actually feels good to the leading firms, because as they move up-market in their own world, for a time they are replacing the low-margin revenues that they lose to the disruptors with higher-margin revenues footnote We call disruptions that take root at the low end of the original or mainstream value network low-end disruptions. Although they are different, new-market and low-end disruptions both create the same vexing dilemma for incumbents.
New-market disruptions induce incumbents to ignore the attackers, and low-end disruptions motivate the incumbents to flee the attack. Low-end disruption has occurred several times in retailing footnote For example, full-service department stores had a business model that enabled them to turn inventories three times per year. They needed to earn 40 percent gross margins to make money within their cost structure.
They therefore earned 40 percent three times each year, for a percent annual return on capital invested in inventory ROCII. Customers in this tier of the market were overserved by department stores, in that they did not need well-trained floor salespeople to help them get what they needed. Their stocking policies and operating processes enabled them to turn inventories more than five times annually, so that they also earned about percent annual ROCII. The discounters did not accept lower levels of profitability-their business model simply earned acceptable profit through a different formula footnote It is very hard for established firms not to flee from a low-end disruptor.
One option for department store executives was to allocate more space to even higher-margin cosmetics and high-fashion apparel, where gross margins often exceeded 50 percent. Because their business model turned inventories three times annually, this option promised percent ROCII. The alternative was to defend the branded hard goods businesses, which the discounters were attacking with prices 20 percent below those of department stores. Competing against the discounters at those levels would send margins plummeting to 20 percent, which, given the three-times inventory turns that were on average inherent in their business model, entailed a ROCII of 60 percent.
It thus made perfect sense for the full-service department stores to flee-to get out of the very tiers of the market that the discounters were motivated to enter footnote Many disruptions are hybrids, combining new-market and low-end approaches, as depicted by the continuum of the third axis in Figure 3. Southwest Airlines is actually a hybrid disruptor, for example. Charles Schwab is a hybrid disruptor. It stole some customers from full-service brokers with its discounted trading fees, but it also created new markets by enabling people who historically were not equity investors-such as students-to begin owning and trading stocks footnote The appendix to this chapter offers a brief historical explanation of each of the disruptive products or companies listed on the chart.
This is not a complete census of disruptive companies, of course, and their position on the chart is only approximate. However, the array does convey our sense that disruption is a primary wellspring of growth. The chart also shows that disruption is an ongoing force that is always at work-meaning that disruptors in one generation become disruptees later.
The Ford Model T, for example, created the first massive wave of disruptive growth in automobiles. Toyota, Nissan, and Honda then created the next wave, and Korean automakers Hyundai and Kia have now begun the third. Plastics makers such as Dow, DuPont, and General Electric continue to disrupt steel, even as their low end is being eaten away by suppliers of blended polyolefin plastics such as Himont.
Instead, they go through a process of becoming fleshed out and shaped into a strategic plan in order to win funding. Many-but not all-of the initial ideas that get shaped into sustaining innovations could just as readily be shaped into disruptive business plans with far greater growth potential. The shaping process must be consciously managed, however, and not left in an autopilot mode. Executives must answer three sets of questions to determine whether an idea has disruptive potential. The first explores whether the idea can become a new-market disruption. For this to happen, at least one and generally both of two conditions must be satisfied:.
If the technology can be developed so that a large population of less skilled or less affluent people can begin owning and using, in a more convenient context, something that historically was available only to more skilled or more affluent people in a centralized, inconvenient location, then there is potential for shaping the idea into a new-market disruption. The second set of questions explores the potential for a low-end disruption. This is possible if these two conditions exist:. Often, the innovations that enable low-end disruption are improvements in manufacturing, service, or business processes, which enable a company to earn attractive returns on lower gross margins, coupled with processes that turn assets faster.
Once an innovation passes the new-market or low-end test , there is still a third critical consideration, or litmus test, to apply:. If an idea fails the litmus tests, then it cannot be shaped into a disruption. It may have promise as a sustaining technology, but in that case we would expect that it could not constitute the basis of a new-growth business for an entrant company.
For summary, table 1 contrasts the characteristics of the three strategies that firms might pursue in creating new-growth businesses: sustaining innovations, new-market disruptions, and low-end disruptions. It compares the targeted product performance or features, the targeted customers or markets, and the business model implications that each route entails. We hope that managers can use this as a template so that they can categorize and see the implications of different plans that might be presented to them for approval.
Executives can use this categorization and the litmus tests to foresee the competitive consequences of alternative strategies as they shape an idea. These improvements may be incremental or breakthrough in character. Technology yields products that are good enough along the traditional metrics of performance at the low end of the mainstream market. The most attractive i. Targets non- consumption: customers who historically lacked the money or skill to buy and use the product. Improves or maintains profit margins by exploiting the existing processes and cost structure, and making better use of current competitive advantages.
Business model must make money at lower price per unit sold, and at unit production volumes that initially will be small emerging market.
Gross margin dollars per unit sold will be significantly lower. Table Low-End and New-Market Disruptions. Xerox reportedly has developed outstanding ink-jet printing technology. What can it do with it? It could attempt to leapfrog Hewlett-Packard by making the best ink-jet printer on the market. Even if it could make a better printer, however, Xerox would be fighting a battle of sustaining technology against a company with superior resources and more at stake. HP would win that fight. But could Xerox craft a disruptive strategy for this technology? At the highest tier of the market, customers seem willing to pay significantly more for a faster printer that produces sharper images.
However, consumers in the less-demanding tiers are becoming increasingly indifferent to improvements. It is likely they would be interested in lower-cost alternatives. So the first question gets an affirmative answer. The next question is whether Xerox could define a business model that could generate attractive returns at the discounted prices required to win business at the low end. HP and other printer companies already outsource the fabrication and assembly of components to the lowest-cost sources in the world.
HP makes its money selling ink cartridges-whose fabrication also is outsourced to low-cost suppliers. Xerox could enter the market by selling ink cartridges at lower prices, but unless it could define an overhead cost structure and business processes that would allow it to turn assets faster, Xerox could not sustain a strategy of low-end disruption footnote Probably not. Hewlett-Packard already competed successfully against non-consumption when it launched its easy-to-use, inexpensive ink-jet printers.
What about enticing existing printer owners to buy more printers, by enabling consumption in a new, more convenient context? Now, this might be achievable. Documents created on notebook computers are not easy to print. Notebook users have to find a stationary printer and connect to it either over a network or a printer cable, or they must transfer the file via removable media to a computer that is connected to a printer.
But as a strategy, this would pass the litmus tests. If Xerox attempted this, we would expect HP to ignore this new-market disruption at the outset because the market would be much smaller than the stationary printer market. The window-mounted air conditioner market is widely known to be mature, dominated by giants such as Carrier and Whirlpool.
Could a company like General Electric GE wallop them? Is a low-end disruption viable? Our sense is that there are overserved customers at the low end of the existing market. They signal their overservedness by opting for the least-expensive models they can find, unwilling to pay premium prices for the alternative products that are available to them. GE might expand its already substantial manufacturing operations in China, making air conditioners for export to developed economies.
This might bring modest but temporary success, because after the established companies respond by setting up their own manufacturing operations in China, GE would find itself locked in a battle with competitors whose costs are comparable and whose distribution and service infrastructure are strong, and where the targeted customers already have manifested an unwillingness to pay premium prices for better products. Employing low-cost labor constitutes a low-cost business model only until competitors avail themselves of the same option.
How about a new-market disruption, however? Disruption is a theory: a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances. The asymmetries of motivation chronicled in this chapter are natural economic forces that act on all businesspeople, all the time. Historically, these forces almost always have toppled the industry leaders when an attacker has harnessed them, because disruptive strategies are predicated upon competitors doing what is in their best and most urgent interest: satisfying their most important customers and investing where profits are most attractive.