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Predicting the next big IT failure

Q&A Which one is it going to be? HP? Dell? Sun? Oracle? Harvard prof and author Clayton Christensen says the path to a giant's doom is paved with sound business practices.
Written by Winston Chai, Contributor
Firms like HP, Dell, Sun and Oracle, just by doing what they do best, may be sowing the seeds of their own downfall, says business guru Clayton Christensen.

The Harvard Business School professor who has a much-discussed theory about why outstanding companies fall from greatness. Paradoxically, he believes the path to a giant's doom is paved with sound business practices such as listening to best customers and investing in its most lucrative areas.

These principles were first captured in his book "The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail" in 1997. In it, Christensen takes a probing look at why great companies lose market dominance despite being fixated on competitiveness, paying attention to users, and spending on research and development.

Drawing on observations from a myriad of industries, he concludes that the fall of once-great companies like Digital Equipment Corporation is not the result of competitor advances, but more the emergence of market entrants with lower-quality solutions which at first seem insignificant.

He said large companies usually focus on developing more advanced products to meet the needs of demanding, high-end customers. This relentless pursuit for performance improvements he calls "sustaining innovation".

"When the level of technological progress is far above what customers actually need and can use, the phenomena of overshooting creates the opportunity for an upstart to come in with something that's cheaper, simpler and good enough for a set of customers who don't need the advanced functionalities," said Christensen. He terms this trend "disruptive innovation".

He believes once the market entrant takes root in the low-end market, it can then improve on the product and take away market share, or in some cases even kill the leader when it marches upwards.

Christensen was speaking to the press in Singapore after having been confirmed as one of the key speakers at the Economic Development Board-organized Global Entrepolis@Singapore event in October this year.

Q: Which IT companies are nearing the end of the growth curve, leaving them open to disruption?
A: In the computer world, these victims can be plotted in succession. Silicon Graphics (SGI) is the first. In the 90s, they were just the darling of Silicon Valley. They have improved to such a point there just weren't any more complicated problems out there for them to solve.

Hewlett-Packard (HP) is next. HP has a US$14 billion enterprise server business and this has about hit the ceiling with no growth above them. This is followed by Sun Microsystems. Sun's machines at any given point in time aren't as good as SGI's and HP's. There's no volume for them any more. Dell is coming up underneath Sun but they have a bit of headroom left.

How can these companies match up against disruptive innovators?
To catch up against disruptors, incumbents must be prepared to set up subsidiaries and give them autonomy to kill their parents. There are a few examples in recent times. HP used to sell its inkjets through its laserjet business but it wasn't very successful. They then set up an independent organization in Vancouver to kill its laserjet business.

Surprisingly, they discovered the inkjet business took off without cannibalizing the laserjet business and they remain as the dominant printer company. The current HP management team seemed to have abandoned this philosophy in favor of consolidation and making HP a monolithic organization.

Intel also did something similar with its Celeron processors, its largest volume product. Had they not done that, Intel will probably still be in a tank and risk losing out to AMD and Cyrix.

What are some disruptive technologies you see in the marketplace?
"Disruption" can only be expressed relative to the business model of a company. For example, Internet retailing is disruptive against store retailing.

Linux is a disruptive technology against Microsoft. Linux has already moved quite far up the market against Unix systems.

The RIM Blackberry also has the makings of a successful disruptor. Right now, you can’t imagine the Blackberry disrupting notebook computers because they are just not good enough. However, once voice recognition technology becomes good enough so users can speak their email instead of typing it, the Blackberry will move up. Retinal projection technologies (used to display information without a bulky screen) used in conjunction with the Blackberry will also enhance its standing against PCs in future.

Peer-to-peer file sharing is another. Whenever a disruption occurs and brings to the market something more convenient, it creates a whole new consumption pattern. By making music more conveniently available, users consume so much more the whole industry is transformed.

The success of Apple's iTunes is a good example. Traditional record labels who have suffered as result can set up a separate businesses to try to catch up or buy Apple's iTunes business out. However, if they do buy Apple out, chances are the record labels will shut down the iTunes business.

Do you see Oracle's intended buyout of PeopleSoft as a reaction to having been disrupted?
Yes. What Oracle is doing is an end-stage reaction to having being disrupted in the volume tiers of the market. Oracle, PeopleSoft and SAP have moved so far up the high end of enterprise resource planning systems there just isn’t enough growth.

Modular providers or "best-of-breed" focus suppliers like i2 came up at the bottom and stole the volume from the less demanding tiers of the market. To a certain extent, Microsoft is doing the same, disrupting Oracle in the lower end database market and enterprise applications market with its Great Plains buyout.

The proposed merger with PeopleSoft might help move it closer to SAP in the high end, but it wouldn't solve the problem of being disrupted at the low end.

Can the disruptive innovation principle be applied to countries?
Yes. That is the reason I am in Singapore. Singapore seems to be in a similar predicament to Japan’s problem of economic stagnation.

If you look at Japan's rise to economic power, every company which helped it along the way is a disruptive innovator. Sony for example, started out producing cheap pocket radios while Canon made tabletop photo copiers. Right now, all these companies who started out at the low end have hit the high end and are pretty much stuck.

Singapore is where Japan was. The country first took root in the low end and attracted foreign investors through basic manufacturing and low labor costs but has now moved too far up. It will need to design and make a new wave of disruption.

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