Innovation – Page 3 – Naofumi Kagami

Tesla is a Prime Example of Non-Disruptive Innovation: BMWs Response As An Incumbent

Peter Yared posted a article describing BMWs response to Tesla. The article titled “BMW Vs. Tesla: A Real Live Innovator’s Dilemma” itself is very misleading because it implies that either BMW or Tesla is facing the Innovator’s Dilemma as described by Clayton Christensen. In fact, it is a prime example of innovations that do not result in disruption. In his publications, Christensen has clearly outlined innovations that provoke a direct response from the incumbent and which almost always fail to disrupt. The incumbent will usually have vastly more resources at their disposal and will counter the entrant quite effectively.

Anybody who has seriously read any of Christensen’s books on the subject will immediately recognize that Tesla is not a disruptive innovation but a sustaining innovation. Peter Yared seems to be rather misguided because he apparently thinks that Tesla is disruptive. Instead, what Yared’s article is describing is not the process of disruption, but rather a typical example of how an incumbent will respond to an entrant with a new technology. In this context, Yared’s article is actually quite worthwhile.

The takeaway is;

BMW has the following resources to counter attack an entrant if they are willing. The resources that are at their disposal include brand, technology, production scale, and sales & distribution.
Tesla is entering the market in a way that provokes incumbents to directly respond.
In this situation, it is very unlikely that Tesla will win.

As interesting as it is to see a disruption taking place, it is also very instructive to witness an incumbent fending off an entrant.

Thoughts on How to Prevent Disruption

Although I don’t have Clayton Christensen’s publications handy (I lent them to my brother), I’ll try to outline situations where low-end disruption won’t happen. We will then be able to see how the iPhone fits.

Raising the bar

Low-end disruption only occurs when the current product starts to overshoot customer expectations in terms of jobs-to-be-done. Hence one way of preventing low-end disruption is to constantly raise the bar; that is to raise customer expectations.

Apple has done this many times throughout the life of the iPhone.

Initially, they realized that the fluidity of the user interface was more important for touch interfaces compared to mouse interfaces. By raising expectations for a fluid interface, they forced Android to invest in catching up for years (Android has just recently gotten fluid interfaces right).

Touch ID and raising user awareness of privacy and security is another example. Although the effects are still to be felt, they are trying to make this a must-have feature. They want to make it so that anyone going back to Android will feel insecure.

Appealing to non-tech aspects

Low-end disruption happens because technical improvements push the capabilities of the device to the point where it exceeds the jobs-to-be-done. Technical improvements in tech are especially fast thanks to Moore’s law. Conversely, this means that other aspects of a product are less likely to improve so fast and will be less susceptible to low-end disruption.

The areas that Apple focuses on are design, user interface consistency, simplicity, etc. These areas do not usually improve rapidly, and in fact, consistency and simplicity are often compromised as technology improves (too many features are crammed in).

By making a major appeal of their products independent of Moore’s law, Apple makes it less likely that technical improvements will rapidly make their product “good enough”.

This is not to say that design, user interface consistency, simplicity cannot overshoot user expectations. They can. Look at the interface for cars or toothbrushes. The thing is that in tech, these issues are very difficult to solve and furthermore, very few companies other than Apple are seriously attacking these.

The jobs-to-be-done of luxury items

Low-end disruptions often enter the market at significantly cheaper price points (although they have to be still making profits to be truly disruptive). Although this is not the only way to enter the market (they can use simplicity for example to expand the addressable customer base), this is the simplest to understand. However, this low cost strategy is unlikely to be effective against the iPhone because price itself is a positioning statement of the iPhone value proposition. In other words, the iPhone is in a sense a luxury.

The iPhone is, for many people, the only luxury item that they own. Apple has succeeded in making the iPhone one of the most affordable luxuries. The iPhone is the only luxury product that both celebrities and huge numbers of teenagers own. You can get iPhones for free with subsidized contracts, but that product is the exact same device that billionaires lust for.

The iPhone is a mass-market luxury item. In fact, I even hesitate to use the word “luxury”. This is quite unique and you don’t see this kind of thing anywhere else, in any industry.

Luxury items have very different jobs-to-be-done from regular ones. In addition to being comfortable and high-quality, they have a “status” component; they have to show off your well-being and your good taste. On seeing you own one of these items, other people must judge you favorably by it.

Hence to satisfy the jobs-to-be-done of a luxury item, you have to satisfy the following;

It must be well designed in a way that conveys its luxuriousness.
The build quality must be exceptional.
The whole brand and all the customer touch-points must be luxurious.
It must be expensive relative to other products.
It must be associated with some aspiration figures.

Technical progress in the Moore’s law sense will not make these conditions any easier or less costly to satisfy. In particular, luxury products cannot be cheap which means that the most often used low-end disruption strategy, namely making a cheaper product, cannot be applied. In order for any company to satisfy these jobs-to-be-done, they have to invest in a completely different set of activities.

Therefore, luxury items are hard to disrupt. Tech companies in particular don’t usually have the skill set or investments in place to compete.

Different between luxury and fleeing to the high end

In Disruption Theory, incumbents will often flee to the high end in response to a low-end assault. That is, instead of catering to the mass-market, they will focus on serving the high-end niche which requires the very features that overshoot the mass-market expectations.

On the surface, if you look at the prices of the products, this seems to be equivalent to a luxury strategy. This is incorrect. Luxury products are focused on satisfying a completely different jobs-to-be-done. Selling luxury products do not require more features or higher specifications at all. They are more focused on making the customer feel better about themselves through the experience itself and social recognition. Hence the ability to design and produce feature-laden, high-spec products does not give you the capability to enter this market.

What Apple has made the iPhone a luxury experience at a price that is affordable to the mass-market. This has come through a collection of efforts that companies like Samsung or Google have very little experience in. Celebrities like Steve Jobs and Jonny Ive, great design, precision manufacturing techniques, boutique retail stores, investment in and use of quality materials (sapphire glass) are all part of this.

Without this investment, it is very questionable if Samsung will be able to pursue a similar “luxury for the mass-market” approach. Instead, they would have to flee to the high-end and target consumers who prefer top-spec machines. As Christensen describes, if the low-end entrants eventually improve their offering or if the phone specs get defined solely by components (as was the case with PCs), then fleeing to the high-end will be in vain in the long term.

Summary

In understanding how Apple seems to escape disruption, it is very important to truly understand the jobs-to-be-done. Instead of focusing on product features and specifications, you must consider the social and emotional aspects of the jobs-to-be-done. By doing this, you can easily map Apple into Disruption Theory and reach to conclusion that Apple is quite difficult to disrupt from the low-end.

You also have to realize that different aspects of a product have different sensitivities to low-end disruption. Tech-oriented features are very sensitive to disruption whereas others are not. Tech companies are easily disrupted simply because they focus too much on the tech. By focusing on non-tech stuff, you can become less vulnerable to low-end disruption.

Importantly, this is not necessarily the same as fleeing to the high-end of the market. Most luxury brands are difficult to disrupt, but at the same time cater only to the very high-end. This is one way of doing it, but it is also possible to be luxury but also mass-market. Disneyland is a good example where you get great hospitality but at reasonable prices. This is where the iPhone is going.

The problem for many tech-companies is that they tend to have a history of tech and tech only. They do not have the non-tech aspects within the organization and even if they did, their brand would not convey that. This is why many companies create new brands for their luxury offerings (Toyota Lexus for example). Since a luxury brand is in many ways a contract for exceptional product & service, and also a signal of financial well-being, the historical tech-brand often won’t do. It would be interesting to see if Samsung eventually creates a new smartphone brand and an accompanying distribution for their high-end devices.

Apple is escaping disruption using a combination of ideas which can be mapped to Christensen’s Disruption Theory. I sense that they understand that the underlying force driving disruption is Moore’s Law, and that is why they invest so much in the non-tech aspects that Moore’s Law doesn’t directly touch. (even in tech investments, they invest in sapphire glass for example; also unrelated to Moore’s Law thus less quickly imitated)

Free Wireless Data For Specific Apps

In many countries now, carriers are exempting certain apps from data charges. For example, even if you are on a pay-as-you-go data plan, the data that you use through the Facebook app on your phone will not count. You have unlimited access to Facebook free-of-charge.

Although I had been aware of specific cases, I had not know of a source with more comprehensive information. This data has now become available through Allot Communications (Summary on GigaOM).

Some things that I find interesting;

This is now available even in the US. AT&T even has a program where the content providers themselves pay the consumers’ data bills.
49% of carriers worldwide surveyed by Allot Communications have this kind of data exemption plan.
Of these, 65% exempt Facebook.
This increases ARPU (average revenue per user) for carriers and also reduced the churn rate, making it very attractive for carriers.

Some of my thoughts;

If you were an e-commerce retailer, you would probably want to have your app included in the data exemption list. You might even be willing to pay for consumer’s data if the online purchases made up for it. In fact, there might be many e-commerce retailers who want to do this.
As a carrier, you could choose to partner with only one e-commerce retailer if these retailers were poorly differentiated anyway. By doing this, you might get very favorable terms. You could even pre-install that retailers app on the smartphones that you sell.

My thinking is that carriers could profit quite a lot from this scheme.

The Stupidity of Bashing the Failing

A recent article in The Economist was so stupid that I couldn’t resist writing about it.

Japanese electronics firms, Eclipsed by Apple

These kind of stupid articles are nothing new. As one would expect, the self-critical Japanese have been writing them years ago. I’ve criticized the logic that these articles use in this blog (1, 2 ).

It’s similarly easy to find the flaws in the logic that The Economist used;

In the article, the author assumes that Japan’s culture of lifetime employment and the associated labor rules are at least partially to blame for Japan’s problems. In fact, this is the only hard reason that is cited. If this was true, then we should see a correlation between a countries willingness to fire workers, and the ability of that country’s corporations to bounce back from hard times. As a prime example of a country that doesn’t think twice about firing workers, we can use the US. Also, as another example of a country where firing workers is difficult, we could use Germany. Although we don’t have nearly enough data to make a statistical argument, I sense that we would have a hard time validating this correlation.
Another problem with blaming it on Japanese corporate culture is that if you look back in history, back into the booming years (which was not always smooth riding, but instead had its fair share of bumps), the aforementioned culture was even more intense. In fact, Japan’s lifetime employment was once envied by at least some US authors. Unless you can explain how Japan’s lifetime employment actually seemed advantageous during the two oil-shocks, you aren’t really in a position to blame the current problems on it. Below I refer to a random article that I found on the web, but I recall that these discussions were abundant in 1970-80.
> Coming at the peak of Japan’s industrial ascendancy, Abegglen produced his insider’s guide to competing against the Japanese challenge, Kaisha: The Japanese Corporation (Abegglen and Stalk, 1985). He repeated the argument that comparative advantages lay in the Japanese firm’s high levels of social integration around lifetime employment.

It’s easy to present theories why Japan maybe faltering. It’s actually just as easy to give a reason why Japan was booming in the 1970-80s. Being able to present a reason for either does not mean that you have a good theory, or that you have any real intelligence. It just means that you can look at two things that may or may not have any meaningful association, and conjure up some logic to say that one caused the other. It means that you have a bit of imagination. Even more embarrassingly, it shows that you’re not thinking with your head, but you are simply following the crowd.

To give a concrete theory that can be consistently used for a least a few decades (and will not look ridiculous after twenty years), it has to be applicable to a span of at least half a century. For a theory on Japan, it has to explain both the boom years and the current stagnation. It has to be a theory that can cause both the good and the bad, depending on circumstances.

For example, what you really want is a theory that can explain why the US consumer electronics industry, which invented the TV for example, is now very weak. Much, much weaker than the state that Japan finds itself in. Or you could try to explain why the company that invented the cell phone (Motorola) has been sold off to a China firm. Or you could try to explain what happened to PC makers in the US. Or you could try to explain what happened to the U.K. automobile industry. If you can come up with such a theory, then and only then will you be able to give some good advice to Japan. Then and only then will be able to predict what will happen to Samsung and the Chinese in the next 50 years.

It’s a bit like trying to understand why a split-fingered fast ball has a different trajectory from a fast ball. If you were only looking immediately after the pitcher released the ball, you would think that a split-fingered fast ball files straight. On the other hand, if you were only looking near the home plate, you would think that a split flies down. Neither it the truth on its own. To understand a single pitch that can change its trajectory so dramatically, you have to take a hard look at how the ball is spinning and how that interacts with the atmosphere. Instead of simply looking at the trajectory, it’s about time that business analysts started looking at spin and aerodynamics.

That is not what the article on The Economist was. It was just a bit of imagination.

Samsung Earnings 2Q14

Samsung’s earnings are in, and they were not very good (Bloomberg: note the original title in the URL slug. The title and tone of this article were revised from the pessimism in the original publication to a much more optimistic tone, which shows how worthless financial reporting has become).

Given these poor results, the blogosphere is awash with analysts telling us that they saw this coming. This is hardly something to brag about because it was so plainly obvious.

It’s also very easy to blame this on what Samsung does not possess; that is software and services. This is equally trivial to do. Giving a sound explanation of why Samsung is now in trouble, does not suggest that you have a clue about what is happening. Anybody can do that. It’s like saying the reason the New York Yankees are pretty weak right now is because their batters aren’t hitting the ball well.

To suggest that you really understand what is going on, you need to provide a coherent explanation of why Samsung was very strong a few years ago, and why it is now starting to fail. This explanation must consider that Samsung itself is mostly doing exactly the same things that there were before. Hence this explanation should not focus on factors that are internal to Samsung, but are external.

Hence the following explanations fail to suggest that the analyst who made them has a clue;

Marketing as a reason for Samsung’s success: Strong marketing is no doubt a reason for Samsung’s ascent to dominance. However Samsung has not relaxed its marketing focus. Unless we have a good explanation of why Samsung’s marketing is no longer effective (external factors), it doesn’t explain the situation.
Software & Services: Samsung is weak in software and services, but it has always been like this. In fact, Samsung knows this and has invested heavily into making itself better in software & services. The lack of strength in software & services does not explain Samsung’s problems because Samsung rose to dominance without them in the first place. Instead, we need an explanation of why software & services matter more than they used to or why Samsung’s efforts have become meaningless.
Cheap Chinese vendors: There have always been cheap Chinese vendors. Hence their presence itself does not explain anything. What has changed is that the Chinese vendors are now capable of creating products that rival Samsung’s in both quality and price at the lower-end of the market. What we need to understand is why the Chinese can now do this whereas they couldn’t do so before.

Clayton Christensen’s theories explain all of these. That’s why I lean on them.

In this context, what is interesting in Samsung’s report is actually the following;

Profit at Samsung’s chip unit, which supplies its own devices and also rivals such as Apple, nearly doubled to 2.1 trillion won on sales of 9.5 trillion won, according to the Bloomberg News analyst survey.

According the “the law of conservation of attractive profits”, as smartphone production becomes more modular allowing new entrants into the market, the attractive profits will shift to somewhere else in the value chain. Although not certain at this point, it is likely that component suppliers will be one of the stages where the attractive profits will accumulate. If so, Samsung’s chip unit may profit (although there is intense competition here as well).

It will be interesting to see how the component industry (Samsung’s chip business, MediaTek, etc.) does in the next few years.

Android OEMs and The Law Of Conservation Of Attractive Profits

A couple of days ago, I wrote a comment on an article on the Tech.pinions website.

The article (by Jan Dawson) was discussing how Samsung came to dominate the Android OEM market, but how it is now struggling with competition on the low-end and is also having difficulty in differentiating itself.

The comment that I wrote;

It’s very interesting that you call Samsung “exceptional”. This is because, at least in my interpretation, the trajectory of Samsung’s accent and decline is precisely what Clayton Christensen’s theories would predict.

I’ve been thinking more about what I wrote, and I think that this is such an important issue that I should put it up as a blog post. Here, I will copy my original comment and add a bit more to it.

The rise and fall of Samsung as a smartphone OEM

Jan Dawson lists the keys to Samsung’s success as the following;

“On the marketing side, Samsung has vastly outspent all other Android smartphone manufacturers and become the default option for people in mature markets looking to buy a mid to high end smartphone.”
“Its vertical integration has allowed it to compete very efficiently and effectively with screen and other component technology.”

Jan Dawson also outlines Samsung’s current problems;

Overall smartphone growth is slowing, putting pressure on Samsung’s other device categories to provide stronger growth

Samsung’s dominant position in Android is being assailed at the low end and in the mid market by a variety of competitors, many of them from China

Google is reining in Android and looking to reassert its own position and services in the smartphone market, putting pressure on Samsung and others to tone down their customizations. New flavors of Android for wearables, the car and TVs will provide even less room for customization

People are at any rate apparently tiring of Samsung’s customizations of Android and starting to look more seriously at smartphones which provide a stock Android experience or at least something more like it

Samsung’s marketing spend is starting to experience the law of diminishing returns, where each dollar of spending no longer conveys the advantage it once did. It has effectively saturated the market and can no longer derive the advantages it once did from its far superior ad spend.

I completely agree with Jan Dawson’s assessment of why Samsung was successful, and Samsung’s current predicament.

The problem is, how did Samsung transition so quickly from “huge success” to “quite problematic”.

Jan Dawson doesn’t go into explaining the transition in depth. That is what my comment tries to do by applying Christensen’s theories.

How the environment changed from favorable to hostile for Samsung

Christensen’s theories are build on the premise that continued innovation (sustaining innovation) will ultimately open-up the possibility of low-end disruption, and that it can be very difficult for some companies in some markets to counter-attack the disruptor.

Hence to understand what happened to Samsung, we should analyze how technical advances changed the competitive landscape, and allowed low-end disruptors to enter the market. That is what I tried to do in the comment;

When the product is not good enough, the attractive profits flow to the integrator. This was the situation at the beginning. Samsung’s ability to integrate the hardware stack and to also put a UI (that was attractive in the sense that it more closely imitated iPhone) on top was the reason they had the best Android product.

As technology improved, customized integration became less necessary. This caused modularity in the hardware stack. SoC vendors like MediaTek are prime examples of the hardware becoming more modular. Also, as Android got its act together and became less ugly, Samsung’s ability to put their UI on top became less important and even downright annoying. Hence the software vendor (Google) increased its power. In fact, integration within the software stack increased. In total, the Android value chain became modularized and Samsung’s strength as an integrator waned.

Samsung tried to buck this trend by creating products that we much better than those assembled from modular parts (which is the same as Apple’s strategy). Hence they designed their own CPU and added features to their software. Unfortunately, both were unsuccessful. Neither created value that appealed to their customers.

The first item explains why Samsung rose to dominance. Samsung is very vertically integrated in hardware. It has top-level semiconductor technology, display technology, wireless technology, etc. Importantly, because Apple had to rely on Samsung for key components, Samsung learned of Apple’s iPhone plans many months before their competitors. None of their competitors had a similar advantage. This allowed Samsung to rapidly produce the best Android smartphone hardware

One thing I want to add that is rarely mentioned is that Samsung’s TouchWiz UI was well received during these early years. Before Android 4.0, the Android UI was pretty bad (Android 4.0 was a huge overhaul of the UI). Samsung’s TouchWiz imitated the iPhone UI much more closely than stock Android, and this was no doubt one of the reasons why Samsung was so successful. Hence in this context, Samsung’s ability to create a good UI skin was also a key factor in its success. As far as I can tell, yearning for a stock Andorid experience is post Android 4.0. Until then, stock Android was not “good enough”.

Going on to the second item, we start to see how technical progress changed the environment. Christensen has described how markets eventually favor modularity over integration after the products become “good enough”. As component technologies improve, it becomes less important to fine-tune the components to obtain the necessary performance. Customers are now satisfied by products that are simply assembled from “off-the-shelf” components (from SoC vendors like MediaTek for example). In many cases, even the assembly is outsourced to China. Because fine-tuning is less important, this allows low-end entrants without extensive hardware expertise to enter the market. Because the low-end entrants do not need much hardware expertise, their business models are often very different from Samsung’s. For example, Lenovo is a low-cost assembler of hardware, an operation that doesn’t require much R&D spending. Cherry Mobile, a fast growing smartphone brand in the Philippines is actually a carrier, not a hardware maker. Xiaomi, a fast growing fabless smartphone maker in China that sells mid-range phones with razor-thin margins, earns profit not through hardware sales but through service sales and reduced costs on marketing.

It is also important to note that many of the new entrants mainly have strengths in their local markets. Cherry Mobile (Philippines), Xiaomi (China), Lenovo (China), Micromax (India), Wiko (France), BQ (Spain) are some of the examples. Being local companies, they have some marketing advantages over Samsung and can better tailor their products to local preferences.

To reiterate, technical progress has allowed low-end entrants with a very different low-cost business model, to enter the smartphone market. Samsung’s integration and expertise in hardware is no longer a competitive advantage. In fact, it could even become a liability because it could make it difficult for Samsung to directly address these low-end entrants.

Technical progress has changed the initially favorable environment for Samsung into a hostile one.

Google’s increased power over OEMs

This is explained by “the law of conservation of attractive profits”, which I have described in a separate post.

It also explains why Google now has the power to reign-in Android. The negotiation power of the integrators has declined and has shifted to the OS and service vendor. Google did not have this power until the hardware stack became modular.

The law of conservation of attractive profits allows Google to have stronger influence over Samsung. However, as I described in the previous post, I tend to think that this is temporary and that the attractive profits will transition back to the OEMs who have alternative business models.

Looking into the future

One of the more interesting features of the recently announced Android “L” is the new ART runtime. This looks like it will significantly improve Android performance on low-end hardware. This will accelerate the shift in power away from Samsung and towards the low-end entrants. Combine this with the Android One reference platform, and we will likely see almost all value in low-end Android hardware sucked out. Samsung will have a very hard time competing in this market, and since their competitors are now asymmetric, it’s very hard to see how they can launch a strong counter attack. However, since most of the entrants are local, the spread of low-end entrants might be a gradual process.

On the high end, especially in markets where the cost of the smartphone is subsidized by the carrier, Samsung will continue to be the dominant Android OEM. Other Android OEMs simply cannot match Samsung in marketing and product features. Whether that is enough given the strength of iPhone is yet to be seen.

Importantly, Google’s strategy is providing absolutely zero incentive and zero profits for OEMs to innovate in hardware. With this market structure, it’s difficult to see how the low-end entrants could evolve to the point where they can overtake Samsung in the high-end, even Xiaomi or Lenovo. I don’t see this ever happening in the foreseeable future.

Actually, this could make Apple more dominant in the high-end, and Google probably won’t even care.

Statistical Validation of Disruption Theory

There has been a bit of discussion on the web about the validity of Clayton Christensen’s Disruption theory. I hope this article by Thomas Thurston will put it all to rest; “Christensen Vs. Lepore: A Matter Of Fact”.

Most people don’t know this, but it turns out Disruption Theory is the foundation of the most accurate, thoroughly vetted, quantitative prediction models of new business survival or failure in the world today.

…

I did my best to reduce his theory to falsifiable yes/no logic using published research. Even so, in the first round these relatively crude rules based on Disruption Theory blindly predicted if new businesses would survive or fail with 94 percent accuracy and over 99 percent statistical confidence. Holy crap.

So statistically, disruption theory is pretty good a predictions.

How often does it get it wrong?

A lot of people point to examples of when Disruption Theory, or Christensen, was wrong. It was wrong about the iPhone. Tesla. Ralph Lauren. In fact, it’s been wrong over 7,500 times by my count (remember it has a 33 percent error rate when predicting winners). Keep in mind, however, it’s 66 percent right while everything else is stuck at 25 percent. Improvement, not perfection, is the standard.

Well, it doesn’t get it right 100% of the time. Does that mean the theory isn’t valid? Not at all.

Many bloggers dismissed or attempted to modify Disruption Theory because it got Apple wrong. These people don’t understand statistics or don’t understand how to use statistics to validate or invalidate an argument. I could list them here, but I won’t.

The method used here is very standard. For example, every new drug that comes to the market is tested for effectiveness using the same statistical methods. Drugs sometimes work, but often they don’t. All they have to do is work a bit better, a bit more often. If we rejected every drug that ever failed to work for certain patients, there would be no drugs.

I especially like Thomas’ closing sentence. It’s the standard way of statistically testing which theory is correct, which Thomas uses to test Lepore’s theory against Clay’s. Anybody who doesn’t fully get it shouldn’t be talking about how theories are validated.

Lepore could be right about Disruption Theory, but the odds are literally over 500,000 times greater that, as a matter of fact, she’s just plain wrong.

P.S.

Although I am appalled that a large number of people who discussed Disruption Theory on the web didn’t seem to understand the basic principles of statistical testing, I understand where they came from.

Statistics simply isn’t taught enough at schools. Statistics, in my view, is one of the most important branches of mathematics and is relevant even for people who won’t touch maths ever in their professional careers. We have to understand statistics so that we, in democratic nations, can correctly assess the accuracy of claims made by politicians, and so much more.

This is a real shame.

Notes on the Capitalist’s Dilemma

Clayton Christensen, the author of “The Innovator’s Dilemma” has been working on the idea that capitalism is having trouble in investing in the types of innovation that really count. Instead investing in those that are actually detrimental to the economy.

Coming from the most influential thinker on innovation, this idea should not be taken lightly. Harvard Business Review has recently published a summary of his work, and it is very much worth reading (the article is divided into many pages, so if that troubles you, I recommend the page optimized for printing.).

I’ll just jot down some things that I consider to be the key points;

“The Capitalist’s Dilemma” is the reason why major economies around the world are experiencing “jobless recoveries” where the economy grows, but jobs are not being created.
Not all innovations are equal. In fact, the majority of the innovations that are happening today are detrimental to economic growth. The authors dissect “Innovation” into three separate categories and argue that the one that create jobs (market-creating innovations) is currently being de-emphasized, while the one that eliminates jobs (efficiency innovations) is being highlighted.
The reason that the wrong category of innovation is being pursued is because the approach to finance that is taught is wrong. Business schools are teaching students to focus on the wrong metrics for evaluating corporate strategy, and as these people end up running banks or businesses, this is hurting the economy.

As the authors’ work illustrates, we have very little understanding of what drives economic growth and the role that innovation plays in it. No wonder we are in this mess.

There’s Still Time Left for Microsoft Tablets

Nine months ago, back when the flattening of iPad sales had not yet become obvious and when the majority of analysts were predicting tablets to soon imminently replace notebooks, I wrote quite a bit about Microsoft (in Japanese).

In summary, I wrote;

破壊的イノベーションが成功するかしないかの最大のポイントは、既存のトップ企業が、まだ間に合ううちに反撃に出るかどうかです。間に合うかどうかというのは、新興の企業･製品が十分に既存製品を代替できるところまで進化しているかどうかにかかっています。つまりスマートフォンとTabletが十分にパソコンを代替できるかどうかです。十分に代替できるところまで来ていれば、Microsoftは反撃のしようが無くなります。しかしそうでなければ反撃が効きます。

The largest factor determining whether a disruption succeeds or not is whether the incumbents respond in time. “In time” is defined by whether the entrant product has evolved to the point where it can fully replace the incumbent. In the context of Microsoft, it is defined by whether the combination of a smartphone and a tablet can replace a PC. If the answer is yes, then Microsoft cannot retaliate. Otherwise, a counterattack will still be effective.

Tabletについては、まだまだパソコンを代替できていません。特にAndroidは7インチに偏っていて、娯楽に完全にフォーカスしています。Tablet市場がパソコンを使って仕事をする方向に向かっていません。これではなかなかパソコンは代替しないでしょう。

Tablet still cannot replace PCs. In particular, Android tablets are skewing towards 7-inches and are focusing on entertainment. The tablet market is not moving towards doing work. Hence, tablets are unlikely to replace PCs.

反撃にいったん出れば、既存のトップ企業はそうそう負けるものではありません。Microsoftの場合、まだ間に合う気がします。

Because of the vast resources they can deploy, incumbents rarely lose once they retaliate in time. In the case of Microsoft, I think they still have time.

Apple has released their sales figures for 1Q2014 and the sales of the iPad have clearly flattened. Although iPad sales volumes (~ 20 million units) are still very impressive, at this level, it does not look like they are on a trajectory to replacing PCs.

So Microsoft still has time.

In fact, the new Surface Pro 3 clearly shows that Microsoft understands this. Instead of launching a hastened response to the iPad which was the original Surface RT, they have launched a product that attacks from their dominant strength in PCs and office productivity software. They have realized that laptops are not going to be replaced by tablets any time soon, and that sales of Windows laptops will continue to surpass the sales of iPad-like productivity tablets. Hence their dominant power, although weakened, will still be a formidable asset for the foreseeable future.

So instead of starting afresh, they are playing their strengths and using their resources wisely. Instead of attacking tablets head on, their plan seems to be to embrace and to internalize tablets into their laptop products.

This clearly makes sense.

Of course, it will take time. But Microsoft has realized that it has time.

Why Are Smartwatches Focusing on Notifications?

It is very interesting to see the new smartwatches focusing on notifications as their main feature. This begs the question; why are notifications so important?

Are notifications so important that many people are willing to purchase a several hundred dollar device and wear it wherever they go?

I don’t think so. I think that the only reason why smartwatches are offering notifications is because it was relatively easy to do. Smartwatches are small so you can’t display a lot of information on them. You can’t provide a good UI that can be used to enter information. The only use-case that was left was notifications. The focus on notifications was not because notifications are important; it was because there was nothing else that Samsung, Google could think of putting on the device.

So the issue remains. Smartwatches are a form-factor in search of a use-case. This is not innovation.

Innovation in wearables lies in understanding what problem they can uniquely solve. How can a device that will be with you at all times enrich your life?

Of course, there may not be a market for wearables after all. Unlike smartphones, wearables are not a replacement for a device that people were already carrying around with them. Wearables are asking the public to carry a second device in addition to their smartphone, which overlaps a lot in functionality. Whether or not there is a market for such a device is very unclear. Even if it existed, it is easy to imagine that it would take a huge amount of time to spread. It is a speculative market.

Innovation is rarely about a technology searching for a market. It’s more often about making a complex product simpler and easier to use, thereby both increasing the number of people who use it and the occasions in which it is used. Notifications simply don’t qualify for this.