Business Best Practices
In his book The Innovator’s Dilemma, Harvard Business School professor Clayton Christensen popularized the term “disruptive innovation.” Products that fall into this category bring different value propositions to the market than what is currently provided by existing market participants. Although disruptive technologies underperform existing products in mainstream markets, they possess other features that new customers value. In the near term, because a disruptive technology results in worse product performance, their initial sales volume is low.
This definition of a disruptive innovation is an apt description of Apple’s first iPhone. When it was launched in 2007, the iPhone underperformed against benchmarks that were standard in the smartphone industry. As a result, just 1.5 million units were sold in its first two quarters. Here is how the original iPhone stacked up against existing smartphone competitors, using measurements that were considered important at the time:
However, Steve Job’s creation was not just a cell phone; rather, it was the world’s first, handheld computer. Its data processing capabilities—not voice—are what disrupted the cell phone market. Although other smartphone manufacturers offered web browsers, they were clumsy and difficult to use. In contrast, Apple’s web browser made surfing the Internet easy. Compared to its rivals, the iPhone’s user interface was simple, intuitive and uncomplicated. At the swipe of a finger on touch sensitive glass, one could get access to e-mail, text messaging, video, photography, maps, books, music, games and mobile shopping. The iPhone was a game-changer, the industry’s Swiss Army knife.
After having introduced a product that was revolutionary in some respects, but lacking in others, Apple began a structured process of enhancing features—and adding functionality—that satisfied customer needs. This is the essence of continuous improvement. For example, in 2008, iTunes was introduced, which solidified the iPhone’s role as a multi-function device that could seamlessly provide music and video on demand.
Unveiled on September 12, 2012, the iPhone 5 is the current iteration of the iPhone. In his Wall Street Journal column All Things Digital, Walt Mossberg describes the differences between the iPhone 5 and its predecessor model, the 4S, which was introduced a year ago:
The incremental improvements described in the previous table are not radically new. In fact, some commentators have described the iPhone 5 as a catch-up device, adding features that are already resident on the leading Android and Windows phones. For example, many of the Android phones already feature larger screens.
In conclusion, Apple’s product development strategy does not involve releasing breakthrough technologies, year after year. Rather, disruptive innovations—such as the iPod, iTunes, iPad, and the iPhone—are unleashed, upending entrenched market competitors. Then, the worlds’ most innovative company improves upon its breakthrough product by implementing stable releases, adding features and functionality that delight its customers.
I need to bring this blog post to an end, because I have to go down my local store, and place my order for an iPhone 5. The current backlog is 4 weeks, and I don’t want to wait any longer than that!
The winters in Rochester, NY can be long and harsh. I know. My son attends college there. Situated on the southern shores of Lake Ontario, the yearly snowfall averages 92 inches. But the harshness that I am referring to relates to the demise of Kodak, which was born in Rochester in 1889, and died there on January 19, 2012, falling into bankruptcy.
Given that its name was once synonymous with photography, a Kodak moment, the disintegration of this iconic corporation is particularly poignant. As recently as 1976, the company held a 90% market share of film sales and 85% of camera sales. It was the Google of its day, attracting the best technical talent from across the country. During lunch, the company played movies for its employees.
©Kodak used with permission
A disruptive technology—the digital camera—killed off the film business. Ironically, Steve Sasson, a 25 year-old Kodak electrical engineer, invented the first digital camera in 1975. This fact begs the question: how could a great company like Kodak, flush in the 1970’s with abundant resources and some of the most talented people on the planet, fail to take advantage of a product that was invented in its laboratories?
A failed business strategy and management myopia both contributed to Kodak’s downfall.
Kodak’s Failed Business Strategy
When there is a disruptive technology, firms are often unable to capitalize on the invention for fear of cannibalizing existing product sales. Kodak’s primary strategy was to sell high margin film. Known as the razor blade strategy, the company developed inexpensive cameras as a means to an end: their purpose was to facilitate lucrative film sales. In summary, its digital camera invention was held back because of management’s concerns about the negative impact on film sales.
When Sony launched a filmless digital camera in 1981, fear permeated Kodak’s executive suite. Specifically, over the next decade, Kodak invested approximately “$5 billion—or 45% of its R&D budget—in digital imaging,” according to a 2005 Harvard Business School case study. Unfortunately, with disruptive technologies such as digital cameras, the first-mover advantage is too great for late entrants to overcome. By the time Kodak realized that their razor-blade business model was dead, the horses were already out of the barn. The company was unable to catch-up to the competition.
Earlier this month, Kodak’s announced that it was exiting the film and digital camera business altogether. Sadly, all that remains of this once august corporation is the intellectual value of its patents, resulting from decades of belated investments in digital technologies.
Management Myopia
Not only was the first digital camera unwieldy—it weighed over 8 lbs.—but it didn’t even save images. Instead, they were projected onto a TV screen. It is difficult to imagine how Kodak’s mainstream customers—Mr. and Mrs. Jones from Kansas—would have bought that first, clunky digital camera.
Conventional wisdom suggests that good management involves staying close to your customers. And that is what management at Kodak did. Rather than allocating resources towards the internal development of a risky, digital camera that their mainstream customers had little interest in, the company funded projects that enhanced its position within the lucrative film market. Management at Kodak was constrained by the needs of their established customers. That is fine when making incremental improvements to existing products, but it is fatal when dealing with disruptive technologies.
In retrospect, management ought to have spun off its digital camera business to an independent subsidiary. The small business unit could have focused on meeting the needs of the customers who would have embraced it, such as hobbyists and leading-edge photographers. Apple followed this strategy with its first, Apple computer. I remember buying mine from a Chicago-based, electronics shop that catered to technical enthusiasts (techies) who were far removed from the mainstream, consumer marketplace. Over time, Apple developed its product offerings, introducing features and functionality—such as the mouse and Graphical User Interface (GUI)—that made it attractive to Mr. and Mrs. Jones from Kansas.
In his book The Innovator’s Dilemma, Clayton Christensen describes numerous instances where companies have failed at internally developing disruptive technologies. In contrast, firms that set up separate subsidiaries have been able to grow game-changing innovations into full-fledged businesses. HP did this with the invention of the ink jet printer in the 1980s. It set up an autonomous subsidiary in Vancouver, Washington, far removed from the influence of corporate headquarters in Palo Alto, California. Initially, the ink jet printer market was small and limited; over time, the company turned it into a significant business.
Small is Beautiful
I worked as a product manager at a small company that manufactured food-processing machinery for the beverage industry. New product development was the key to its success. In 1980, a large conglomerate acquired it. Within 7 years, innovation, the life-blood of the firm, dried up, and the conglomerate sold off the business.
When it comes to winning the new product development race, small entrepreneurial-driven firms will usually beat the behemoth corporation, especially when dealing with disruptive technologies.
Occasionally, a new technology is introduced that disrupts the natural order of things. Apple’s iPad represents just such an innovation. The touchscreen display and navigation options make this computer a radical departure from the PC. [In this context, I am broadly defining the PC as either a desktop or laptop computer.]
With the iPad, you don’t have to use a trackpad—or mouse—to move a cursor around a screen. Instead, you use your fingers to touch and swipe the screen. In addition, the iPad is very light, weighing only 1.5 lbs (680 grams), and has a battery life of 9-10 hours, which is far greater than the battery life of the typical laptop computer. Combined, all of these features provide the user with a more direct and immediate relationship to computing: all cables, mice and other devices are gone. The iPad facilitates a “magical” experience, according to Steve Jobs. Certainly, it makes life easier for the customer.
Ease-of-use is one of the many reasons that the iPad has caught on like wildfire, becoming the biggest selling device in Apple’s history. For the quarter ending Dec 31st2011, the Cupertino-based juggernaut sold 15.4 million tablets, accounting for $9.1 billion in revenues or about 20% of the company’s total revenue. Compared with last year’s holiday quarter, tablet sales doubled.
We are witnessing what Harvard Business School’s Clayton Christensen calls a disruptive innovation. Typically, inventions that fall into this category have characteristics that are radically different from existing products; however, initially, they offer lower performance in areas that are important to mainstream customers. For example, compared to a laptop or PC, the original iPad’s processor was slow; storage space was limited; and it wasn’t equipped with a keyboard. But over the past couple of years, Apple has significantly improved the performance of its tablet computer. Here are some of the features contained within the new IPad, which was released today:
- High resolution retina display–2048×1536 pixels more than on an HD TV
- A dual core CPU twice as powerful as the A5 found in the iPad 2
- A rear iSight camera with 5MP sensor and advanced optics, including IR filter, autofocus, face detection, and white balance
- HD video recording (1080p resolution)
- Voice dictation (there’s a new key on the keyboard for speaking into the iPad)
- 4G LTE support: HSPA+ for up to 21Mbps or dual-carrier HSDPA for up to 42Mbps or LTE for a max of 72Mbps connectivity
- Battery life is 10 hours (9 for the 4G models)
Regarding the future, Steve Jobs used the metaphor of the PC as a truck, and the iPad–or tablet–as a car. America was originally an agrarian economy. Then, the truck was used for all tasks done on the farm. But as we developed into an urban economy, the car replaced the truck for many jobs.
The tablet will be increasingly used for consuming digital data—viewing videos and photos; reading news websites, feeds, and books; checking on e-mail & social media; and listening to music. In contrast, the PC will be used for heavy-duty tasks. One of you said it well: “typing a large document or programming a 1,000 lines of code is much easier with a full size, qwerty keyboard.” A PC with a blazingly fast processor, which is hooked up to a large display—including multi-monitor arrangements—can facilitate multitasking and productivity. Developers, professional photographers, graphic artists and hardcore gamers will probably continue to use the PC, at least in the near future. But to quote Jobs once again, “as we move away from the farm, the car started taking over.”
And the data appear to substantiate Job’s prediction. During 2010, when the iPad was introduced, sales of PC’s outnumbered sales of tablet computers by a ratio of 20 to one. In 2011, PC’s outsold iPads by a ratio of only six to one. Horace Dediu, an analyst with Asymco in Finland, predicts that tablet sales will surpass PC sales in 2013.
In conclusion, the iPad symbolizes much more than just simply an incremental improvement in technology. It is evolving to become a PC replacement for many applications. The PC will survive, but its market share will continue to decline vis-à-vis tablet computers. This is no different than what occurred 60 years ago when televisions were invented. As a result, the audience of people who listened to radio shows declined greatly. Although the radio has endured, its share of the overall listening audience is small in comparison to TV’s market share.
Here are other instances where new technologies displaced existing technologies:
How do you weigh in on this issue? Will Apple’s improvement of features and functionality enable the tablet computer to become a PC replacement?
The Battle Between Asian Rivals
Honda and Toyota have fallen down in three areas: New Product Development, Total Quality Management, and Supply Chain Management. As a result, they have lost market share to their Korean competitors: Hyundai and Kia. Honda’s profits dropped by 56% for the quarter ended Sept. 30, according to an article in yesterday’s Wall Street Journal. Also, their U.S. market share has declined by 1% over the past year. Since 2008, Toyota has lost 4.5 percentage points in U.S. market share. In contrast, Hyundai’s (and Kia’s) U.S. market share has increased, from 1% in 1999 to approximately 9% in 2011.
Once, Honda and Toyota were both considered the gold standard in terms of automotive excellence. In the case of the latter company, U.S. executives traveled to Japan in order to understand the secrets of its highly touted, Toyota Production System. But no more.
In the following three sections, I will describe how Japan’s formidable competitors have lost ground to their Korean adversaries.
1. New Product Development
Since Apple ranked #1 in the Boston Consulting Group’s 2010 survey of the worlds most innovative companies, let’s examine Apple’s formula for success. A sleek look and feel—in addition to ease of use—is what distinguishes the company’s products. Steve Jobs indicated that beauty—not novelty—was the highest value. Design, as it were, is an intangible and emotional subject. So, let me share with you my personal experience relating to Honda’s automotive designs.
Our family currently owns two Honda’s: a 1999 Odyssey, and a 2007 Accord. In addition, my wife has owned several Toyotas. We are big Honda and Toyota fans. This fall we were in the market for a new car, so I test-drove Honda’s small SUV: the CRV.
A Boxy 2011 Honda CRV Small SUV
It felt solid and sturdy, but the styling was boxy and dowdy. Immediately afterwards, I drove a Hyundai Tucson.
Not only was the styling beautiful, but also the interior of the Hyundai was contemporary and ergonomic. Although Honda is introducing a new 2012 version of the CRV in the near future, I wondered how could Honda’s management allow the company to become a design follower rather than the design leader?
A Sleek 2011Hyundai Tuscon Small SUV
Incidentally, I test-drove a Kia (sister company to Hyundai) family SUV: the Sorento. In contrast to the Honda CRV, driving the Sorento was delightful. Several years ago, Kia hired Peter Schreyer, formerly Audi’s top design engineer. The Sorento’s Germanic solidness and craftsmanship showed during the test drive. The price was right as well. Ultimately, my positive emotional experience resulted in my buying a Sorento.
Another example of Honda design issues relates to last months introduction of the new, 2012 Honda Civic, which was widely panned in the press. Dan Neil, the Wall Street Journal’s auto writer, said it all: “The redesigned 2012 Honda Civic…is a dud. A Sham. A shud. Massive fail, LOL.” A salesperson at a local Honda dealer said this: “I could not believe it. The 2012 Honda Civic lacked basic features such as Bluetooth.” As a result of the criticisms received, Honda is responding by rushing a mid-cycle, re-design of the Civic to the market.
In the past, Korean car designs were neutral. It was difficult to tell the difference between one model and the equivalent Japanese car. Now, Hyundai’s design prowess is leaving the two largest Japanese producers in the dust.
A 2012 Kia Sorento Family SUV
Superior design is one of the reasons why Hyundai and Kia have increased their U.S. market share at the expense of their Japanese competitors. Honda needs to restructure its design group, beginning by bringing in a new design czar, who will oversee the creation of products that delight customers.
2. Total Quality Management
Akio Toyoda, CEO and grandson of Toyota’s founder, has acknowledged that his firm chased market share over quality during the last decade. The result has been a car wreck: from 2008-2010 Toyota recalled over 10 million cars. Although Toyota has taken measures to shore-up its quality shortcomings, quality is all-about perception. And the chickens are now coming home to roost: During the last three years, Toyota’s U.S. market share has declined from 16.5% to 12.5% (2011).
In contrast, the Koreans’ quality has risen substantially. This year, Hyundai and Kia ousted mainstays Honda and Toyota to take the #1 spot in customer loyalty. The Sonata–Hyundai’s newly designed mid-sized sedan–won Road & Track magazine’s 2011 International Car of the Year award. In addition, Hyundai and Kia provide a standard 5 year/60,000 mile bumper-to-bumper warranty, whereas Toyota and Honda offer only a 3 year/36,000 mile bumper to bumper warranty, There is a new sheriff in town.
3. Supply Chain Management
Toyota’s and Honda’s supply chain network needs to be re-evaluated and reengineered. There are two primary reasons for this.
First, the appreciation of the yen vis-à-vis the U.S. dollar has penalized production in Japan. Profitable automobile manufacturing there has become difficult at best, impossible at worst. There are several ways of dealing with the fluctuating exchange rates as well as with the appreciation of the yen:
a) Develop robust forecasting models for predicting short term and long-term exchange
rates.
b) Hedge currencies to neutralize the effect of fluctuations.
c) Offshore assembly/production of automobiles to lower cost countries and/or to countries
where the currency is depreciating. For example, Kia now produces its Sorrento in Georgia, U.S.
d) Outsource components to suppliers in lower cost countries.
e) Create excess, flexible capacity so that production can be shifted in response to
intermediate term changes in foreign exchange rates.
Second, as advocated in a recent blog post, all automobile manufacturers must evaluate and re-think their supply chain networks to mitigate against the risk from natural disasters. Honda had 113 suppliers that were located in areas that were affected by Japan’s March, 2011 earthquake and tsunami. Shortly after the earthquake, the company was unable to establish contact with more than 40 of them. (Source: Autoweek). Currently, the introduction of the 2012 Honda CRV may be delayed due to the flooding of Honda’s auto plant in Thailand.
Although Just-in-time (JIT) inventory control—or lean operations—has been a dominant global operations strategy, some of its precepts need to be challenged. For example, some automotive companies have reduced the number of suppliers for critical components to a single-source. But when natural disasters cripple the component supplier, final assembly plants must curtail production; in some cases, they are forced to shutdown their operation.
This is exactly what happened during the Sept. 30 quarter. Due to supplier shortages of components and sub-assemblies, both Toyota and Honda had to curtail production. When shopping for cars this summer, a sales manager told me that a major Toyota dealer in the western suburbs of Chicago parked their cars diagonally, because they wanted to hide the fact that their inventory of new autos was less than 50% of what it should have been.
Unlike the Japanese, the Korean auto companies are less reliant on suppliers in Japan and Thailand. Thus, during the quarter ended Sept. 30, Hyundai and Kia did not experience component shortages due to the recent natural disasters.
In summary, there is a saying: “You cannot sell oranges from an empty cart.” If product is unavailable, regaining market share becomes impossible, and achieving acceptable levels of profitability amounts to a fiction.
Toyota and Honda can do a better job of evaluating—and modifying—their supplier networks in order to minimize risks. There are many risks that can affect the smooth functioning of a supply chain. The main threats that need to be dealt with immediately relate to natural disasters and currency fluctuations.
Conclusion
Honda and Toyota are both great companies. However, they have stumbled badly, and need to regain their footing. To right their teetering ships, they must radically reshape processes in three areas: New Product Development, Total Quality Management, and Supply Chain Management.
What other factors do you think account for Toyota’s and Honda’s misfortunes? What do they have to do to recover?
