Market-leaders can adapt to disruptive innovation!

One of the more striking - and disturbing - findings of Clayton Christensen's original work on disruptive innovation was that market-leaders were almost never able to cope with the attack of a disruptive innovator (see my earlier post). Even in cases in which leadership understood the danger posed by the disruptor, inertia and short-term economic constraints and incentives almost always led the market leaders to maintain their original trajectories. Over time, the disruptors produced better and cheaper products than the market leaders, and correspondingly the customers switched allegiances. The disruptors became the new market leaders, and the former market leaders often simply disappeared.

Since many have suggested that higher education shows all the characteristics of an industry that is ripe for disruptive innovation, this inability of market leaders to adapt in the face of disruption is rather disturbing.  However, there is good news from more recent research by Christensen and his group.

Scott Anthony and Clayton Christensen (AC) have recently published an article entitled The Empires Strike Back in which they report that a growing number of long-established market leaders ...are turning disruption from a threat into an opportunity. They suggest a couple of reasons why this is happening:

One explanation is good old-fashioned survival instincts. After seeing so many corporate icons toppled, companies finally recognize that their competitive advantage can disappear quickly.

Another factor attuning companies to the power of disruption is the search for profits in developing economies. Winning in emerging markets often requires lower prices and different business models - two hallmarks of disruption.

They identify three patterns that repeat in incumbent companies that have managed to seize on some disruptive approach:

1.Pushing beyond core competencies: AC quote Jeff Bezos of Amazon as saying  "If you want to really continually revitalize the service you provide the customer, you can't stop at 'What are we good at?' You have to ask, 'What do our customers need and want?' And no matter how hard it is, you better get good at those things."

2. Embracing business model innovation: Driving disruption requires moving beyond purely technological innovation to consider new ways of creating, capturing, and delivering value.

3. Managing the old and the new differently: metrics of success (including financial) for the new approach may be quite different from those of the old. 

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How might we imagine that these observations regarding drivers for incorporation of disruptive approaches will apply to traditional higher education?

First, the private traditional market leaders of the sector - the Harvards, Princetons, Chicagos, Williams - are not likely to be frightened by the failure and disappearance of any of their real peers because of actions of disruptors. The disruptors may eventually provide equal or better learning outcomes at a lower price. However, since brand value in higher education is provided primarily by institutional history and the the research visibility of faculty rather than by quality of learning, the disruptors will not be able to displace the current market leaders in the private sector for a very long time.  However, as one moves to traditional private institutions of increasingly lower perceived brand value, at some point the brand value of of those institutions will no longer provide a protective moat against the disruptors. In this range, presidents will begin to see their peers disappear, and likely become much more open to adoption of the new disruptive approaches. Of course, increasing societal resistance to tuitions that increase annually 3.5% above inflation will put financial pressure on this entire group, with again, least pressure at the top, more as one moves to lower areas. This pressure will also make many presidents think more positively of adopting disruptive approaches.  

The public sector traditional market leaders such as the University of California or University of Michigan face a somewhat different set of challenges. Here, the issue is likely to be decreasing or flat state funding that begins to cut into their ability to hire and retain the best research faculty, thus shrinking their moat. Of course, these institutions start with a very wide moat, indeed, so they are unlikely to be frightened by the disappearance of any of their peers at any time in the foreseeable future. However, the more entrepreneurial are likely to find some of the disruptive approaches very attractive because of their ability to lower costs and increase capacity. Thus this set of market leaders is most likely to be moved to consider embracing disruption not because of disappearance of peers, but because of internal desires to maintain their traditional markers of excellence in the face of decreasing public investment. Similarly to the private sector, as one moves down to institutions in the public sector (including two year institutions) that are lower in perceived brand value, disruptors will become more competitive. While public institutions seldom disappear, public institutions in this region will feel considerable pressure (including political) to embrace disruptive approaches that show lower costs and better outcomes.

In fact, as this argument suggests, one does see a number of higher education institutions below the "market leader" tier that already are embracing some of the of the new innovations in order to get ahead of the wave. Examples are Southern New Hampshire University, Tiffin University's association with Ivy Bridge College, and Westminster College. 

The second driver pushing market leaders towards embracing disruption identified by AC is moving into global markets. Unfortunately, most US higher education institutions that go into global markets seem determined to recreate abroad what they have here in the US - including major elements of the cost structure.  Thus globalization has generally not be embraced as a way to experiment with new business models in higher education. I have commented on this often in the past, and it seems to me to be a huge missed opportunity. 

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The patterns shown by companies that have successfully embraced disruption seem to carry important lessons for higher education. Many of the potential disruptors in higher education enable traditional institutions to access and teach students from groups that they traditionally have not paid much attention to - for example adult learners, disadvantaged students, international students in their home countries. We often note that reaching out to groups we do not currently teach is to "go beyond our core competencies." This research suggests that a willingness to go into areas where higher education generally don't have much knowledge may well be key to a healthy future.

The second pattern also reminds us that simply grafting a new technology e.g. distance learning, on to an existing business model is unlikely to produce maximal results. One must also be prepared to reconceptualize the elements of the business model: e.g. resources, processes, understanding of value to be provided, and cost structure.

 All of this together really leads to the last pattern - managing of the new must be different from that of the old. For example AC note IBM evaluates the success of its "incubator" groups, the Emerging Business opportunities program, on how well managers learn from early failure and make adjustments in response. What else should one expect when moving into unfamiliar areas where new core competencies must be developed?

So, this latest study by AC lends encouragement to the idea that some in traditional higher education will see disruption as an actual opportunity to improve, rather than simply as a challenge to the status quo- and that they will succeed! 

Comments

[Christian College]

Market leaders should study about disruptive innovation, its impact and way to overcome it. Nice blog and knowledgeable too.