Thursday, August 14, 2003

Disruption and oligopolies Austrian economist Joseph Schumpeter (1883 - 1950) has had his reputation enhanced over the last few years. While he wrote about many things, the ideas that seem to resonate the most are his ideas of "disruptive innovation" and "creative destruction." To quote from the online Concise Encyclopedia of Economics, "Innovation by the entrepreneur, argued Schumpeter, led to gales of 'creative destruction' as innovations caused old inventories, ideas, technologies, skills, and equipment to become obsolete. The question, as Schumpeter saw it, was not 'how capitalism administers existing structures,... [but] how it creates and destroys them.' This creative destruction, he believed, caused continuous progress and improved standards of living for everyone. " Another online academic paper called "Disruptive Innovation Explored" makes a distinction between incremental and disruptive innovations "Incremental or evolutionary innovations … improve the performance of established products, services or business models. They are critical to sustaining and enhancing shares of mainstream markets." If we take, for example, the television manufacturing industry, it is constantly evolving in terms of adding improved color and sound, cable readiness, a larger variety of screen sizes, and now high-definition. None of these moves in themselves have significantly altered the manufacturing industry, even though the industry is very different from what it was 30 years ago. The other kind of change has been the disruptive or revolutionary change Revolutionary breakthroughs lie at the core of entrepreneurial activity and wealth creation , and almost by definition serve as the basis of future technologies, products, services and industries … Terms such as "disruptive", "radical", "non-linear", "discontinuous", "breakthrough", "paradigm-shifting" and "revolutionary" have all been used to describe what is in essence the opposite of sustaining innovations. One such threat to the current television manufacturing industry is the idea that future televisions will be as much computers as boob-tubes. If and when this marvelous disruption occurs, the current TV manufacturers will be in a vulnerable position, where their expertise can be outflanked by others. However, having a new paradigm is not enough "for a discontinuous innovation to be disruptive, successful exploitation is vital, which, results in significant transformation of the mainstream market and its value proposition." Disruption in the market is a big threat to established companies, who are often blindsided by the changes. We agree fully with these categories, and we believe that the new oligopoly has learned these lessons. The new oligopoly tries to grow in such a way to prevent new rivals from coming out of nowhere to disrupt their territory. We've written about the practice of buying out new companies and their ideas, whether in the beer industry or the ice cream industry. That allows the buying company the option of releasing the disruptive product (and getting an edge on other members of the oligopoly), or stifling to for the long-term good of the industry or its allies. This why Pepsi is investing in new age drinks, why Budweiser has bought microbreweries, and why Kraft and bought out organic food companies. It's why big oil companies invest in solar and wind power, big auto companies are on the leading edge of electric car companies, why Microsoft went from scoffing at such development as point-and-click computing and the Internet to dominating them. Big companies are inherently bad at disruptive innovation; their investment is paid back better if they make evolutionary innovations, improving products they know they have a market for. Disruption is just too risky. But oligopolies have learned that they have to move fast whenever there is a threat of disruption and use money and market power to keep the disrupters under their control. They obviously can't do it all the time, but they are getting steadily better at it. 7:34:43 PM

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