Through the Market-Backdoor --- while they sleep

Or how to steal an entire market with a Disruptive Technology

In his research on "disruptive technology", Harvard Professor Clayton M Christensen discovered that when the engineers of leading firms occasionally do get the go-ahead to develop a disruptive technology, their sales department will invariably make it fail by trying to sell into their familiar existing markets. For leading firms this is very likely the high-end, high performance and high profit market, in which the "immature" new technology cannot compete. To launch such a disruptive product, new customers must be selected who can benefit from it. Upper management of leading firms will always side with marketing and, if recognized early, will prevent such "blatant mistakes" by their engineering divisions, no matter how large the cost savings are.

In fact, these cost savings (for the customers) are precisely the reasons for established firms to avoid any and all development of disruptive technologies, because it would cause a substantial drop in their own revenues. This is called "Market Cannibalization", because the firm would now also compete against their own products, which could actually threaten the very survival of the company. The management of established firms is very sensitive to these possibilities and will do their utmost to prevent it from happening, to ensure that there will be revenue-growth instead. Professor Christensen sums this up with a sentence that could be right out of Lao Tzu's, Tao Te Ching

The very Capabilities making their Organizations Effective also Define their Disabilities.

And herein lies the key to overturn a powerful established Industry with a "disruptive innovation". The great insight of this sentence points us strait to a basic concept of Martial Arts: <Turning the Strength of an Opponent against him>. This Strength or "very Capabilities", are their "processes and values", in short their business model. This "modern" business model not only made them grow to their present size, but it also maintains it in an environment of change, because it provides for a strong innovative ability for "sustaining" innovations to adjust to normal evolutionary technological change. The way I think about these "great firms" is as gigantic skyscraper like structures, which are held-up and given stability by a "steel-skeleton" called business model. For a small startup company to compete against these "Dinosaurs" with a "normal" technological advance and the same business model is a hopeless undertaking. But a "disruptive technology" is not a normal evolutionary advance, it's a big leap, causing a "Punctuated Equilibria" as Jay Gould and Niles Eldredge named it in 1972 for the great advances in biological evolutionary theory. The "steel structure" of the "great firms" cannot bend to adjust to such a leap in technology. It's the very foundation of their success, which finally brings them down. As Kenneth Boulding said, "nothing fails like success".

When in the past, old established industries were overturned, it nearly always happened by a <disruptive technology>, or even by a mere "killer application". Another, maybe better term would be <enabling technology> instead. --- Christensen writes:

Nearly every one of the disruptive technologies reviewed in The Innovator's Dilemma - including hydraulic excavators, steel minimills and small business accounting software - had the effect of enabling a larger population of less-skilled people to do things that historically had been in the domain of expensive specialists. In each of these examples, customers ultimately found themselves with products and services that were far more reliable, more convenient to use, and cost less, than what would have been available had these disruptive revolutions not occurred. ---- Though they were simple and inadequate at the outset, the disruptive innovations that overturned their industries left us much better off - even though they invariably left in their wake the wrecks of the companies that were the industry's prior leaders. - In fact, these disruptions have been a fundamental mechanism by which the quality of our lives has improved.

Please keep these conclusions about the "Quality of our Lives" in mind when in the following pages I try to find effective ways to - "Kill" - Multi-Billion-dollar-Industries. Granted, business is not primarily a moral issue, but it "feels good" to know one might be on the righteous side. While in several chapters of his book and in a separate article in the Harvard Business Review, Professor Christensen deals with the problem of how an established firm can survive an assault by a disruptive innovation, my objective here is the Opposite. I am dealing with the problem of how a small entrepreneurial "Startup" company can capture a substantial, or even a complete market, which is now held by old established firms. And just as Christensen uses concrete product examples in his chapters, I am using the novel Hand-held DSO (STAR TREK TRICORDER) design based on the new disruptive technology of "Software-Defined-Instruments".

The first question one has to answer is, "do I really have a disruptive technology"? Apparently, this is not easy to answer as one Department Head of HP/Agilent admitted to me after he, and most of his colleges, had read Christensen's book. That was then, today we have a paper that is a "must-read", a superb essay on this subject specifically targeting electronic developments. The introduction to the EETimes supplement Sept. 002, "The Art Of Change" by Girish Mhatre. In "Picking the winners" he develops several criteria for a wining technology. Products that work by "Push or Pull", those that concern materials and their processing and technologies that rethink architectures. (E.g. Software defined) And as general principle he suggests a list named "insatiable" demands for electronic products. These are higher bandwidth and frequency, more memory, smaller size, lower cost, lower power consumption.

The second task is to identify the shortcomings of the "disruptive" product compared to the offerings of the established industry. For the present design of the Tricorder DSO the main difference, compared to the high-end offerings of major players, is that it works in real-time only in the first third of the time-base range, the upper two thirds are in equivalent time. This has been the standard for high bandwidth scopes for several decades, but the major T&M firms are now going to all-realtime in their drive to "up-market" products, which generate much higher profits. (See Christensen) It will take a few years until the disruptive technology of "Software Defined Instruments" can also provide this feature. Identification of the shortcomings is very important for the selection of the "introductory market", and for this I found the detailed letter of rejection, which I received from HP's T&M division, very useful. --- Eric Vogel, R&D Project Manager at the time, writes:

1. Equivalent time sampling (ETS): Customers simply do not understand ETS.. Our customers, surprisingly, are not very knowledgeable about test equipment, so the notion that a scope can have a sampling rate lower than its bandwidth violates their only reality check --- Nyquist. Because customers expect that sampling rates should be at least 2X the desired bandwidth, ETS scopes must fight an uphill battle to educate customers on whether it can work at all, let alone how well it can work. As an extension to ETS, we believe your technologies would have an even higher barrier to acceptance.

Eric Vogel basically presented HP's upper-management understanding of their markets and type of customers. It is a long and very detailed letter, which tells me that HP held a serious meeting with many staff members to discuss my proposal. (It also confirms the high respect that we all felt for HP during my long time with Bell Labs.) And while this part of his letter pinpoints precisely what type of markets should be addressed with the Tricorder DSO, another element of the letter is even more revealing for some different considerations. These are the parameters of the new DSO not mentioned at all, such that the bandwidth can be an order of magnitude higher than anything presently offered by HP/Agilent, and at a cost 20 times lower than the offerings of its competitors. (Bandwidth is THE main performance parameter for a scope, like horsepower is for an engine. (See the charts.) There are three more points addressed in this letter and I will copy only point 2 here, not for its importance, it isn't, but because it's funny.

2. Single-shot performance: Our customers are telling us that they use handheld, high-speed sampling products like HP LogicDart as single-shot boxes, rather than repetitive boxes. That means that the fundamental contribution of your technology is contrary to the needs of our customers for single-shot performance.

This $1000 LogicDart was a two-channel logic analyzer and had just been introduced with a substantial advertising campaign. Nine months later it was quietly put to rest as a complete market failure. (I suggested to Eric to donate all unsold units to local bars, with dartboards incorporating the HP logo. - I got no response for this great new proposal.)

So, what should the introductory market be for the Tricorder? --- The same that Apple Computer chose for their Apple II and the first Macintosh --- Universities, for students and teachers at some discount. And while Apple Computer did it mainly for "name-brand-recognition", the Tricorder has two additional reasons to go there first.

1.) There is a great demand for high-performance (high bandwidth) scopes at engineering departments of all Universities, which presently cannot be filled, because of prices as high as $40,000 for ETS scopes (and $75,000 for 4 GHz real-time units). The Tricorder DSO can easily provide these performances for costs ranging from $350 to $900, which will even be affordable by many students. Addressing the University and student market aggressively will also increase the total oscilloscope market beyond the present $1.4 billion mark. Since this will not lower the revenues for the big established firms, they might even ignore it, but even if they don't, there is nothing they could do to counteract it. (Please read: "What Goes Up, Can't Go Down" in the Book.)

2.) The second reason for choosing the University engineering student market first is directly related to Eric's first argument. This new GigaHertz DSO design, as it is the case for nearly all "disruptive technologies", does not yet provide all the "conveniences" of conventional DSOs of established firms. It is a "thinking mans" scope instead, and here is the "rational" for addressing the engineering students first:

There is a "temporary" difference in their life's objectives for a (run of the mill) engineer in the industry and for an engineering student at a University. The first is there to make good money and to have an easy job, and not to have to learn anything new. The student at the University, however, is there to learn something new, so he or she can get the best job, make good money and not have to learn anymore. (Same objectives, --- different times in life.) Therefore, a student will be willing to learn what a "ETS scope" is, and that, for instance, she or he needs to program the computer to perform a short loop to make certain signals repetitive. --- (Are there also engineers who want to make difference in this world? Yes you, who are reading this paper and I, who wrote it.)

Very soon s/he will become very familiar with their little "personal" GigaHertz DSO, and they will understand that the difference between realtime and sampling really does not matter for the majority of testing jobs; in fact, the vastly higher bandwidth of the ETS scope will be much appreciated. After graduation, their "personal" DSO will go with them to their first job, and if it is a small company, they will be the only engineer who has a scope that can analyze the signal performance of 2-GHertz + clock PCs and fast GHz data-links.

This initial student market is quite substantial. In the US alone 90,000 engineering students enroll at Universities every year and the World market should be much larger. These are the initial sales, which will be followed by sales to design laboratories and service organizations, especially for the 2-GHz and higher performance units, because the price difference, compared to conventional DSOs, is much larger.

Why go through the Backdoor of the Market?

The leading Firms of the Industry, striving to maintain stability within the shell of their business model, have at least on the surface a valid reason to avoid disruptive technologies, but why do the majority of their customers also do so? This is obviously not a rational decision, but clearly a prejudice. The CEO of the engineering department of the (now defunct) CompuServe organization drove this home to me. On seeing my design of a handheld GigaHertz DSO at one tens the cost of existing products, he immediately said: "Nobody will buy a GigaHertz DSO if it is not made by HP or Tektronix!" He is right of course, and therefor this new GigaHertz DSO will not address the <old-management-market> at all for the first year, --- it will come in the <back-door>, addressing the young engineer and student who wants a "personal instrument".

What is a <Personal Instrument>?

In the old times every cowboy had his own personal saddle and six-gun, every sea-captain and navigator his personal telescope and sextant, every physician his own stethoscope --- and even during the first half of this century, every engineer had a quality slide-rule sticking out of his shirt pocket. These were their <personal> instruments, and it was desirable to have them of the best quality and performance. Why? Because these instruments reflect the competence and pride we have in our profession, they become an <extension of ourselves>. The same psychological forces are still at work today for technicians and engineers. They have, or would like to have, "personal" instruments as their tools of the trade. While nearly every technician and engineer has his or her "personal" DMM today, the high performance scope must be shared with others. In many laboratories in this country engineers have to <stand in line> to use one of the few high-performance DSOs. The privilege for allocation of these expensive instruments is jealously guarded. ('Non-social' engineers are 'hogging' the $20,000 scopes on their benches.) Unfortunately, these high-performance DSOs have become an absolute necessity in this decade of 2 GHz PCs and 10 Gigabit data-links. And if a similar instrument, the size of a scientific calculator, could be marketed for prices close to that of high-end DMMs, (about $500) most technicians and engineers would demand their "personal" scope. For this to happen, the low price is very important, because it must fall within the "purchasing authorization limits" of first line supervision of large corporations.

The Future belongs to the Young, --- and long live the Revolution!

The young and competent engineers and students will be the ones to demand to have this new type of Tricorder-size, GigaHertz DSO/TDR in his or her desks as a <Personal Instrument>. ----- And management will comply to keep them happy, while still buying the $20,000 DSOs for the <real work>. (Until they too wise-up) I still remember when HP introduced the first scientific hand-held calculator many years ago. Bell Labs management of my department decided to buy one for every (deserving) engineer as a reward. What happened was that the whole shipment, many dozens, $395 each in 1972, got stolen right at our shipping dock. We had to wait another two-month to get our scientific calculators because HP had a large backlog of orders. I am sure the same thing will happen to the new Hand-held GigaHertz DSOs --- but if you are the manufacturer, it means only a second order, and that is a 'good' thing.

These first scientific calculators of 1972 were actually a <disruptive technology> which killed all slide-rule manufacturers in one year; and it was the for-runner of the PC revolution. When I visited with my wife's family in Germany in the 1970's I observed something which I thought was very strange at the time. I found that my brother-in-law belonged to a "calculator-club" at the math-department of his university. This phenomenon became much more visible with the first Altair and Apple II computers in this country.

And here is a very "unscientific" way, requiring no professional knowledge, to identify the beginning of a <disruptive innovation>, namely by its "emotional flavor", that of a "revolution". Politics and business are often very much related, as the British Tea bags floating in the Boston Harbor would indicate. And just as the beginning of a "political" revolution starts with an "underground" organization, a "business" revolution also creates this type of underground. "Computer clubs" sprung up all over the country with the introduction of the first Personal computers (Altair, Apple). I also took part in this, and so did Paul and Bill from MS --- and yes, it had the flavor of a revolution, POWER TO THE MASSES, us little guys who had to stand in-line to get access to the big IBM mainframes. We exchanged programs in Tiny Basic and Fig Forth and the motto was "We do not need the million dollar IBM's any more, we are FREE of them!" ---------------> Mainframes into the Boston Harbor!"

One might wonders why the (old) management of HP/Agilent has so much trouble identifying a <disruptive technology>. But maybe one shouldn't, they have plenty of famous historical figures as shining examples, such the last Queen of France and last Czar of Russia. As Christensen said: Never in history have the leading companies in an industry led a disruptive revolution, They typically have not just ignored the potential disruption, they have actively worked to discredit and oppose them.

And Agilent is attempting to do precisely that --- this year with a $135 million advertising blitz. I think it is rather ironic that just a few $100 thousand were enough to start Microsoft, and the same amount would be sufficient to bring the first "disruptive" instrument to market. Will we ever become aware (conscious) of mankind's evolution in politics, business and technology before it happens? --- Or will we always be surprised after the fact? ---- Back to Index