Innovation : CBI Journal 5 : Connected Economy

Perspectives on Business Innovation Issue 5 : The Connected Economy

Published May 2000 - reprinted here by permission.

We print below the "big idea" article from the Journal ( Connectivity reinvents the rules of invention ), the table of contents of the Journal, and also Christopher Meyer's Introduction to the Journal, setting out this issue's themes.

You can download the full Journal in Adobe Acrobat format ( 2.4MB )


INNOVATION IN THE CONNECTED ECONOMY : A CONVERSATION WITH CLAYTON CHRISTENSEN

About the Authors :-

Clayton M. Christensen, a professor at Harvard Business School, is the author of the prizewinning and best-selling The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Before joining Harvard Business School, he served as chairman and president of Ceramics Process Systems Corporation, which he co-founded with several MIT professors in 1984. He holds a B.A. with highest honors in economics from Brigham Young University; an M.Phil. in economics from Oxford University, where he studied as a Rhodes Scholar; an MBA with High Distinction from Harvard Business School in 1979; and a DBA from Harvard Business School.

Thomas Petzinger Jr. spent 22 years as a reporter and editor at The Wall Street Journal, where he wrote the paper's popular "Front Lines" column. He is now chairman and chief executive officer of LaunchCyte LLC, a Pittsburgh-based business incubator fostering convergence of the life sciences and information sciences. He has written three books, including The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace, and is a visiting fellow of the Cap Gemini Ernst & Young Center for Business Innovation. He holds a B.S. in journalism from Northwestern University, where he was a Richter Scholar.

Clayton Christensen has revolutionized how the world sees innovation. Established companies, he discovered, pursue innovations that support their existing business models-a practice that blinds them to radical innovations-ones that often come from out of the blue. His longtime study of sustaining versus disruptive technologies has exploded in popularity as a way of interpreting this era of dizzying change.

Christensen certainly believes that the connected economy in general-and the Internet in particular- exposes many industries to the potential for disruptive innovation. But his views are nuanced. In some ways, he believes, the connected economy brings about sustaining innovations that simply reinforce existing business practices. And nothing in the technological landscape, he says, has altered fundamental human resistance to change.

In this one-on-one dialogue, Thomas Petzinger Jr. embraces a more enthusiastic view of the effects of the connected economy. He adopts the view of molecular biologist Stuart Kauffman that the capacity for innovation explodes as the potential for combination increases.Christensen and Petzinger met over a tape recorder in Prof. Christensen's office at Harvard Business School.

We have a more connected economy, of that there's no doubt. Connection increases both access to information and the potential for action. Doesn't that mean that we have a more innovative economy, a deeper capacity for innovation ?

I don't think you can make any generally applicable statements about this, but certainly, there are pieces of the economy where people have been able to maintain profits for a long time because they hold privileged access to information, such as location of inventory or demand. I think those kinds of businesses are very ripe to be disrupted and the world will be far better off as a result.

You think of travel agents and financial services-businesses that centralized information or restricted access to it.

Christensen: That's right. The connected economy will make all of that stuff go transparent. If I manage a portfolio of bonds for Travelers, and I want to dispose of some of my bonds, I go to Salomon Smith Barney, which knows how many people are interested in those bonds on the buy side. They keep that information to themselves. Wall Street generates about $25 billion in profit because they have that kind of information. And the stock exchanges are the same way.

A lot of these kinds of industries have been competing a long time on reliability. You may resent to the end Salomon Brothers' ability to make money from the transaction, but you know if you work through them, they're going to get the transaction done. You pay a huge premium for that. Now, the Internet is going to change that world. Salomon is going to have to compete on a very different basis. They'll need innovations that keep me coming back, because the alternative is Internet-based transaction systems that are so low in cost that there's no way Salomon Brothers can play in that game. Their world's going to change a lot.

Petzinger: Let's talk about the origins rather than the effects of disruptive innovations. Innovation is clearly not a human innovation, so to speak. It's inherent in the process of change called evolution, which is more than three billion years old. We all know that as the speed of evolution increases, so does the speed of innovation, which is why geneticists study fruit flies instead of elephants. Right now, from all I see, the pace of evolution is accelerating in this new economy, and so is the rate of innovation.

Christensen: Yes, unquestionably. But it's not clear to me that in every case, the connected economy is the fundamental root cause of the acceleration. When interactions between buyers and sellers become a lot more efficient, you'd certainly expect that to facilitate faster innovation. But those kinds of innovations are sustaining in character, almost all of them. The disruptive innovations in many ways are far more dependent upon how rapidly consumers' behavior can change, and in many ways that's independent of whether the Internet has invaded our lives or not.

Petzinger: But surely the Internet will cause consumer behavior to change !

Christensen: Yes. But again, those things are relatively lengthy processes. Let me give you a good example. Right now we type at a number of levels. We write papers and articles on word-processing equipment on which spell checking, grammar, and syntax are very important. Then we sit down and we do e-mails not nearly as carefully. We don't spell check. Sometimes a lot of people don't even capitalize. At the low end, kids in chat rooms are very casual about this stuff.

Petzinger: You obviously have teenagers, too.

Christensen: Yes. So now, let's think about voicerecognition technology. My research would predict it will take root in chat rooms first-the kind of very undemanding applications that bring in disruptive technology. The marketing issue is, Where can I find a group of people who would be delighted to use a lowquality product ? Where's a market willing to accept only 90 percent accuracy versus typing ?

Petzinger: In a chat room, that would be a big improvement in accuracy.

Christensen: That's exactly right-but take a secretary who already types 100 words a minute with 99 percent accuracy. To ask someone like that to speak very slowly and distinctly-that requires lots of behavioral change. So this disruption needs to take root in the chat room. Then maybe it will get ported to a Palm Pilot married to a Qualcomm phone. And then next it will be used for e-mail on a desktop computer. And only after that will you and I have developed the comfort and the intuition for how to speak the articles and the papers we are trying to write.

Petzinger: And it will be the companies we've never heard of today that will develop the lousy, early-stage versions. And IBMs of the world will sell the later versions with lots of features and terrific reliability.

Christensen: Exactly. And how fast these innovations grow from beginning to ultimate market, to me, is affected in a tangential way by the Internet and the connected economy. But there is so much non- Internet technology development that has to happen, and so much behavioral change that has to happen.

Petzinger: Innovation is generally the result of combination, the uniting of disparate things. Jacob Bronowski once said, "Every act of imagination is the discovery of likeness between things which were thought unlike." In a previous issue of this very journal, Stuart Kauffman of Bios Group argued that the economy is entering a supercritical zone in innovation, because the more things you have, the more things there are that can exist as complements to what you already have. Doesn't that guarantee an acceleration of innovation ?

Christensen: All of our instincts would be to say yes, because the more analogous situations you get confronted with, the more insights you are likely to receive. But let me offer a counter-example. The people who are bringing to the market these "netpliances" have great growth projections. They're assuming that 40 percent or 50 percent of American homes don't yet have a computer because they are too costly. Inherently they're assuming that if I can price this thing at $199, a lot more people will go online. That may be true, but it may also be true that roughly half of the households in America don't see their lives benefiting by going online. They've just never felt the need. My intuition is that there are so many low-income homes that do have computers that people who don't have them now won't feel the need at any price.

So let's apply this analogy to the issue of combination. It is very true that, as discussed in Thomas Kuhn's The Structure of Scientific Revolutions, the true breakthrough insights have come at the intersection of disciplines-rarely from within the discipline. Long before the Internet ever happened, that was well known, right ? And yet, the vast majority of practitioners have never said, "If I want to change the world, that means I better step up out of my little silo and stick a foot into some other silo." The vast majority stayed right where they were. Now why was that ? Was it because there is something about human nature that causes most people to want to stay within something that they understand ?

Petzinger: Maybe it's not human nature. Maybe there's something in industrial culture, in the hyperspecialization of modernism, that rewards people who stick within their domains. And maybe the connected economy will destroy that culture. A short walk from here, over at Harvad University's Museum of Comparative Zoology, Professor Edward O. Wilson has spent a lot of time studying how human nature and human culture each change with the other.

Christensen: Either way, the availability of information is quite independent from how rapidly people can change their own behavior. I am quite inclined to think that in the connected economy, more people will come across more analogous insights that will help them come up with new things. But I would be reluctant to then expect things to explode exponentially -because you do have human behavior involved.

Petzinger: On the subject of resistance to innovation, let's talk about what I rank the most infamous case of all: healthcare delivery. I'm working with a group of healthcare leaders trying to foster the diffusion of innovation. Even incredibly simple innovations like administering aspirin within 30 minutes of a heart attack can't seem to take hold. What's the deal ? Why is that industry so singularly resistant to adoption of innovation ?

Christensen: I've done a lot of thinking about this, and I've just been given an appointment on the Harvard Medical School faculty. Here is something I realized only after I wrote The Innovator's Dilemma. Disruptive innovations typically enable a larger population of less skilled people to do things previously performed by specialists in less convenient, centralized settings. It has been one of the fundamental causal mechanisms through which our lives have improved. So take the computer, for example. Remember when you had to take your punch cards to somebody else in a central office ? Then along comes the PC. It couldn't do nearly the sophisticated problems that you can solve on a mainframe-but it brought the masses into the computing business. And from that disruptive root, it has gotten so good that we can now do in the convenience of our homes and offices so much more. And we consume far more computing than we ever did before. You could tell the same story about photocopying-or equity investing. Charles Merrill brought Wall Street to Main Street and then E-Trade brought Wall Street to the college dorm.

Petzinger: So disruptive innovations tend to distribute expertise and access, to decentralize them ?

Christensen: Exactly-but in medical care, this has not happened except in a very few isolated situations. We still need healthcare innovations that enable individuals to do for themselves what historically nurses had to provide, that enable nurses to do what you needed a family-practice physician to provide, and enable family-practice physicians to do what you needed a specialist to do. And we need innovations that enable care to be delivered in a home that historically you had to go to a doctor's office to get, and in an office where you needed to be in an outpatient setting to get, and in an outpatient setting where you had to go to a hospital to get.

In cases where that's already happened, we've actually received the Holy Grail of lower cost, higher quality and more convenient healthcare.

Petzinger: Where has it happened in healthcare ?

Christensen: Angioplasty. It used to be you had to be near death in order to justify having open-heart bypass surgery. And it could only be offered in centralized, high-cost, inconvenient settings provided by very expensive specialists. Angioplasty enabled a much larger population of less skilled practitioners whom we call cardiologists. They don't normally think of themselves as less skilled, but they are not openheart surgeons. At the outset angioplasty wasn't nearly as effective. It could only be used on mild cases. But it has gotten better and better and better and better. And that class of patients is far better off. We don't yearn to return to the days when you had to go to Denton Cooley for bypass surgery. We actually consume far more cardiac care today than we did back then because it is lower cost, more convenient, and higher quality.

Or in diabetes, we've seen the same thing in blood glucose monitoring. I have diabetes, but now I don't have to go to the hospital to get my blood tested. I do it for myself. And now I go to my doctor and I tell him how I am doing.

Petzinger: Soon you'll be doing more via the Web. A website will monitor your sugar and beep your doctor when there's a problem.

Christensen: Yes, or it will beep me, and I'll go to a doctor only when there's something that I can't solve. Already the demand for endocrinologists is down a significant fraction from what it was 10 years ago.

Petzinger: But you're talking about exceptions. Healthcare and medicine are singularly powerful at blocking disruptive innovations.

Christensen: Yes. Nurse practitioners are fully competent to diagnose an earache. In fact, they are fully competent to diagnose diabetes. But 38 of the 50 states have regulations prohibiting these people from doing what technology enables them to do. Much of medical care is simple rules-based stuff: I do this test, if I get this reading, I am pregnant and if I get that reading, I am not pregnant. Many things that used to be solved in a problem-solving mode, scientific progress now enables us to solve in a patternrecognition mode. Again, it's those kinds of innovations that enable a larger population of less skilled people to do things that historically you needed specialists to do.

I had a guy come in here about six months ago who told me to put on this set of glasses he brought in. They were really thick and black with a funny little rubber bulb on each end. He had me take my glasses off and put his on. He put an eye chart over there and told me to cover my left eye and pump the right bulb and to stop as soon as I could read the bottom line. I repeated with the other eye and in 15 seconds, I had corrected my own vision.

Petzinger: Let me guess. The ophthalmologists have crushed him.

Christensen: The healthcare community sees this and says, "You can't let people correct their own vision ! Because what happens if they have glaucoma or cataracts ? Who is going to catch this ?" Well, that's the right answer to the wrong question. The right question is how can we enable individuals to do for themselves what they can do ? And what other innovations in this system or in the technology will be required so that we don't allow glaucoma and cataracts to go untreated ?

Medical specialists are aligned with the interest of the hospitals, who are aligned with the interests of the American Trial Lawyers Association, who are aligned with the interests of the regulators, to prevent disruption from happening.

Petzinger: Sometimes, the most bitter enemies actually need each other.

Christensen: That's a good point.

Petzinger: I have a hunch the connected economy will route around obstacles like that. I once wrote about an internist in Hartford named Jerrold Spitz, who took one of his friends to the emergency room on a Friday night with heart attack symptoms. The attending physician needs to see a baseline EKG, right ? But the patient's baseline is locked up in a doctor's office somewhere till Monday morning. So they admit the patient for the entire weekend, and it turns out he had heartburn instead of a heart attack. So Dr. Spitz started a service called EKGonline. Now any physician anywhere can access your baseline EKG from the Web.

Christensen: To the extent that the Internet brings more information to physicians who already don't have enough time to digest information, I am not sure it is going to change a whole lot. But where the Internet enables a broader group of less skilled people to do things that historically only specialists could do in a centralized setting-this fits the pattern of disruptive innovation.

Petzinger: We could probably have a similar discussion about education, couldn't we ?

Christensen: Yes. Now people must come to the Harvard Business School, a centralized, expensive, inconvenient setting, to get educated by high-cost specialists. We need innovations that enable people at Motorola University to deliver content of the quality you receive at the Harvard Business School, for a fraction of the cost, for the greater convenience.

Petzinger: Education, health care-can you imagine higher stakes ? Whether the connected economy accelerates them or not, disruptive technologies are certainly headed our way. It's both scary and exhilarating.


You can download the full Journal in Adobe Acrobat format ( 2.4MB ) 

           THE BIG IDEA 

6 INNOVATION IN THE CONNECTED ECONOMY: A CONVERSATION WITH CLAYTON CHRISTENSEN

Does the Internet really facilitate innovation ? Clayton Christensen, author of The Innovator's Dilemma, and Tom Petzinger, former Wall Street Journal coulumnist and author of The New Pioneers, debate the limits of the connected economy.


13 MEET THE CONNECTED ECONOMY'S NEW CORPORATE SPECIES: THE DOT COMPANY

What do you get when you combine the speed and flexibility of a dot com with the heavy-duty infrastructure of a brick-and-mortar company ? The dot company-the latest corporate entity of the connected economy.

 

          INNOVATION IN ACTION

 

The connected economy brings business, customers, and technology together in an unprecedented way. The following three case studies describe how one company brings customers and merchants together through wireless technology, how another group of companies created their own corporate venture funds, and finally how an industry of competitors collaborated to create a single software standard.


21 ERICSSON'S GEOBILITY GOES FOR THE CONNECTED CUSTOMER

 

26 PUSHING PLATFORMS: CORPORATE VENTURE FUNDS

 

33 WORKING TOGETHER: COLLABORATIVE COMPETITION CREATES NEW MARKETS

 

         A BLUEPRINT FOR CHANGE

 

40 IMPLICATIONS OF NETWORKED BUSINESS MODELS FOR INCUMBENT FIRMS

As start-ups infiltrate the economy today, established companies need to evolve their business models if they are to remain competitive. Here's how mature companies can begin to take advantage of the connected economy.


52 THE ERNST & YOUNG NAVIGATOR: HOW TO GO PUBLIC IN THE CONNECTED ECONOMY

Taking your company public has always been fraught with competition and challenge- but in today's economy, it's especially daunting. The Ernst & Young Navigator, Ernst & Young's online consulting service, provides advice 24x7 for those in the market for an IPO.

 

          ON THE HORIZON

 

58 DYNAMICS OF EXCHANGE I N NETWORKED MARKETS

The implications of networks in the connected economy go beyond pricing and segmentation. Here is an exploration on how the Internet and successive technologies will reshape the nature of exchange.


67 BREATHING LIFE IN TO THE CONNECTED ECONOMY

Learning, adapting, and evolving are characteristics of both biology and business. Figuring out how to operate in a "bioeconomy" may be the next big thing in business innovation.

 

          SHARED CONVERSATION

 

Our purpose in Business Innovation is to promote a Shared Conversation among business practitioners and observers. On the topic of the connected economy, we've heard a variety of perspectives. Here are three of them . . .


74 ANTONIO DAMASIO ON THE FEELING OF WHAT HAPPENS

 

83 THE CENTER FOR BUSINESS INNOVATION'S VISITING FELLOWS ON THE EXPERIENCE ECONOMY

 

87 GUY KAWASAKI ON RULES FOR REVOLUTIONARIES

 

         DEPARTMENTS

 

91 TECHNOLOGY WATCH

An excerpt from Neal Stephenson's book, In the Beginning . . . Was the Command Line-a treatise on the cyber-culture past and present.


95 THE WELL-READ MANAGER

A review of Code and Other Laws of Cyberspace by Larry Lessig, and other recommended reading to help build your knowledge library on the connected economy.


99 HEADS-UP

A listing of upcoming events not to be missed.


100 RESEARCH ROUNDUP

Updates, results, and other news from Cap Gemini Ernst & Young-sponsored research initiatives.


108 INCONCLUSION

In the spirit of open conversation, one good diatribe deserves another. If you enjoyed the Cluetrain Manifesto, wait till you've read the Gluetrain Manifesto.


WELCOME TO THE CONVERSATION

Author William Gibson is widely quoted as having said that "the future is already here-it's just unevenly distributed." Seldom has this been so true in business. As the infrastructure of the connected economy falls into place, the gap between those businesses that are impelled by the capabilities of networks-to connect, to catalogue, perhaps most importantly, to search-and those who have not yet begun the transformation, continues to grow.

As "e-commerce, e-company, and now e-conomy" becomes the conventional wisdom, the most conservative of companies ( and, at least among the advanced economies, of nations ) are wiring up ( 1 ) to reduce costs-for example, through the currently hot idea of B2B exchanges such as the Ford/GM/Daimler Auto Exchange, estimated to save $3,000 per car; ( 2 ) to add new value to their products or services-gasoline companies are offering tiny network terminals that tell the gas pump who you are so you needn't fish for your credit card; and ( 3 ) to start entirely new, information-based businesses ( e-Schwab ). Lee Iacocca's fear that a service economy would render us a "nation of burger-flippers" seems a distant and fleeting memory.

We are by no means the end of the line, however. As B2B and B2C give way to A2A ( Anyone to Anyone, like eBay and PayPal ), new infrastructure like DSL and cable modems bring high-speed, "always-on" Net access to millions of homes, and truly broadband networks move off the drawing board, the evolution that began with websites, moved through push, to portals, to currently fashionable B2B will continue at an enormous rate for years to come.

For the moment, however, established enterprises are working hard to catch up with the dot coms who are paving the way. In our leading article, Clay Christensen, author of The Innovator's Dilemma, writes about the challenges of moving into the future. John Jordan's article on the Implications of Networked Business Models provides a roadmap of the territory, parsing the now substantial experience of the dot com world. At the same time, some of the dot com leaders are coming to understand Iacocca's point of view a bit better and are striving to add physical muscle to their speed and intangible value. In our article on the "dot company," we describe the convergence of the rebellious and the established toward a new species of enterprise combining the best of both-thesis, antitheses, synthesis-as Hegel ( Georg Wilhelm Friedrich, not John ) taught, the structure of all revolutions. The future is not dot coms alone, nor will they be eliminated by finally waking giants; we will have an information economy populated by the various types of dot companies, commanding both the tangible and the intangible, infused with speed, customization, anticipation, and the rest of the attributes of today's best informationonly ventures.

After the Revolution . . .

Will this complete the upheaval ? At the Center for Business Innovation, we always wonder, "What's after what's next ?" One good place to look is at the development of pieces of software being used as autonomous agents. Today, these small pieces of code can search the Internet for you, finding the Web page you want or the lowest price on a "Weird Al" CD for your daughter. Soon, agents will replace humans in the B2B world, creating automated markets that negotiate effectively with far more complete information than a purchasing agent or salesperson could ever capture. But efficient transactions and markets are only a precursor.

This morning, I set up my antivirus program to update its definitions daily. My Mac already goes to the Apple website every Tuesday morning, by itself, to see if new operating system components are available, and if so, it downloads and installs them. The computer I shut down in the evening is not the same as the one I started up over coffee.

Our article entitled "Breathing Life into the Connected Economy" discusses the likely path such developments will take. The connected economy will learn to innovate on its own as it becomes alive ! The peasants-autonomous software agents-will not so much arise as infect a revolution carried on by biological means rather than those of physics. We will find ourselves living in a world that evolves without us, following the rules of an economic ecology, in which we remain the dominant species, but not the only one initiating change.

Will we like it ? Who knows. But the roles of individuals, leveraged by active, learning agents; corporations, self-assembled over networks; and society itself, increasingly independent of both geography and scarcity; will surely change. To stay informed, watch this space.

You can download the full Journal in Adobe Acrobat format ( 2.4MB ) 


Christopher Meyer was the director of the Cap Gemini Ernst & Young Center for Business Innovation in Boston. The Center was charged with identifying the issues that will be challenging business in the future, and defining responses to them. His own current research interests include the development of a New Theory of the Firm, the implications for management of new discoveries in complexity and self-organizing systems and the development of the "connected economy."

Chris established the BIOS Group, Cap Gemini Ernst & Young"s initiative to develop complexity-based solutions for management. He has more than 20 years of general management and economic consulting experience. With Stan Davis he co-wrote "BLUR: The Speed of Change in the Connected Economy" ( Addison-Wesley, 1998 ), "Future Wealth" ( Harvard Business School Press, 2000 ), and "It’s Alive: The Coming Convergence of Information, Biology, and Business" ( Crown Business, 2003 ).

Chris can be reached at Chris.Meyer@gotnerve.com.


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