The Pattern: Mature vs dynamic Markets
However I have realized an interesting pattern here. In slow changing, mature markets we may have all the information available to make decisions. So the maximiser approach works fine here. The problem is, this does not apply to areas where rapid innovation happens and where new markets are created. In these fields, which are subject of Christensen’s books, we will never have all necessary information available.
In dynamic markets we have to combine information with intuition
In those areas it is more important to develop an understanding of the market. This understanding is developed through experience and by getting out of the office and talking to customers. Venture Capitalists for example don’t assess founding teams by looking at case studies. Talking to customers of an industry is the way to develop an understanding for what is going on in a market. Once we have the solid experience and understanding of a certain market we are able to take decisions based on intuition. This experience and understanding will also enable us to recognize patterns, trends and connections.
“A new idea comes suddenly and in a rather intuitive way, but intuition is nothing but the outcome of earlier intellectual experience.”
Lessons learned for Investors
Now let’s return to the disruption debate and apply these thoughts. As a practitioner, you can either trust the logic of the disruption theory, what I consider the satisficer approach, or you can request case evidence and scientific proof before you apply it. In the context of rapid innovation, the value of that theory doesn’t lie in its scientific proof through case studies. The value of Christensen’s theory lies in the logic of the theory. Christensen used case studies to recognize a pattern of how innovation happens. Based on those patterns he offers us a framework that we can apply to individual situations and which helps us recognize disruption opportunities and threats. In particular, his books give us sets of questions, which help us observe customers. For example he tells us how to spot customers who are over-served by current products and who would be interested to buy from a market entrant who offers more affordable product alternatives. He also tells us how to evaluate whether there is a sustainable business model around these alternative products in the low-end segment. And finally he also gives us a set of guidelines to evaluate the extend to which these alternatives represent a threat to existing players in the market. Once you speak to customers, you don’t need case studies for evidence, you will know whether a framework applies or not. In short, Chistensen’s books develop patterns, which help us better develop an understanding of the customers and ask the right questions. This is the value that it provides.
Focusing too much on the details of selective case studies even carries the risk of missing out on the big picture. We run the risk of forgetting to apply our intuition and what we learned from speaking to customers. In a study, the Insead University examined the success of predictions from maximisers and satisficers by having them forecast the outcome of the 2010 FIFA World Cup. They found out that maximizing tendencies had a significant negative impact on the correctness of forecasts. Maximizers performed more poorly in forecasts than the satisficers. The most interesting part however is the reason why this was the case. The Insead report states that the lower performance of maximisers was caused by their lower consistency in their predictions and a higher variance of their responses. They say, “that involve judgments about exogenous uncertainty, maximizers’ pursuit for the elusive ‘best’ causes them tremendous anxiety and worriment and this then gets manifested in their higher response variability.” Let’s try to translate this into simpler terms. It seems fair to say that higher “response variability” was caused because maximisers focused too much on selective information pieces and accordingly lost the big picture out of mind.
Applying the patterns and structure that Christensen’s framework provides seems more reasonable than looking for selective case studies as evidence. How well we apply this framework is up to us. And – in that respect Lepore is right – we cannot apply it blindly. It is key to make sure to understand the individual situation and what elements of the framework apply to that situation. Not everything that is called disruption is really disruption. Disruption indeed has become a buzzword, as has been frequently stated before.
The disruption theory helps us by identifying patterns. We can use these patterns as a framework for our analysis.
References to the debate:
Original Article by Jill Lepore in The New Yorker: THE DISRUPTION MACHINE
Comment by Clayton Christensen in Businessweek Clayton Christensen Responds to New Yorker Takedown of Disruptive Innovation
Tom Tunguz on why the theory is useful as a framework: The Disruption Debate Is Focused On The Wrong Ideas
Bloombergview with clear words: An Incompetent Attack on the Innovator’s Dilemma
The Business Insider with further references : The New Yorker’s Takedown Of Disruptive Innovation Is Causing A Huge Stir