Business Report

The Empire Strikes Back

How Xerox and other big corporations are harnessing the force of disruptive innovation.

It has been a long time since anyone considered Xerox an innovation powerhouse. On the contrary, Xerox typically serves as a cautionary tale of opportunity lost: many obituaries of Steve Jobs described how a fateful visit by Jobs to the Xerox Palo Alto Research Center in 1979 inspired many of the breakthroughs that Apple built into its Macintosh computer. Back then, Xerox dominated the photocopier market and was understandably focused on improving and sustaining its high-margin products. The company’s Connecticut headquarters became the place where inventions in its Silicon Valley lab went to die. Inevitably, simpler and cheaper copiers from Canon and other rivals cut down Xerox in its core market. It is a classic story of the “innovator’s dilemma.” Xerox struggled to defend against threats at the low end of its business, failed to create growth in new markets, and found itself on the brink of irrelevance, if not extinction.

But now Xerox is turning things around. In the fall of 2009, the first order of business for its new CEO, Ursula Burns, was to buy Affiliated Computer Services for $6.4 billion. The 74,000-employee services company had built a powerful new business model by taking over document management from corporations, state governments, and law firms, typically using non-Xerox equipment. For companies, outsourcing was simpler and cheaper than doing it themselves.

Under Burns, Xerox was now redefining its mission. “I kept asking people: What is it that we do?” she said in a recent speech at the Churchill Club. “The answer was always: ‘We’re a copier company, a printer company, a document company.’ ‘No, that’s not what we do,’ I said. ‘We help companies transform very complex and burdensome business processes.’”

As Burns plunged Xerox into the services business, she devoted R&D resources—at the storied PARC lab and elsewhere—to developing simple, Web-based document tools such as BlitzDocs, which enables banks to streamline the mortgage approval process, and CategoriX, which helps law firms increase their analytical capabilities and manage millions of documents.

This is disruptive innovation—making the complicated simple, making the expensive affordable, driving growth by transforming what exists and creating what doesn’t. And it appears to be working: profits in Xerox’s services business rose to $911 million in the first three quarters of 2011, up 13 percent from a year ago. Within three years, Burns expects two-thirds of Xerox’s revenue to come from the services side of the business, compared to around half now.

In the past, Xerox’s success would have been an anomaly. Less than a decade ago, when we were finishing the book The Innovator’s Solution (Christensen as primary author and Anthony as his research associate), we highlighted the fact that disruptive innovations are typically introduced by startups, the rebel forces in the business universe. The book named 100 companies that had successfully created disruptive businesses since the 1870s in industries from accounting software to excavators. A full 85 percent of them were new companies formed specifically to commercialize disruptive technologies.

Innovation Race: Most disruptive technologies are brought to market by startups (blue). But established companies (red) are responsible for a growing percentage. Above, we compare the origins of over 250 significant innovations, from Bell’s telephone to Napster, by company type.

We define disruptive technologies as those that offer “good enough” solutions to new groups of consumers, and often at radically lower prices. For just that reason, disruptors often fly below the radar of incumbent businesses, which have strong short-term incentives to deliver better-performing, higher-margin products to their most demanding customers. They initially view disruptive innovations as undesirable for their customers—if they see them at all. But then the performance of the disruptive technology keeps improving, to the point where it can topple a corporate giant. Just think about how inconsequential e-books were to brick-and-mortar bookstores three or four years ago. Then came the price and performance improvements of Amazon’s Kindle, and the introduction of Apple’s iPad, and suddenly Borders was forced into liquidation.

However, analysis we have done at Innosight suggests that a growing number of long-established market leaders like Xerox are turning disruption from a threat into an opportunity. Throughout the 1980s and 1990s, only about 25 percent of disruptive innovations we tracked in our database came from such incumbents, with the rest coming from startups. But during the 2000s, 35 percent of disruptions were launched by incumbents.

In other words, the battle seems to be swinging in favor of the Empire, as the following examples confirm.

·         General Electric preëmpted competitors by developing low-cost electrocardiogram devices to sell to doctors in rural India and China, who historically could not afford more complicated devices.

·         Whereas startups like Tesla Motors have introduced high-priced electric cars, it is incumbents like General Motors and Nissan that developed affordable models, potentially disrupting the business of oil companies.

·         Dow Corning expanded a self-service, Web-based distribution channel called Xiameter to market low-cost silicone materials, disrupting its own commission-based sales force.

·         Microsoft came out with Kinect, the gesture interface system that appeals to new classes of consumers who see joystick gaming controls as too complicated.

There seems to be something important going on. Empires are striking back at rebel forces. Why is this happening? And what does it mean?

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. Just consider how technology companies such as Nokia and Research in Motion are cratering, while Hewlett-Packard has gone through wrenching leadership changes and even considered leaving the personal-computing business. Today’s tightly interconnected markets make it harder for a company to be deaf to the roar of change.

The increasing pace of disruptive threats isn’t merely anecdotal. Turnover among the world’s largest companies is accelerating. Consider Fortune’s bellwether list of the 500 largest companies in the United States. The list would seem to change slowly; after all, in 2011 companies needed close to $50 billion in revenue to make it to the top 50 (up from $30 billion in 2001). But in the past 10 years, 40 percent of the top 50 companies have changed. Some high-flyers, like Compaq and Sun Microsystems, fell off the Fortune 500 list entirely because they were acquired, and still others, such as Enron and Kmart, essentially disintegrated. Other recent victims of technological disruption: Blockbuster, Unisys, Tribune Co., and CA Technologies (formerly Computer Associates).

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.

In the General Electric example, the medical-equipment division charged local teams with developing ultrasound devices to sell in rural India and China. GE followed a classically disruptive approach. It developed a stripped-down, low-cost version of its established technology, created a new distribution channel, and arranged for local financing to help get the devices into the hands of rural practitioners. These breakthrough strategies have helped GE boost growth in emerging markets.

Among incumbent companies that have benefited from disruption, we see three patterns repeat. Generally speaking, they maximize their chances of success by:

1.      Pushing beyond core competencies. Over the past decade Amazon.com has created new businesses in retailing, e-readers, and cloud computing. When we asked CEO Jeff Bezos how he did it, he said, “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.” Pushing boundaries helps companies spot disruptive signals early—especially if they pay attention to new competitors who serve customers that were previously ignored.

2.      Embracing business-model innovation. Driving disruption requires moving beyond purely technological innovation to consider new ways of creating, capturing, and delivering value. The clearest example of this is Apple, whose market capitalization has soared from $3 billion a decade ago to around $340 billion today. Sure, it has introduced new computing devices, but central to its success have been iTunes, the App Store, new pricing models, and innovative retail stores.

3.      Managing the old and the new differently. Over the last decade IBM’s Emerging Business Opportunities (EBO) program has helped the company succeed in new markets like blade servers and networked data storage. One key is not judging new technology solely on its potential financial return. Instead, IBM evaluates the success of its EBO teams primarily according to whether managers learn from early failure and make adjustments in response.

The surge in incumbent-led disruption means different things to different people. If you’re an entrepreneur and your strategy assumes that the market-leading incumbent will ignore you, you ought to rethink your business plan. The evidence suggests that incumbents are waking up and recognizing that they can’t cede markets to new entrants. Perhaps a generation ago General Motors or Nissan would have ignored upstart electric-vehicle makers like Tesla. Today’s titans are responding aggressively. Tesla has smartly sought to license key parts of its technology to market leaders like Toyota. Entrepreneurs who are dead set on defeating market leaders should consider novel ways to work with them instead.

If you are a senior executive inside a large company, make sure you are thinking about ways to drive new disruptive growth. The next time you and your colleagues talk about strategy, ask yourself how many projects you are working on that have the power to create new markets or disrupt and reframe existing ones. If your coworkers all look at each other blankly, your growth strategy is insufficient. Over time, there’s no escaping it: if you don’t disrupt others, you can be sure that either new or old competitors will destroy you.

Scott D. Anthony is managing director of Innosight Asia-Pacific and the author of The Little Black Book of Innovation (Harvard Business Press, 2012). Clayton M. Christensen is cofounder of Innosight and a professor at Harvard Business School.

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Disruptive Innovation

Technological disruption occurs when faster, simpler, cheaper inventions threaten market leaders. From social networks to renewable energy and medical advances, the speed of technological change has never been greater. With the creative destruction of markets, startups and established companies are vying to create tomorrow’s businesses and shape a better society.

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