When the bell-curve meets the shark-fin

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To be good at long-term investing, it is essential to understand the impact of innovation (previous posts.) Previously, we discussed how banking, one of the most highly regulated industries, is getting disrupted. There is a bigger under-current at play here. Accenture’s Larry Downes and Paul Nunes have this to say in their book Big Bang Disruption: Strategy in an Age of Devastating Innovation.

The new disrupters attack existing markets not just from the top, bottom, and sides, but from all three at once. By tying their products to the exponential growth and falling costs of new technologies, their offerings can be simultaneously better, cheaper, and more customized. Not just for one group of users, but for all (or nearly all) customers. This isn’t disruptive innovation. It’s devastating innovation.

 

Earlier research into innovation had modeled it in terms of a bell curve – you have your early adopters who pay a premium for a less-optimal product. This helps you finish up the product for a wider audience, aka “crossing the chasm.” However, innovation in the age of cloud computing, social networks and always-on internet should be modeled as a “shark fin.”

shark fin innovation

Traditionally, incumbents have been able to stave-off disruption by observing what their competitors were up to. For example, if Panasonic caught wind that Sony was working a high-def portable system, then it too would embark on a research project to head-off Sony. But increasingly, innovation is coming “sideways.” For example, Google Maps did not intend to kill off the map making industry, it was just collateral damage caused by Android + phone GPS + 3G network.

These “big bang” disruptions also have a tendency to tail off just as suddenly as they show but, but not without completely throwing the existing incumbents in to disarray. One of the competitive responses has been to buy off the disrupter. But this could end badly if there is no easy answer to the questions “What next?”

zynga omg

Case in point: Zynga’s acquisition of OMGPOP for $180M

But that is not to say all acquisitions are doomed. Consider Google’s acquisition of Waze for $1B in 2013. The company itself was founded just 5 years ago in 2008 but had 50M users at the time of its acquisition. Instagram’s user base grew from 30 million users when it was acquired by Facebook in 2012 and over 150 million by the end of 2013. And let’s not forget Google’s acquisition of Youtube and Cisco’s strategy of “accretive acquisitions.”

Some Indian tech companies, recognizing that innovation is increasingly occurring outside their walls, have remade themselves into venture capital firms. Case in point: Info Edge and Persistent Systems. If the key to Big Bang Disruption is to run a large number of small experiments, then their strategy of making small investments into teething companies might allow them to drive the disruption rather than become victims of it. As the era of “big iron” gives way to on-demand-computing, my money would be on these two to overtake the present-day incumbents in the Indian IT space.

[stockquote]NAUKRI[/stockquote] [stockquote]PERSISTENT[/stockquote]

 

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