One issue that is likely to haunt some of the high-flying tech and game companies that are currently doing wonderfully is their reliance on data and analytics can inhibit innovation. Clayton Christensen, the esteemed Harvard professor who wrote the seminal work on innovation, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, explains how deep customer understanding works against strong firms keeping up with innovators in their space. The use of data and analytics to understand and anticipate customer needs is now the driving force behind most of the exciting tech and gaming companies. This strength, however, could leave these companies vulnerable to new competition and turn today’s stars into tomorrow’s duds.
The Innovator’s Dilemma
To understand the situation data reliant companies will find themselves in it is important to understand first the innovator’s dilemma. Although I will blog about it in more detail this year, (I will not try to capture all the nuances of Christensen’s book; I strongly recommend you read it for yourself), the underlying thesis is that often great companies fail to be the disruptive innovative force in their industry because they have such a deep understanding of their customer’s needs they do not see disruptive opportunities that initially cater to other users. Instead, they continually create better products for their customers, which sustains technology but cannot disrupt. Disruptive companies come in with a simpler technology that aims at a different market, gains traction there and then encroaches on (and eventually destroys) the established firms. This cycle has been repeated in multiple industries. As Christensen writes, “blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.”
Christensen uses the example of the disc drive industry to highlight this phenomenon (though he also has multiple other examples). 5.25″ drive makers kept creating better drives for PC manufacturers. When 3.5″ tech came on the scene, these makers assumed that most of their customers did not have a need for the smaller drives (which, incidentally, had worse performance metrics) so they never committed. Instead, new entrants sold cheaper products to laptop makers. Eventually that market became bigger but by then the established firms could not gain a foothold. Moreover, the 3.5″ technology was perfected to the point at which it took the market away from the established players, even in their core segments.
Christensen also asserts that markets that do not exist cannot be analyzed. Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable. Even though the market may not yet exist, it could provide the entry point for competitors to launch a disruptive technology and then encroach on the existing market. Disruptive technologies, though they initially can only be used in small markets remote from the mainstream, are disruptive because they subsequently can become fully performance-competitive within the mainstream market against established products.
The game industry as a prime example of the innovator’s dilemma
A look at the history of the game industry shows Christensen’s thesis at work. As discussed, Generally disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. The disruptors offered less of what customers in established markets wanted and so could rarely be initially employed there.
Social games fit this definition perfectly. The early social games from Zynga (Farmville and Mafia Wars), Playfish (Pet Society and Restaurant City) and Playdom (Mobsters and Social City) were developed using Flash, a programming language disdained by established game developers. The graphics were much simpler than those demanded by traditional video game customers. The gameplay was often one or two generations simpler than that of current console games. Traditional game companies did not see an opportunity because they knew what “real gamers” wanted and it was not these social games. At the end of the day, though, most traditional game companies either went bankrupt or had to spend billions to acquire social game companies to survive in the disrupted game industry.
Why analytics and big data are the enemy of innovation
There is nothing more powerful than data to help companies understand their customers, particularly for social game companies to understand their players. Yet this customer intimacy inhibits the ability to innovate. Tech companies know what their customers want, how much they want, when they want it, how much they want to pay for it, etc. They know how their customers will react to small changes in price, timing, value, etc. This knowledge allows companies to improve continuously the experience for their customer without wasting money or effort on activities that do not have an optimal ROI. Every decision regarding product is toward optimizing the customers’ lifetime value. Never before have companies known so much about their users.
This knowledge is great in optimizing the user experience and improving the product or technology to suit the customers’ needs. It runs counter, however, to creating or competing with disruptive technologies. These technologies initially cater to a different customer. All of your data and analysis is not only worthless but also counter productive, as it pushes you to optimize your product for the customer you know. As Christensen shows repeatedly, industries big and small, low tech (earth-moving equipment) to high tech (CPUs and video games) get disrupted by simpler rivals attacking a different part of the market and then moving into the established market space.
As big data and analytics become more ubiquitous, this disruption will occur more frequently and on a greater scale than ever before. Companies that are worth millions—or tens of millions—of dollars due to their deep understanding of customers because of all the data they have will not be able to combat disruptive entrants targeting different customers. What worked before will not work now.
What you can do to remain innovative
Unless you want to end up like Control Data or Midway Games, you should take the steps to make sure your company can create and leverage disruptive technologies. I am the last person to recommend abandoning analytics and you must ensure you are always using all tools possible to cater to your existing customer base. That should be the central part of your business strategy.
You should also realize, however, that by its nature building your tech and product to cater to existing companies is not disruptive and leaves you vulnerable. The strategies and plans that managers formulate for confronting disruptive technological change, therefore, should be plans for learning and discovery rather than plans for execution. Keep them independent from the strategies for serving your existing base and at least you have a fighting chance in the next wave of innovation.