Author searches for dilemma's solution

August 30, 1999

BY MICHAEL KRAUSS

"Prediction No. 8: Non-Internet companies will figure it out," said Kevin O'Connor, CEO of DoubleClick, Inc. "Most companies today have not figured out how the Internet will affect their businesses." His point ? This year they will.

Now there was a blinding flash of the obvious from the podium at Summer Internet World, held in July in Chicago.

"What is taking them so blasted long?" was my thought as I listened to O'Connor's words.

O'Connor went on to talk about Harvard Prof. Clay Christensen's book, The Innovator's Dilemma, then he went on to Prediction No. 9.

Well, I'm still stuck on Prediction No. 8 and The Innovator's Dilemma. If you haven't read the book, you should, and here's why.

The Innovator's Dilemma explains why you can do everything textbook-perfectly in marketing and managing your business, but the business may still go down the tubes. The challenge is reconciling your classic training in marketing management with the opportunities and threats posed by new disruptive technologies like the Internet.

Christensen's well-researched book illustrates that paying attention to core customer needs and meeting those needs may send your company to oblivion. Ouch! I thought that was what I was supposed to do as a marketer (pay attention to customer needs, that is, not send my company into oblivion).

That's Marketing 101: Identify buyer needs, build products and services to profitably meet those needs and keep one step ahead of the competition.

"The pace of progress that markets demand may be different from the progress offered by technology. Products that do not appear to be useful to our customers today may squarely address their needs tomorrow. We cannot expect our customers to lead us toward innovations that they do not now need," Christensen writes.

Translated into plain marketer's English, market research among your current core customers and prospects may prove misleading. Needs assessments, product and service concept tests and in-home product-use tests all may provide false readings.

Christensen's studies of the computer disk drive market demonstrated this phenomenon. Most of the time, it makes sense to study and listen to the core market, but when new disruptive technologies loom on the horizon, it's best to pay attention to the fringe of the market - the early adopters, not the middle majority.

It also might make sense to pay attention to your own professional judgment and intuition as well.

Another problem raised by Christensen is the lack of flexibility of our organizations. "The capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe," Christensen writes.

What a very polite way of saying that many companies are "one-trick ponies." Maybe that explains why Merrill Lynch was so late in turning to the Internet. Merrill management always was known for having the best retail broker sales force in the business. I'm sure it was difficult for their leadership to imagine business carried out through another channel.

In contrast, a lack of internal inhibition may propel Drugstore.com to become the largest fulfiller of medical prescriptions.

All of us know that change is difficult, and big, monolithic companies simply have difficulty changing the way they do business in order to take advantage of the opportunity presented by disruptive new technologies.

There's another problem as well. In the past, if large organizations failed to innovate, they could always buy the innovative upstart companies. A fat wallet made up for a failed internal R&D effort.

Columbia House's recent merger with online music retailer, CDnow is an example of this phenomenon. After all, we used to say the pioneers are the ones with the arrows in their backs. Let the upstarts develop and refine the new disruptive technologies, and then we'll simply acquire them.

Where the idea of acquiring the upstart innovators breaks down is on Wall Street. It's about market capitalizations. The market caps of these new upstarts are so great that established companies can't afford to buy them. Look at MP3.com, which recently completed its initial public stock offering:

Market capitalization is a stunning $4 billion. That's a pretty penny to pay if you are one of the five traditional music distributors (Universal, Time Warner, Sony, Bertelsmann, or EMI) trying to get into the Internet music game.

Wouldn't it be a lot cheaper to create the innovations yourself? It would, but it would take really visionary leadership from the CEO's corner office and some gut-wrenching change initiatives to get today's large organization steaming in the direction of real innovation.

Take the fast-food business as another example. McDonald's invented the modern fast food business. It lives and breathes hamburgers. It invented the quality, value and service-business model. Will they be able to embrace new, disruptive technologies?

The other day, I asked someone close to the top of the McDonald's organization, "How many customers come through the Golden Arches every day?" The estimate was around 25 million customers a day.

What if you collected the e-mail address of every one of those customers? Given McDonald's marketing prowess, could your future business be in selling toys and other goods over the Internet by mining your customer data? Could the hamburger business become a mere point-of-entry and an opportunity for relationship building?

I'm not sure if word filtered up to McDonald's CEO, Jack Greenberg. In fact, I doubt it did. Would you tell your friend, the CEO of the world's biggest hamburger chain, that his future might be in collecting e-mail addresses and selling toys over the Web and not in burgers? Probably not. He might think you were crazy.

And there's the problem in a nutshell. Given the speed with which the Internet is reshaping fundamental business models, maybe DoubleClick's Kevin O'Connor should leave a copy of The Innovator's Dilemma at the drive-through next time he goes for a Mac, a pie and a fry.

Be sure to put Jack Greenberg's name on it, Kevin.

Michael Krauss is a partner with Diamond Technology Partners in Chicago.
He can be reached at news@ama.org.