Korea and the innovator's dilemma

By John Burton

Clayton M. Christensen is one of the most famous management gurus today. He is considered the prime theorist behind the concept of the disruptive economy, where innovative start-ups successfully challenge industrial giants and even make whole business sectors obsolete. Think as an example of the taxi app Uber threatening the traditional taxi industry by making rides more efficient and at lower cost.

Christensen, who was a Mormon missionary in Korea before entering the doctoral program at Harvard Business School in 1989, established the concept of the disruptive economy in his 1997 book, “The Innovator’s Dilemma.”

The title refers to the fact the executives at established companies often focus on making their products better through incremental improvements to protect their current business model. Christensen calls this “sustaining innovation.” But the executives often ignore other market developments that could wipe out their business, what Christensen described as “disruptive innovation.”

The reason why established executives are normally blind to the threat is that the potential disruptors often introduce competing products that are initially dismissed as cheap and inferior. But the disruptors gradually improve their products to the point where they become “good enough” to win customer acceptance at affordable prices and start taking market share away from incumbent firms.

It is the “outsider” status of the disruptors that is actually an advantage because they are more likely to identify underserved or new markets and initially target less profitable customers. Over time, they gain market momentum to challenge and even topple the dominant players.

In many respects, Samsung Electronics and Hyundai Motor were classic disruptors. In the early 1990s, they were seen as making cheap but shoddy consumer electronics and cars. They achieved initial export success by targeting emerging markets, such as India, Southeast Asia or Eastern Europe, or supplying their products (in case of Samsung) to other, more famous electronics companies. But they continually made improvements to their products to the point where Samsung is now the world’s largest electronics company and Hyundai one of the top five automakers.

Now the tables are being turned, at least in the case of Samsung. Xiaomi and other cheap but “good enough” Chinese smartphone are beginning to erode Samsung’s market share while it has been distracted until recently by concentrating on tinkering with its products, oblivious to the emerging threat.

Korean companies are particularly vulnerable to this phenomenon because many of them are run by engineers, who tend to focus on the product itself rather than the marketing environment and what consumers might be actually demanding. Many Korean companies believe that a good product alone guarantees sales.

It is instructive to note that lot of successful tech companies have actually been built around their marketing prowess rather than engineering skills. Steve Jobs was first and foremost a marketing genius who recognized the untapped potential of personal computers, which were largely being ignored by makers of mainframe computers, such as IBM, who appeared trapped in pleasing established corporate customers.

There is irony in that situation since IBM prided itself as being foremast a marketing machine with its famed sales force. “Marketing is king, engineering is prime minister and software is the court jester” was how IBM management was described 30 years ago, which predated the rise of software programmers.

But IBM was eventually able to survive despite being caught by surprise with the rise of personal computers because it had an acute understanding of how to package technology, which was based on its extensive marketing experience. It was this idea that persuaded IBM to reduce its dependence on computer hardware and pivot to the more profitable business of services and consulting over the last 20 years.

Apple also had a winning idea based on marketing: creating excellently designed products using easy-to-use software that could be applied to a variety of platforms from personal computers and music players to smartphones and tablet computers. Amazon on-line shopping and Facebook social media were also designed around customer-focused services.

In contrast, companies managed mainly by engineers have difficulties weaning themselves away from a product-based core technology strategy. Samsung Electronics had bet heavily on smartphones because it supported a range of other related business, such as semiconductors and displays. Even though it spent the equivalent of the Icelandic GDP on marketing several years ago, it has shown that it still lacks the innate skills able to read the market.

Samsung as well as other Korean companies will have to revive their “disruptive innovation” genes rather than relying on their “sustaining innovation’ ones, if they are to continue to survive and prosper. But whether they will be able to do so will depend on changing their management outlook as well and that may be the most difficult challenge of all.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john.burton@insightcomms.com.