This essay is part of Case Study class assignment that I took on the second semester of my study at MSc Innovation Management and Entrepreneurship, University of Manchester. Upon finishing this essay, I realize that the definition of “Disruption” has skewed so far from the original definition that was coined by Christensen (1997). Nowadays, Disruption is a cheap word that we use everywhere, for almost every new every product. Hopefully, after reading this post, you will get a better understanding about what Disruption really mean and to help you achieve that, I will include several paragraphs that I deleted because I can only put maximum 2200 words on my essay. Enjoy reading ! 🙂
This essay will discuss about digital cameras as high-end disruption in photography industry and how Fujifilm as an incumbent transform itself as a reaction. This essay will proceed as follows: first, the concept and background literature for high-end disruption will be discussed. Second, an analysis of digital cameras as high-end disruption will be detailed. Third, the Fujifilm transformation case will be analyzed and last, conclusion and recommendation will be provided at the end of the essay.
The term Disruptive innovation was used by Christensen and Raynor (2003) instead of Disruptive Technology to broaden the theory’s applicability. In his original work, Christensen (1997) described Disruptive Technology as a technology that only attracts a niche market due to their subpar performance in aspect which mainstream customer value but started to diffused to wider audience and finally replace the old technology as the quality increase drastically in a short time, matching and surpassing the old technology while at the same time, offering a new value that is not available on the old technology.
The next 2 paragraphs is additional that I don’t include in my essay
Christensen (1997) used the development of the Hard Disk Drive industry as an example of a Disruptive Technology. He argued that the most important aspect in the development of Hard Disk Drive industry was the architectural innovation that made the size of the drive became smaller. During the introduction of the new drives, it always offered less capacity compared to the previous size that was more known on the market. For example, the 8-inch drive only carried 20 MB capacity when it was introduced, compared to the 200MB capacity that was offered by the 14-inch drive, the required capacity demanded by the mainframe industry as the main customer. The lack of interest from Mainframe Industry to the 8-inch drives caused the manufacturer of the 14-inch drive to nor pursued the 8-inch drive as they thought there was not enough demand.
Nonetheless, the 8-inch drive found a niche market in the minicomputer industry. It capacity grew exponentially in the following year while offering other important attributes such as smaller size and internal power supplies that in the end attracted the interest from the mainframe industry, leaving the 14-inch with no market. The same pattern was repeated during the transition from 8-inch to 5-inch and from 5-inch to 3.5-inch. The new drive initially offered lower capacity, rejected by current customer and manufacturer, find a new niche customer, capacity grew exponentially, and finally replace the old model as the standard on the market.
There are two type of Disruptive Innovation based on the radicalness of the technology, low-end disruption and high-end disruption. The radicalness of innovation refers to the newness of the technology that is being introduced in the market (Govindarajan and Kopalle, 2006). Low end disruption happens when incumbents using sustaining strategy, building products that is getting better and more expensive, exceeding customer expectation and leaving a hole in the the lower price segment, which could be used to introduce non-radical innovation with specific feature that is valued by price-sensitive segment (Christensen and Raynor, 2003). Example of low-end disruption are disk drives, Dell direct and low-cost no frills airlines like Southwest and JetBlue. On the other hand, high-end disruption happens when the product is offered at higher price compared to existing product in introduction strage that attracts less price-sensitive which value the feature offered by the product (Govindarajan and Kopalle, 2006). Example of high-end disruption are digital camera, cellular phones, and Walkman.
Combining Govindarajan and Kopalle (2006) innovation characteristic that captures low-end disruption and general definition of disruptive innovation which include both low-end and high-end disruption, we can identify 5 characteristics of a high-end disruption:
- The innovation underperforms on the attributes mainstream customers value
- The new features offered by the innovation are not valued by the mainstream customers;
- The innovation is typically more complex and offered at higher price than existing product
- While the innovation seems to bring greater profit, the niche market that it attracts during the introduction make the profit potential seems limited.
- Over time, further development allows the technology to be offered at much lower price, allowing the technology become affordable for the mainstream market.
DIGITAL CAMERAS AS HIGH-END DISRUPTION
Figure 1 shows a surprising fact that it only took 5 years since the first significant production of digital camera in 1999 to take over the whole camera production by 2004. The development of digital camera was fit into every characteristic of high-end disruption. First, digital cameras had low photo quality when it was introduced, a feature which people value in camera. The first digital camera sold was Dycam Model 1 in 1990 which captured black and white photo and had very low resolution at 376 x 240 pixels. The photo quality from the Dycam Model was fall short compared to the photo quality from 35mm film camera. The photo quality of Digital Camera started to get better in 1999 when Nikon launched Nikon D1, the first digital camera that equipped with lenses that was equivalent with the one used in 35mm film camera, producing 2.62 MP photo.
Second, after Dycam Model 1 was introduced, several companies were launching digital cameras, offering various kind of features that were not available in film camera. Kodak DC25 which launched in 1996 offered media storage to save the photo, while Sony Digital Mavica FD5 which launched a year later used different approach to save the photo using 3.5-inch floppy disk. By providing a media storage system, digital cameras allowed people to reuse the media storage, they did not need to buy it continuously as they used to do with film camera. Another important feature from digital cameras is photo preview that was offered by Casio QV-10 in 1996, allowing people to get the photo result instantly which save time and money. However, those features were not attractive for mainstream customer who were looking for camera with high-quality photo.
Third, when Nikon D1 as the first digital SLR camera was launched in 1999, it was priced at $5000, much higher than the traditional SLR camera at around $350 (Canon EOS 300). Fourth, since the price was so expensive, only the rich and working journalist who could afford it, making the target market very limited. Fifth, as the technology progress and more people were buying digital camera, the price of digital camera had decreased significantly between 2001-2005. Figure 2 shows how the price had changed during this period, a 4-5 MP digital camera that used to cost more than $1,500 in 2001 only cost less than $250 4 years later in 2005.
Figure 3 shows that the introduction of digital camera not only affected the camera industry, but the whole photography industry. The introduction of digital camera pushed the photo film industry out of the photography business, replaced by memory. The same fate also happened to the photo lab and silver hade prints, their service was not needed since almost everyone uses digital camera. Their position on the image display market were replaced by the printer industry. This situation had a great impact on Kodak and Fujifilm whose main revenue were from photographic photo film, photo lab, and silver halide prints.
When digital cameras started to replace film cameras in late 1990s, the traditional photography industry was enjoying the peak of photo film selling. An unsurprising fact for incumbents in disruptive innovation, since they tend to focus on their existing customer (Christensen, 1997). The incumbents started to realize the threat from digital camera in 2004 when the sales of film camera continue to decrease significantly. Komori, who was appointed as the new CEO in 2003, acknowledged this challenge and developed a medium-term plan called “Vision 75” in 2004 to establish the second foundation of Fujifilm. He ordered research other applications of Fuji’s core capabilities in chemistry and other technical experts to find the new source of growth. Diversification of product using core capabilities is beneficial because it allows companies to use their strategic asset and valuable experience (Markides and Williamson, 1994)
Inside Fuji’s Vision 75 strategy were 6 action points, which will be analyzed as follow.
- Building a centralized Advanced Research Laboratories to research on earlier stage, more novel technologies. The establishment of centralized research lab was important because it encourages risk taking and long-term thinking, attracts top talent, and could emphasize the importance of research (Tirpak et al., 2006), elements that are important in researching earlier stage product. Along with the centralized research lab, affiliate marketing group was also established in 2006. The introduction of affiliate marketing group was to foster collaboration between marketing and R&D which proven to be a key factor in developing successful product (Hise et al. 1990). Moreover, to support the R&D activity in the new business, the R&D budget had been increased from 60% in 2002 to 76% by 2006.
- Stepping into the merger and acquisition activity which had spent more than ¥ 150 billion between 2004 and 2005. Fuji acquired companies which business was related with Fuji’s existing portfolio in business or technology, a practice which create superior economic return compared to acquisition of companies that has no correlation with Fuji’s business (Singh and Montgomery, 1987). The merger and acquisition activity was also a novel approach for Fuji, which historically relied on in-house business development, showing that it had adopted open innovation practice.
- Setting up a corporate venture capital with ¥20 billion “business development fund” in 2004 on exploratory research. To support the mission to find a new source of revenue stream, the establishment of corporate venture capital allowed Fuji to detect and develop strategical collaboration with a new venture (Christensen, 1997). One of the result of this activity was Mediapix, a joint venture with NTT Data, which ease printing proses of pictures taken with mobile phone.
- Reorganization which started by laying of around 5000 employees, a difficult decision that had to be taken because Fuji could not afford to lose more money after losing its main revenue from photographic products. While downsizing does not always result improved financial performance (Morris et al., 1999), the decision saved Fuji from losing ¥100 billion which could threat the company’s stability. In addition, Komori created six new divisions to create a decentralized structure, a familiar model among companies to increase the speed of execution and decision making (Patacconi, 2009). Fuji that used to be a single business unit with a few peripheral divisions, became highly decentralized with 14 business units by 2006.
- Change the mindset of the employees was vital because without the support of the employee, every plan would not work. The employee had to realize that in the face of disruptive innovation from digital cameras, Fuji had to develop a new culture around developing leading-edge technology. To convince the employee, Komori would held lunch meeting, gave speech to explain his mission and Fuji’s new organization, and even introduced a new company’s philosophy. The way Komori approach his employee was crucial because it allowed direct communication between employee and the higher management which is vital in major change process (Morgan and Zeffane, 2003).
- Develop long-term roadmap in 2006 by selecting several technologies and product areas as the focus of future growth: (1) High functional material (2) Medical Imaging and Life sciences (3) Graphic Arts (4) Documents (5) Optical devices. This decision came several years after the centralized R&D labs ware established, which means that the result from the research had suggested Fuji to focus on those 5 areas, giving employee direction of the playing field and to prevent wasting resource on unprofitable project (Anthony et al., 2006)
Three years after the introduction of “Vision 75” strategy, the transformation of Fujifilm seemed to be working well. In Highly Functional Material business, they had developed flat panel display materials for high growing LCD and TV screen market and acquired a UK dyes and ink manufacturer to strengthen its footprint in inkjet materials. In Life Science business, it had invested two biopharma firms in 2005 and had entered both cosmetics and dietary supplements industries in 2006, believing that its nanotechnology had the capability to develop high-quality cosmetic materials. Figures 4 shows Fuji generated more money from Information and Documents solution in 2006, covering the loss from Imaging solution that has been decreasing since 2004.
CONCLUSION AND RECOMMENDATION
Digital Camera is one of the example of high-end disruption. When it was introduced, the price was very high with very low image quality and only attracted a niche market. It was difficult to believe the idea of digital cameras replacing film cameras. When Komori realized in 2004 that digital camera would eventually replace traditional camera, which meant that Fujifilm would lost its main revenue stream, he developed a mid-term plan called “Vision75” which focus on finding a new source of growth by utilizing Fuji’s core capabilities in chemistry and other technical experts. In 2006, Fuji’s plan to find the new source of growth seems to have worked as the share revenue from Information and Documents were increasing amid decreasing share revenue from Imaging Solution continue since 2004.
As Fuji keep diversifying its product, one of the challenge Fuji will face was that it would tap into a new market territory which Fuji had no prior experience, such selling its own cosmetic brand instead of licensing the process like what Fuji usually did. However, selling product and retailing was actually not completely new for Fuji. They used to sell Camera and photo film in retail. The only aspect that was completely new was the cosmetic market, which Fuji has no experience. There are some recommendations that we have which could be used tackle this issue. First, Fuji could conduct a transfer knowledge session from its employee who has experience in retail market. However, there is a chance that the employees do not have the knowledge anymore since it had been a long time. Second, Fuji could hire senior management team from well-known cosmetic company such as K-II. This activity would allow Fuji to get the network and credibility in cosmetic industry, which are important to attract top employees. Third, Fuji should start in small market instead of going fully global since the beginning to test the performance of the product, it would reduce the risk if something goes wrong and getting feedback from customer.
Anthony, S., Eyring, M. and Gibson, L. (2006). Mapping Your Innovation Strategy. Harvard Business Review, May.
Chesbrough, H. (2002). Making Sense of Corporate Venture Capital. Harvard Business Review, March 2002.
Christensen, C. and Raynor, M. (2013). The Innovator’s Solution: Creating and Sustaining Successful Growth. 1st ed. Harvard Business School Publ.
Christensen, C. (1997). The innovator’s Dilemma : when new technologies cause great firms to fail. 1st ed. Boston, Mass: Harvard Business School Press.
Govindarajan, V. and Kopalle, P. (2006). The Usefulness of Measuring Disruptiveness of Innovations Ex Post in Making Ex Ante Predictions*. Journal of Product Innovation Management, 23(1), pp.12-18.
Hise, R. et al. (1990). Marketing/R&D interaction in new product development: Implications for new product success rates. Journal of Product Innovation Management, 7(2), pp.142-155.
Markides, C. and Williamson, P. (1994). Related diversification, core competences and corporate performance. Strategic Management Journal, 15(S2), pp.149-165.
Morgan, D. and Zeffane, R. (2003). Employee involvement, organizational change and trust in management. The International Journal of Human Resource Management, 14(1), pp.55-75.
Morris, J., Cascio, W. and Young, C. (1999). Downsizing after all these years: Questions and answers about who did it, how many did it, and who benefited from it. Organizational Dynamics, 27(3), pp.78-87.
Patacconi, A. (2009). Coordination and delay in hierarchies. The RAND Journal of Economics, 40(1), pp.190-208.
Singh, H. and Montgomery, C. (1987). Corporate acquisition strategies and economic performance. Strategic Management Journal, 8(4), pp.377-386.
Tirpak, T. et al. (2006). R&D Structures in a Changing World. Research-Technology Management, 49(5).
Featured image source: 1