November saw the twentieth anniversary of ‘The Innovator’s Dilemma’, the book in which Clayton Christensen sets out the theory of disruptive innovation. However, in an article in the Harvard Business Review, Christensen commented that he believed his theory to be ‘possibly the most misunderstood theory in the world’. So how is it misunderstood?

Clayton Christensen
Clayton Christensen

In the popular conscience, ‘disruption’ seems to apply primarily to new innovations that create new products and new business processes. It seems that most people believe a truly disruptive innovation has to completely change the game and do so very quickly.

For example, most people would say that the most disruptive innovation of recent times has been the internet. It has changed the way we live, created new businesses and destroyed existing ones.

Yet, this contrasts quite starkly with Christensen’s definition in the innovator’s dilemma. This definition states:

A disruptive innovation is not a breakthrough innovation that makes good products better. A disruptive innovation makes products so much cheaper that none of your traditional customers will buy them and causes you to go after new customers.

So, according to the theory, the internet in itself was not disruptive. Indeed, in its original form, it was so expensive and difficult to access that few people used it. What was disruptive was the evolution of technology that allowed us to access the internet. This process democratised access and allowed people to do things they had been unable to do before, not because they didn’t have the technology but because they couldn’t access it. So, the truly disruptive innovation is the smart phone, allowing people to access the internet cheaply and simply all over the world.

When this type of innovation occurs, companies have a choice, which Christensen termed ‘the innovator’s dilemma’.

The new innovation usually reduces the cost of production and allows products to be sold much more cheaply. If companies adopt these products, they have to sell them at lower prices which reduces their margin. It can also damage their brand as existing customers normally view these cheaper products as inferior. However, if they don’t exploit the new innovation, other companies will and eventually may come to challenge or even surpass them. And that’s the innovator’s dilemma.

Examples of the innovator’s dilemma

Disruptive innovationWe can see this dilemma played out in two famous case studies. The first begins in the 1970s when Toyota innovated the business model of automotive production and began importing low quality, cheap cars to the US. Ford noticed this and decided not to imitate the product as the cost in changing their current processes and the risk of cheapening their brand was too high.

As we know, over time, Toyota improved and began to move up the value chain until it eventually surpassed Ford. Meanwhile, Ford found its margins reduced anyway as the innovative, cheaper production methodology of Toyota began to dominate the industry. So, eventually Ford suffered the same loss of income and brand power that it initially feared. This case was one of the inspirations for the innovator’s dilemma.

Moving on to the late 1990’s, Intel noticed that, although the personal computer market was growing rapidly, their market share was stagnating. On investigation, they discovered that the growth was in cheap, low quality machines, containing inferior rival processors.

In consultation with Christensen, Intel decided to develop cheaper, lower quality processors and enter the lower end of the market. Their rationale was that if they didn’t take on these new competitors when they were weak, they would eventually come to challenge Intel. This move was very successful. Using its economies of scale, Intel secured a large share of the lower end of the market as well as the premium segment and ensured its continued success to this day.

So what does all this mean for ELT?

Online learning is certainly disruptive. It is so disruptive because it has democratised learning, making it so much cheaper than before in terms of both cost and time. For example, anyone who wanted to learn a language in the past had to pay for a course at a school, spend time and money travelling to class and then spend more time learning in the classroom. That’s a considerable investment.

With online and mobile learning, you can use free, short activities at any time with very little investment. Therefore, online learning makes language instruction viable for large numbers of people who previously rejected it due to the high levels of financial investment and time required.

The current reaction from both publishers and ELT schools seems to be either to ignore online learning or accept it’s important and attempt to adapt our current business model to digital. This second approach is dangerous for two reasons.

Teenager with mobile phoneFirstly, most people using online platforms are not our traditional customers. Before the creation of online learning, they chose not to purchase our product. This was largely due to reasons of commitment, time and cost. The Ed Tech business model of largely free access to short activities appeals to them in ways our products don’t. What these customers don’t particularly care about is good pedagogy because they have a lack of experience and, sadly, interest in this.

Therefore, if we only attempt to transfer our standard business model and pedagogy to the online world, we’re doomed to fail as we are not engaging these new customers with things that they value but rather trying to offer them something we value and they are largely ignorant of and uninterested in.

The second danger lies in business processes. Our current margins depend on charging for instruction, whereas many of the new online products are free. So, by charging for online content, we risk being overlooked, even if our products are better, because the democratisation of content has also created a commoditisation of content.

And what about those sections of the ELT community that feel we don’t have to engage with online learning? Their argument seems to revolve around quality. As online products are often very low quality, they present very little danger to our traditional markets.

Although we may not be extending into new markets, our traditional customers value our quality and are prepared to pay a premium for top class pedagogy. As a result, many ELT professionals feel that we should be developing our traditional processes and refining our current customer offer, not worrying about online learning. Maybe these people should get a job at Ford?

Why we should be worried

The theory of disruptive innovation teaches us that most disruptive innovators enter at the bottom of the market but they don’t stay there. As their product is cheap, they often gain wide appeal at the lower end of the market and outside traditional markets. Using that market power, they improve until they move up the value chain and take on traditional market leaders. That can take years or minutes, depending on the product.

Evidence from the UK ELT industry suggests that this may already be happening. At least four schools have closed this year and many others have seen severely reduced bookings. This may simply be a reaction to the strength of sterling. A product with already high levels of investment: buying a course, booking a flight and a hotel, travelling to the UK, is now just too expensive. When sterling falls in value, the customers will probably return.

Or maybe they won’t. When they stopped travelling to the UK, where did these customers go? Did they stop learning? We know that some chose to study in Malta or the USA but not all of them. Where did these other customers go? Online? And if they did, are they ever going to come back? Or will the ease of access, low cost and low time commitment keep them online forever?

What should we do?

So how to respond? Personally, I think the answer is to give up the debate about quality and pedagogy and act. Why aren’t there thousands of imitators of Duolingo already? We need to move fast, copy these products and flood customers with choice.

Duolingo
Duolingo

Looking at Intel, we learn that a successful challenge to industry disrupters is not to develop a ‘better’ alternative to the competitor but to quickly launch a substitute that performs to the same level.

Therefore, a successful challenge to Duolingo would involve reverse engineering its features and business model and launching a similar version. If a large publisher were to do this, they could use their economies of scale to market this product and create a strong competitor in the free language learning market.

This probably wouldn’t be profitable but that’s not the point. This action would take market share from Ed Tech companies and stop them from developing and challenging us in our core market in the future.

In this way, we can ensure that the rise of Ed Tech within ELT will be led by ELT companies. These quick and dirty products will be bad at first but don’t worry, Christensen’s theory tells us that quality will come later.

Why has no-one done this already?

This probably hasn’t happened because of what it would mean for the industry. It would wipe out our margins and very quickly drive many companies bankrupt. However, if we continue to try to support a business model that is no longer sustainable we’re all going to go bankrupt anyway, albeit more slowly. That’s what the story of Ford tells us.

Some people reading this may ask why it’s better to go bankrupt quickly rather than slowly. Obviously, it’s not. However, the fact remains that, without radical change in the ELT industry, the majority of companies will go bankrupt as their market share is eroded by online alternatives and margins fall.

We need to recognise that the majority of online customers don’t care about what we’ve been doing offline. We need to engage these customers and work out what they value. And we need to give it to them for free. I don’t know how the ELT industry can do this but I don’t think the Ed Tech community really know how to monetise their product yet either.

However, Dr Christensen’s ideas tell us that if we don’t present a real alternative to our new competitors, those competitors will create the future of the industry. If that happens, will that future include us?

The theory of disruptive innovation teaches us that once a disruption takes place, we only have one choice: we can either be the disruptor or be disrupted. Which would you rather be?

 

References

The Innovator’s Dilemma, C. Christensen, 1997

Disruptive Innovation Explained:

Disruptive Innovation, https://hbr.org/2015/12/what-is-disruptive-innovation

 

Photos

 

Ed Pegg is thebusinesslinguist.wordpress.com.
He is a business trainer, author, public speaker and entrepreneur based in London in the UK.
Ed believes our words are our most powerful tool. He helps global professionals to choose the best words to get the results they need at work.

20 Comments

  1. Dear Ed,

    You forthright appraisal of your original post humbled me. I have learned a great deal on this forum. Your recent post demonstrates that there is still much to learn. Thank you.

  2. Hi Mike and Brendan,

    My sincere thanks for taking the time to write such clear, even handed and thought provoking comments.

    In light of your comments, I agree that my article is guilty of over-generalisation and maybe reads a little sensationally. However, I hope you can understand that this was unintentional.

    Basically, I’m a teacher who read an article, had an idea and eagerly shared it. Any problems with the analysis are due primarily to over-enthusiasm and a lack of careful editing. I am not trying to push any particular agenda and apologise if this came across.

    On reading these comments, a friend of mine sent me this article about the problem of ‘we’ in English. I think it’s relevant to this conversation and you’ll enjoy it if you haven’t seen it already.

    http://bit.ly/1Y40Egh

    Both of you raise a good point about the geographic focus of the article and I accept that this is unfairly focused on the UK. Again, this was a consequence of my narrative drive and I apologise. On reflection Mike, I would say that my focus was even more local than you suggest as I was basically talking about specific threats that my organisation faces.

    And I agree with you Brendan that my jump from exchange rates to how one form of Ed Tech is destroying the industry was maybe a bit over-reaching. Again, this was a reaction to frustration in my local context.

    The UK industry is in an incredibly challenging place at the moment for many reasons. One of these is the strong pound. However, many of my colleagues feel that it’s only the exchange rate that is causing problems and I wanted to make them aware that there are wider issues involved. However, I accept your points and apologise for my sloppy analysis.

    As to your comments about the structure of the industry, I again agree with you but hadn’t fully considered this at time of writing. I’d appreciate it if you could re-read the article substituting private language schools for ELT Industry.

    Finally, I accept that maybe it was a mistake to use ‘fact’ in the article. The statement is not a fact but an opinion. Again, I hide behind over-excitement and narrative drive.

    I would like a second attempt at this offending passage:

    ‘However, the fact remains that, without radical change in the ELT industry, the majority of companies will go bankrupt as their market share is eroded by online alternatives and margins fall.’

    to be reread as:

    I believe certain sections of the ELT industry are experiencing severe disruption. This is primarily led by how online resources is changing the way learners study and the way customers view the value proposition of language schools.
    This is particularly relevant to the high cost niche of private language schools in the UK. Unless a serious rethink of the business model is undertaken, I believe this niche of the industry is unsustainable in the future.

    I guess that’s what I was really trying to say but without your engagement I wouldn’t have been able to get there.

    Before I finish, I’d like to ask you both to do something.

    Mike, although I hadn’t considered it before your comment, I agree that ELT Jam is very Eurocentric. Have you considered redressing that balance by submitting a post giving the viewpoint from China on Ed Tech?

    Brendan, you sound quite sceptical about the importance of Ed Tech and definitely have some strong analysis to support your view. Would you consider a post telling everyone to calm down?

    I would sincerely love to read both these articles.

    Finally, although I accept that my analysis lacked rigour, I’m genuinely happy to have written it and created this forum to discuss an issue that I think is both fascinating and critical to the future of a job I love.

    Thank you both for engaging me so openly and helping me develop my understanding.

    If you would like to continue this conversation after the popularity of this post fades, please continue to contact me at edpegg@hotmail.com.

  3. Hi Ed,

    Thanks for your article. On first read, like Mike Butler, I was a little confused as to who you were addressing and who you were referring to. I’ve since re-read it a few times and I get what you are trying to say.

    If you don’t mind, though, there are a couple of areas I would like to clarify, and some points I would like to challenge – in the spirit of constructive, open discussion, of course. But, please do make yourself comfortable – this is a rather long-winded comment.

    Firstly, I think it’s worth defining what you mean by ‘online learning’ – I suspect by this you mean free, self-study materials that are available online (though, often can be used offline)? This is important because online learning can include high-quality, teacher-led instruction, too. And, a lot of online learning uses premium, paid-for product. Thus, in the context of your argument, the traditional incumbents (who are also present online) become messily comixed with the industry insurgents of EdTech.

    Secondly, I think the term ‘ELT industry’ gathers so many disparate players and bundles them into one, large bucket. There will be huge variance between a private language school in Vietnam, a residential summer school in the UK, a state primary school in Mexico, a freelance instructor in Madrid, and an open university with English language instruction in Turkey. And this is even before we throw publishers into the mix, with international publishing houses targeting global markets versus local publishers, some of whom operate in highly-regulated and closed markets – note how some ministries of education mandate that only locally-published educational materials can be used in state education, which offers them a massive protective shield against all challengers (both new and old).

    In one of your comment responses you state that ‘ELT is an open marketplace where customers are free to choose provision.’ I’m afraid that this simply is not true as a blanket statement: the majority of current learners are probably engaging with English as part of their compulsory education (often in state-provided education). These learners mostly can’t choose their provider, and their providers will be much less likely to be threatened by EdTech disruption than those operating in the private sector. In this large (and still growing) segment of ELT, the ‘protective shield’ becomes more like a Star Wars-esque force field.

    In your article you use one niche of ELT (UK private schools) as a springboard for some massive brush strokes about all of ELT. You also mention other variables that may be influencing a down-swing in demand (exchange rates, traditional competition), but later appear to drop these in favour of a single EdTech challenge. You also make a huge speculative, non-evidenced assumption that learners that drop out of traditional ELT instruction are going online (still undefined) and may never return. These premises then form the basis of the discussion that follows to the point where you state:

    ‘However, the fact remains that, without radical change in the ELT industry, the majority of companies will go bankrupt as their market share is eroded by online alternatives and margins fall.’

    That is one massive, sweeping statement. What you say may turn out to be true one day, but my point is that you haven’t produced any real supporting evidence for this hypothesis, which you call a ‘fact’. It is, therefore, just as likely to be false as it is to be true.

    I’ve been hearing that EdTech will completely disrupt ELT for a few years now, and every time the hypothesis is presented, it is done so as an immutable fact and with almost no detail to justify it. I suppose what I would like to see is a more thorough approach to this issue: take an area of segment that we can demonstrate is in decline, expose the variables that are driving this decline, and then show how much of that is really the result of EdTech. Basically, I’d like to see the smoking gun with EdTech’s name on it.

    My final point is related to Christensen’s theory of disruptive innovation. Christensen, in my opinion, is a brilliant and fascinating character – I’ve spent a fair amount of time reviewing his seminal theory and reflecting on how it may or may not effect ELT. Here are my thoughts.

    Christensen himself acknowledges that the theoretical model of disruptive innovation cannot be applied to every industry. The example he gives of exclusion is the restaurant industry, where the demand for Michelin-starred restaurants will never be impacted by, say, fast food outlets or street-side hotdog vendors, regardless of how cheap they are. Is education an area where the theory may not apply? It’s more than a valid question.

    But even where there appears to be a neat fit for disruption theory, things can go really wrong. If you take smartphones as an example – a technology driven industry, where there is fierce competition and continued innovation – Christensen ended up with a lot of egg on his face when he attempted to apply this theoretical model as a performance predictor. Here’s Christensen in 2007 on the iPhone:

    ‘The prediction of theory would be that Apple won’t succeed with the iPhone. They’ve launched an innovation that the existing players in the industry are heavily motivated to beat: it’s not disruptive. History speaks pretty loudly on that, that the probability of success is going to be limited.’

    Next up is Christensen’s efforts to put his money where his mouth is with his Disruptive Growth Fund in 2000 – he used his theory to select stocks and make investments in companies that passed his theory test. Unfortunately, the fund was liquidated within a year, having lost 64% of its value. I know that stock investments are high-risk and the failure of the fund doesn’t negate the theory, but it has to make you stop and think before placing a bet on EdTech’s certain and assured future dominance.

    Finally, Christensen’s form has been poor when it comes to education. He’s already had two big cracks of the whip when it comes to envisaging the future of education through the lens of disruption theory. In fact, he wrote two books dedicated to disruption in education: ‘Disrupting Class’ in 2008, and then followed that up with ‘The Innovative University’ in 2011. Both books offered predictions which we can now see are considerably wide of the mark.

    I appreciate and enjoyed your article, Ed, but as you can probably see, I do have some issues. The landscape for ELT is most certainly changing (as indeed the world is), but in different ways to different people, schools and businesses. I have no doubt that some schools and publishers will go bust, whilst others may struggle (and, of course, others might thrive – four traditional schools close in the UK, but seven new ones open in Bulgaria), but I suspect strongly that the drivers will be diverse and varied, effecting different parties at different times and in different ways. I also think that many commercial operations will be able to transition successfully through sustained or incremental innovation (and without revolution). And, ultimately, we may even find that innovative EdTech start ups are one of the smaller threats facing ELT that have only a small long-term significance.

  4. Hi Ed,

    Thanks for responding so quickly! I like to read Christensen too but I claim no more than a passing familiarity with his ideas. He is definitely not the first one to notice the effect of competition within an industry. For ages businessmen recognized that new entrants were constantly entering “their” market. Perhaps Christensen was one of the first to recognize and document how people at the top of an industry, in raising their prices and adding additional features to their offerings, created room at the bottom for new entrants who competed on price and basic features.

    But in regard to how Christensen thinks, if we are going to apply Christensen to the problem at hand shouldn’t we first identify how ELT qualifies as a single industry (instead of just assuming said is true). In my mind, as a EFL teacher, I would like to think I am special and different but if I stick my head out of my shell I actually notice that we belong to the Education industry as a whole. We are not ourselves an industry but rather a part of a much bigger industry- Education.

    I also couldn’t help but notice your use of “we” in your essay. You claim this “we” is meant to represent the entire (worldwide) ELT industry. But I wonder, when you mentioned “we” if you stopped to consider what is happening in the wider world. I know that sounds condescending but living in China I sometimes feel that the level of analysis I hear on ELT JAM stops at the borders of Europe. By no means do I decry this, as we all live local lives and are motivated by local concerns. It only becomes a concern to me when people use the universal “we” without reference to places outside their local frame of reference.

    If you go back through your essay you will notice that the companies you mentioned were European and all of the problems you decried were British problems.

    In China one of the biggest educational providers Xin Dong Fang shifted from a classroom instruction model to a mixed model with seemingly great success as I believe they are now the biggest single provider in the Chinese market which is the biggest educational market in the world. They showed it can be done. You can successfully incorporate the Internet into your face -to-face business model. However getting big means squeezing others out of the market. What are the implications of this story to England?

    I really think you are on to something with this analysis. I encourage you to keep going. I hope these comments may give you slight pause to reframe your ideas from within a broader perspective.

  5. Ed, I don’t really identify with “we” in this essay. I tend to think that people in Britain and America somewhat see themselves as the center of the ELT industry with everyone else at the periphery. I think in this essay your “we” is actually talking about people at the assumed center of the industry.

    I also think in this essay you paint in stokes that are overly large. Christensen identified individual companies entering a market and attacking the bottom part of the market. He also identified companies in the top of the market who were willing to ceed control of the bottom to newcomers (hard drives). In your essay it sounds like we (the whole ELT industry) is defending itself against interlopers when in fact we know that this industry constantly refreshes itself with new blood.

    Your overly broad analysis doesn’t seem to square with the analysis of individual actors in Christensen’s theory. And it doesn’t account for what is happening on the broad “periphery” of the market.

    1. Hi Mike,

      I’m not entirely sure where you get the idea that I’m saying the UK is the centre of the industry, could you elaborate? You also mentioned what’s happening on ‘the broad periphery’ this sounds interesting but didn’t elaborate here either. Could you?

      I think in the same way you suggest my analysis to be ‘overly large’ you could be in danger of choosing one part of Christensen’s theory to suit your own purposes.

      If you watch the excellent video posted above, Christensen says his role is to teach people ‘how to think, not what to think’.

      So, the correct answer for individual companies might be to directly challenge new entrants at the bottom of the market or give up on that section of the market and focus on higher level, higher value areas, whatever they might be. This is what Jedrek suggested.

      I find Christensen’s theory so brilliant because it’s not a black and white description, it’s an analysis tool. And although our results of that analysis are different Mike, they’re both equally valid.

      At the end of the day, it’s up to individual actors to do their own analysis, draw their own conclusions and take appropriate action.

      Thanks for taking the time to comment.

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