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?
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
We 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.
Firstly, 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.
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?
The Innovator’s Dilemma, C. Christensen, 1997
Disruptive Innovation Explained:
Disruptive Innovation, https://hbr.org/2015/12/what-is-disruptive-innovation
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.