The Innovator’s Dilemma

Larry Desjardin- August 16, 2012

As most of you know, I traveled last week to NI Week, where National Instruments unveiled their new Vector Signal Transceiver. For much of my free time between events, I found myself wandering between booths on the exhibition floor. With over 90 exhibitors, it certainly ranks as one of the largest test and measurement shows anywhere in the world. But here is an interesting observation: except for an occasional power supply, the show was almost completely devoid of traditional box instruments. I believe I spoke to people at every exhibit oriented towards automated testing, and there was little doubt from the people I spoke to about the industry’s accelerating trend to modular instruments.

To be fair, you may expect this from an NI-oriented event. But I couldn’t help but think this is what all automated test trade shows will look like a few years from now.  And, as the rock band Boston once sang, it’s more than a feeling.  Recent earnings reports from public test companies would lead you to the same conclusion: modular instrumentation, particularly PXI, is taking share from traditional instrumentation.  The difference in growth rates makes this a mathematical certainty.

So, if you’re a test-and-measurement vendor, what should you do? The answer is obvious if you are NI--you press the gas pedal to the floor to accelerate this transition. For anyone who attended NI Week, there is no doubt that this is exactly what NI is doing. They’ve brought new PXI solutions to the market, segment by segment, and are now focusing on causing the same transformation in RF.

It is also obvious if you are one of the smaller players with a largely modular play. You do the same. The math is clear--if modular formats are outgrowing traditional instrumentation year after year by greater than 10 points, then place your limited bets on the growth segments.  Your new products will even help accelerate the trend.  This is why there is a growing ecosystem of modular instrument vendors in PXI and AXIe.

But what if you are a vendor of traditional box instrumentation?  Now it isn’t so obvious.  Let’s put aside non-automated bench equipment and handheld instruments for the moment, as they are not directly threatened by this transition.  But for product categories where automation is a significant portion of the sales, this represents a real dilemma for the vendors. They could dabble and run an experiment. Good luck with that.  For many reasons, an experiment is not likely to be successful. They need a serious effort where they bring new capability to the market that exploits the advantages of modularity: the size, speed, flexibility, and/or cost.  However, in doing so, they accelerate the transition to the new format and away from their current ones. This is the innovator’s dilemma.

The innovator’s dilemma is real. Typically the incumbents keep to their old strategy until it is too late and they become a niche. Faced with a threat that requires new skills or business model, they enhance the old core competencies to go after an ever more selective group of customers. Think about the Swiss watchmakers when they were faced with the quartz movement. Their mechanical designs became even more exotic.  But shouldn’t the marketing departments recognize the trend and propose a response? The innovator’s dilemma is so insidious that often the new technology isn’t recognized in the current market models, or is segmented out as something different and strange. Besides, they have a lot of current customers (the remaining ones) that are demanding new features. Culture plays a strong role internally, keeping an organization in denial about the threat.  As the new technology advances, the incumbents often delay an explicit strategy until it is too late.  It was only when Lebanese-born entrepreneur Nicolas Hayek headed Swatch, that the Swiss had a viable response that revitalized their industry.

The innovator’s dilemma is deadly.  It should come with a product warning label like you find on cigarettes:  WARNING. This product will be hazardous to your health.

It’s not just business that suffers from the innovator’s dilemma, any organization can. Typically, they do so when they are at the top of their game. After all, isn’t being the best and biggest proof of their current strategy? This was the case for the US Navy at the end of the Spanish-American war.  Having defeated the Spanish, the US Navy was indisputably the most powerful navy on the planet.  They achieved their success using the rules of close combat. Their core competencies were all centered around those rules.  However, the rules were changing due to technology.  Nevertheless, many in the Navy resisted the change, even creating biased tests to show the superiority of their current methods.  And their recent victory was proof that they were right.  It was only through the tenacious efforts of Admiral Sims that the US Navy reinvented itself, oriented around the rules of long-range combat.

This is where the test industry is.  Traditional instrumentation still dominates in total size, but the growth rates indicate this won’t last.  There are some adopters, but other incumbents that apparently aren’t addressing the disruption.  My former employer, Agilent Technologies, made a bold move to enter the modular segment two years ago, so they clearly have a strategy. But there are many others still on the sidelines.  They do so at their own peril.  Yes, they may be relatively safe for a couple more years, but the modular tsunami is going to affect nearly every segment in the market that requires automation.

For those who don’t believe me, do yourself and your company a favor: Take the current market share of modular products in automated test (somewhere between 10 and 15 percent). Now, have that portion grow by 10 points higher rate than the entire market. This is conservative.  Modular has done that for a decade, and is exceeding that growth advantage today.  Calculate when modular hits majority share.  Mark that on your calendar as “game over”.  Now working backwards, what are you going to do about it?

The US Navy took one tact. The Swiss watchmakers another. The choice is yours.