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Technology Stocks : Applied Materials No-Politics Thread (AMAT) -- Ignore unavailable to you. Want to Upgrade?

To: Cary Salsberg who wrote (4994)	1/17/2003 12:34:56 PM
From: Sam Citron	Respond to of 25522

Cary, It is most appropriate that you refer to Cree in a post about disruptive technology. I certainly "owe" you for much more than your suggestion that Cree may not be the best stock to short. Dr. Clayton Christensen's keynote address to the JP Morgan Healthcare Conference was mainly a summary of his longstanding work on the subject of how disruptive technology arises in a most innocuous fashion to gradually unseat the incumbent gorilla. It is especially easy to digest orally as he explains it in his own words. I thought that he was also trying to explain how the health care industry has managed to stifle disruptive technology and that would have been extremely interesting but I was rather busy multitasking a number of other chores and have not yet had a chance at a second listen. In any case, I am sure you are quite familiar with the main argument. Here is a summary, contained in Innovation in the Telecommunications Industry: Separating Hype from Reality which can be found at innosight.com : ...There are three key litmus tests to determine whether a technology will be disruptive or not (Exhibit 3). The first test determines whether there is a large new growth opportunity that gives the technology a “home” to incubate and improve. These niche markets can either be in a “greenspace” market – depicted in Exhibits 2 & 3 as green rectangles outside of the mainstream market – or within niche pockets of overserved least-demanding customers in the mainstream market. This second group of customers is typically attracted to new, low-cost business models. Disruption begins with a product or service that initially under-performs the incumbent’s offering along the dimension competition is based on for mainstream customers in the industry. For example, the personal computer (PC) initially had dramatically less functionality than the minicomputer, and was a “toy” to mainstream users. However, Exhibit 3 points to factors that could allow the disruptive technology to find a new growth opportunity where users value some aspect of the technology despite its limitations. In certain niche markets, customers were delighted by the PC because it allowed a larger group of customers, who did not need the highend functionality of the mainstream offering, to flexibly or conveniently achieve an outcome that would previously have required expert skill to accomplish. While the “green space” growth opportunities can be quite exciting and rewarding, eventually managers of potentially disruptive technologies hungrily eye the big prize of the “sweet spot” of the mainstream market, depicted in Exhibits 2 & 3 as a large blue rectangle. Once adopted in its initial niche market, the technology improves at a rapid pace, fulfilling the needs of an evergrowing population of customers. The next key test a disruptive technology will face is getting “good enough” to attract customers away from the sweet spot of the mainstream market. A technology is defined as being “good enough” when it meets some minimum required performance to encourage customers to give up an incumbent’s offering. Exhibit 3 points to the two key issues facing a disruptive technology. Core customers must value the disruptive technology’s benefits despite the fact that it typically under-performs the incumbent’s offering along some key dimensions. Customers are often willing to make this tradeoff because they feel overserved by the incumbent’s offering. Of course, attracting customers away from the core market is predicated on the potential disruptive technology’s ability to continue on its improvement trajectory and get “good enough” to be acceptable to the majority of core customers. For example, the rapid growth in processing power allowed the personal computer to meet the needs of the mainstream customers in the “blue space” who had previously relied on minicomputers. Factors such as fundamental physical limitations or regulatory barriers can often deflect the trajectory of potential disruptive technologies. However, it is important to note the power of the dynamic forces of innovation – oftentimes factors deemed “impossible” to overcome have been tackled or circumvented by determined entrepreneurs. In fact, entrepreneurs are often best suited to find ways around seemingly insurmountable barriers in pursuit of sizable rewards. The final, and most important, litmus test an innovation must pass is whether the incumbent, who “owns” the core mainstream market, can fend off the attack from below or whether it must “retreat” up-market. Exhibit 3 points to the two key questions that determine an incumbent’s ability to respond. First, a disruptive technology that reshapes the industry to earn profits in a new way usually features lower gross margin dollars per unit sold and higher asset turnover or utilization. This makes it either difficult or unattractive for incumbent managers to allocate resources towards the technology. Second, a disruptive technology grows up in an independent “value network,” made up of component suppliers, retailers and other value chain participants (see Box 1 for a more detailed discussion of value networks). This independent value network makes it difficult and costly for incumbents to “co-opt” the technology. Co-option is a typical defense mechanism where an incumbent tries to “cram” a potentially disruptive technology, into its business model and mainstream market before it is good enough – much like forcing a square peg into a round hole. Supported by its independent value network, the disruptive technology can unseat the incumbent firm. The incumbent, who has already overshot the needs of much of the mainstream market, inexorably moves further and further up market in search of customers to serve and profits to make. Litmus test 1: does a growth opportunity exist? • Is it either: – a new or unique application outside of the mainstream market – a new business model targeted towards the least-demanding mainstream customers • Does it allow a larger number customers with relatively less expert knowledge to achieve a desired outcome? • Does it fit with customers existing patterns of behavior? Litmus test 1: does a growth opportunity exist? • Is it either: – a new or unique application outside of the mainstream market – a new business model targeted towards the least-demanding mainstream customers • Does it allow a larger number customers with relatively less expert knowledge to achieve a desired outcome? • Does it fit with customers existing patterns of behavior? Litmus test 2: can it attract customers away from the core of the mainstream market? • Can it become “good enough” for the mainstream, or are there barriers to improvement: – Physical limitations – Regulatory barriers – Economics of business (e.g., scale) • Will mainstream customers value the offering despite its limitations relative to the incumbent’s offering? Litmus test 2: can it attract customers away from the core of the mainstream market? • Can it become “good enough” for the mainstream, or are there barriers to improvement: – Physical limitations – Regulatory barriers – Economics of business (e.g., scale) • Will mainstream customers value the offering despite its limitations relative to the incumbent’s offering? Litmus test 3: can the incumbent respond? • Is the option to respond either unattractive or impossible (due to internal processes) to the incumbent? • Has the innovation developed an independent "value network," comprised of component suppliers, retailers and other value chain participants, from that of the incumbents? If not, can technology be co- Litmus test 3: can the incumbent respond? • Is the option to respond either unattractive or impossible (due to internal processes) to the incumbent? • Has the innovation developed an independent "value network," comprised of component suppliers, retailers and other value chain participants, from that of the incumbents? If not, can technology be co-opted? Hope this helps. As I said, it is much more palatable orally. Sam