Fundamental insight can trigger disruptive innovation

When an organization (or an industry) is invented to solve a problem, the early innovators may not always understand what business they are actually in. Or perhaps they know it well, but later leaders eventually drift from what their purpose actually is. In these scenarios, neither precedence (being the incumbent) nor size is as important understanding the true nature of the business. The fundamental insight is the recognition of the actual purpose for which an organization (or industry, business, etc.) exists. The discovery of a misalignment between what an industry is currently doing and what its fundamental purpose is can be fertile ground for disruptive innovations.

Kodak is a well-known negative example. In 1975, Kodak invented the digital camera, but the leadership had long forgotten that their actual business was “simplifying photography for the masses.”^[1] They thought that their business was selling all the products that made film cameras work. So, “the invention of digital photography directly challenged the company’s business model. Kodak made money on every part of taking pictures. They made the cameras, the film, the flash cubes, the machines that processed the film, the chemicals that were used to develop the film and the paper the pictures were printed on.”^[2] Kodak’s leadership did not recognize that their success (approximately 90% of film and 85% of camera sales in the United States at the time^[3]) had caused them to drift away from—and become unable to see—their actual purpose.

Other contemporary examples include major airline companies that are increasingly turning profits on their frequent flyer programs and marketing credit cards on behalf of banks to their captive audiences.^[4] Is the business of gas stations actually selling fuel for vehicles or lottery cards and food? At what point does it switch from one to the other? In The Great Upheaval, Levine and Van Pelt note many such stories. The railroads “thought they were in the train business rather than the transportation business and were overtaken by airlines. Carriage makers lost out to the automobile industry.”^[5] The news industry thought its business was selling newspapers rather than distributing news (by selling advertising) and got decimated by the advent of the internet. The authors note:

The question of “what business are we in” takes on a special urgency in times of profound change when existing institutions are negotiating a shifting terrain in which new competitors, new products, new methods of distribution, and new consumers are emerging. Higher education is in this position today. … Every institution of higher education must ask itself, “What business are we in?” This is not the same as asking, “What business are we in right now?” (for which the newspaper, railroad, and carriage business would have been correct answers).

In examining the business they are in, colleges cannot equate current practices with their business. They have to avoid the error that newspapers made in equating their distribution method—campuses, degrees, and credits—with their business. They have to guard against the mistake made by carriage makers, thinking the product they were producing was the only product they could produce and believing their current consumers were their only possible market. As colleges and universities think about the future, it is essential to recognize that traditional methods of distribution may be liabilities, traditional products may be outdated, and consumer tastes may be changing.^[6]

In the history of shipping, one of the most transformative inventions was the shipping container. In The Box, Levinson recounts the history and notes that some people consider Malcom McLean to be the "inventor of the shipping container" while others observe that he was not even the first one to think up the shipping container.

In a narrow sense, of course, these critics are correct. The high cost of freight handling was widely recognized as a critical problem in the early 1950s, and containers were much discussed as a potential solution. Malcom McLean was not writing on a blank slate. Yet the historians’ debate about precedence misses the transformational nature of McLean’s accomplishment. While many companies had tried putting freight into containers, those early containers did not fundamentally alter the economics of shipping and had no wider consequences.

Malcom McLean’s fundamental insight, commonplace today but quite radical in the 1950s, was that the shipping industry’s business was moving cargo, not sailing ships. That insight led him to a concept of containerization quite different from anything that had come before. McLean understood that reducing the cost of shipping goods required not just a metal box but an entire new way of handling freight. Every part of the system—ports, ships, cranes, storage facilities, trucks, trains, and the operations of the shippers themselves—would have to change. In that understanding, he was years ahead of almost everyone else in the transportation industry. His insights ushered in change so dramatic that even the experts at the International Container Bureau, people who had been pushing containers for decades, were astonished at what he had wrought. As one of that organization’s leaders confessed later, “We did not understand that at that time a revolution was taking place in the U.S.A.”^[7]

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