EDI Encounters the Innovator’s Dilemma
Some business books date really quickly. If you tried returning to “Good to Great” or “In Search of Excellence”, you’ll hear about Atari, People’s Express and Fannie Mae. So it’s always instructive to pull a business book off the shelf to see how it reads ten years later. I’ve been thinking a lot about innovation on this blog, so I thought I’d dust off my copy of “The Innovator’s Dilemma” (Christensen, 1997).
This book became a classic as it looked at how the mantras of “listening to your customers” or “focus on profitable revenue” can lead companies down the wrong path. There are many examples (Wikipedia has a good list of these Disruptive Innovations) And of course Wikipedia itself was a classic “Disruptive Innovation” muscling out the veteran Encyclopaedia Britannica and newcomer MS-Encarta.
These Disruptive Innovations occur when a new measure of value displaces the existing way of valuing a product.
- The Transistor radio had worse sound than the analogue radio (still does), but portability was the new measure of value
- The Solid State drive is replacing the Hard disk drive in spite of having lower capacity, but low power is the new measure of value
The business network is a Disruptive Innovation, displacing EDI
EDI just speeds up what you do today. You move messages around, but don’t address the fundamental issues around collaboration. EDI implementations focus on driving down the cost of a transmission. According to GTBP.org :
In 1996 EDI was charged at $.35/KC (kilo-character) . Their annual reports boasted a 25% profit margin…Today, VAN fees are in a range of $.03-$.0075/K.
EDI vendors are doing the “right things” such as listening to their customers. Their customers want speed, reliability, and low prices. However, the mistake is made because they are listening to the wrong customer: the IT department, not the business user (Accounting, Production, Sales). The pricing scheme above was the outcome of a negotiation between an IT manager and a technology salesman.
No one asked: what if I could reduce the traffic by improving the surrounding business processes? Why would an EDI vendor innovate to reduce their own revenue? This type of business is ripe for disruptive innovation, and this is what we are seeing.
A business network provides a “shared space” where buyers and suppliers can collaborate on the same document at the same time. It is a completely different approach to the simple exchange of documents. Therefore the charging mechanism is more closely aligned to value received (number of connections, number of invoice errors reduced, value of better working capital).
According to Christensen, one of the characteristics of a Disruptive Innovation is that
…they offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream.
When business networks first emerged, they were sneered at by the volume EDI users for their lack of scale, and limited document sets. But just like the manufacturers of disc drives who focus on spin speed and capacity, they are getting squeezed out by the networks who are solving a fundamentally different problem.
Instead of moving data faster: actually making business more efficient.