Many is beautiful : commoditization as a source of disruptive innovation

Abstract

The expression "disruptive technology" is now firmly embedded in the modern business lexicon. The mental model summarized by this concise phrase has great explanatory power for ex-post analysis of many revolutionary changes in business. Unfortunately, this paradigm can rarely be applied prescriptively. The classic formulation of a "disruptive technology" sheds little light on potential sources of innovation. This thesis seeks to extend this analysis by suggesting that many important disruptive technologies arise from commodities. The sudden availability of a high performance factor input at a low price often enables innovation in adjacent market segments. The thesis suggests main five reasons that commodities spur innovation: ** The emergence of a commodity collapses competition to the single dimension of price. Sudden changes in factor prices create new opportunities for supply driven innovation. Low prices enable innovators to substitute quantity for quality. ** The price / performance curve of a commodity creates an attractor that promotes demand aggregation. ** Commodities emerge after the establishment of a dominant design. Commodities have defined and stable interfaces. Well developed tool sets and experienced developer communities are available to work with commodities, decreasing the price of experimentation. ** Distributed architectures based on large number of simple, redundant components offer more predictable performance. Systems based on a small number of high performance components will have a higher standard deviation for uptime than high granularity systems based on large numbers of low power components. ** Distributed architectures are much more flexible than low granularity systems. Large integrated facilities often provide cost advantages when operating at the Minimum Efficient Scale of production. However, distributed architectures that can efficiently change production levels over time may be a superior solution based on the ability to adapt to changing market demand patterns. The evolution of third generation bus architectures in personal computers provides a comprehensive example of commodity based disruption, incorporating all five forces.