Software Innovation: Disruptive and Sustaining

Why is Software Innovation Important?

One of the most important themes in business is innovation, and it’s going to be an important theme on this blog. Specifically innovation that is driven by software development is of great interest to TopCoder and our customers (or more broadly speaking, the development of all types of digital assets from banner ads to large enterprise systems.) It’s axiomatic at this point that software is a critical part of almost all businesses and that’s a trend that will continue across new verticals, just as it has in finance, commerce, information management and content production. This means innovation will more and more take the form of software innovation. What will this look like?

The Long Tail of Entrepreneurs

In the book “Army of Davids” Glen Reynolds, AKA Instapundit, described an ongoing transformation from big to small in how we work. Essentially the benefits of the industrial revolution are waning – aggregation of capital, marshaling large workforces, and huge infrastructure investment, are no longer essential for entry into many industries. The first established firms that faced this wave were ones where the internet enable upstart competitors almost immediately – for example content publishing and advertising, other industries will follow course as more advanced platforms enable them.

The biggest companies will be those that can create a platform which generates a large volume. For example Reynolds identifies Wal-Mart as essentially a platform for small business – they can access the equivalent of raw materials at prices that allow them to be competitive. During the industrial revolution supply chain management was one of the ways big companies used their capital advantage to beat smaller competition – now Wal-Mart and other discount retailers do it for you. (Like many platforms it seems Wal-Mart may have stumbled into this by accident: building the most efficient supply chain to sell to consumers also created a supply chain platform for small businesses that need to procure regular retail goods.) The companies that are able to do “big well” end up on the left side of the long tail by providing platforms that enable small firms and individuals.

Applications are Enabled by Platforms

Software innovation follows dual tracks of platforms and applications. Platforms are the backbone systems that power and enable the independent agent to produce applications. Examples are numerous:

• Google (and others) provide content platforms (distribution through search, publishing through Blogger.com, monetization through AdWords) that enable specific content producers to challenge established media.
• Amazon’s Web Services provide infrastructure that enable a broad range of e-commerce and software products.
• Salesforce’s force.com platform enables business software providers to build integrated extensions.
• Apple’s App Store enables the distribution and monetization of mobile applications.

In each case the platform innovation has been successful because it enables application innovation. Many of these early leaders in the platform space innovated by accident. For example many of the innovations for Amazon’s web services platform were developed as innovation for its e-commerce site. The more difficult business insight was re-leveraging these innovations to create a platform that’s operating in an entirely new market.

From Sustaining to Disruptive

In the book Innovator’s Dilemma, Clayton Christensen splits innovation into two categories: sustaining and disruptive. Innovation is fundamentally the introduction of new technology, but depending how that new technology is applied the market impact is vastly different. With sustaining innovation the features of a product that the market wants are improved. With disruptive technology new markets are created. The interesting thing Christensen finds is that disruptive innovation often leverages technology that is regressive from the point of view of the established marketplace. Additionally established firms often struggle with disruptive innovation, both in harnessing it and in the threat it creates for their business.

Software is an interesting case because software technology is fungible. The platform companies above have leveraged sustaining innovation in their own market to create disruptive innovation in new markets. At the same time this disruptive technology is an enabler of further innovation. What lessons can be learned for firms that are being forced into the software space by evolving trends and technology? A good staring point is to realize that they will either become a platform model or compete with one. For starters companies should be asking these questions and answering them:

1. Is a focusing on the business model that has worked causing us to overlook opportunities? Are we overlooking a platform play?
2. How will we engage the platform and application innovators that are going to be critical to our success?

What other questions should companies be asking and answering to deal with these trends? What is your company doing right now?

[bwright]