Leap to Disruptive Technologies: One Account of Many for Cost Disease

I recently wrote about the available evidence of cost disease in weapon systems acquisition. How about causes of cost disease?

There are many explanations relevant to defense. This post will discuss one of the possible contributors. It uses a framework from Clayton Christensen’s book, The Innovator’s Dilemma.

Christensen described two innovative processes.

Sustaining innovations improve existing products and platforms. They target high-end customers who demand better performance. Sustaining innovations can be year-to-year improvements, or they can be technologically difficult projects that seek large improvements. In either case, the performance increase is generally defined around the existing market needs. When you deliver the best performance, you get the highest profit margins from your best customers.

Disruptive innovations create new markets and value networks. They solve problems in a new way, or solve related but different problems. When big firms focus on sustaining innovations to satisfy their most demanding customers, some market segments are ignored. Disruptive innovations often provide lower performance and lower profits initially, but may be able to improve faster and at lower cost than sustaining innovations.

Recreation of Clayton Christensen’s chart on sustaining and disruptive innovation. Disruptive innovation can break in at the low ends of the market, but have potential to improve faster and more cheaply than sustaining innovations.

That was a major simplification, but from here we see the innovator’s dilemma. Firms want to satisfy their best customers and deliver higher performance, resulting in higher profits. But neglecting disruptive innovations can seal the firm’s fate to lose in the long run.

The dilemma is a bit different in the DOD. Defense decision-makers have an unlimited thirst for military effectiveness. Their demand for performance is basically unbounded, and they only consider new systems that have evidence of outperforming the existing system.

Unlike consumer markets, there are few opportunities for low-end performance demand in the DOD. A system with low-end performance but the promise of ill-defined progress will not receive funding to carry it over the “valley of death” into a Program of Record. These projects do not meet a military requirement as defined by traditional adherence to legacy platforms.

So disruptive innovations stay in the technology labs because there is no demand from the acquisition system to fund them. There’s not much enthusiasm in industry for defense projects without a clear path to production, where the real profits are made.

Frederic Scherer framed the problem in 1971:

One of the most fundamental questions to be resolved in weapons development is how far to go toward exploiting the full potential of some technological concept. Should one stop at 70 percent and await a new conceptual breakthrough or press on and incur the frequently substantial incremental development cost of attaining 90 percent? There are no pat answers, but it is fair to say that cases exist in which that extra margin of performance is worth the effort.