With $80B revenue but a streak of 21 consecutive quarters of declining revenue, IBM has a big appetite for growth. The hungry of growth drives IBM investing billions into their AI business, namely IBM Watson Group. However, it also drives IBM away from a disruptive innovation even though it is in her own hand. The disruptive innovation in spotlight is Watson for Oncology.
Watson for Oncology is an AI-driven oncology clinical decision support system. Watson employs Natural Language Processing (NLP) technologies to derive hundreds of attributes from a patient’s electronic health record including doctors’ notes and lab reports. Then, it provides clinicians with confidence-ranked treatment options and supporting evidence to help them make treatment decisions. As a typical supervised Machine Learning system, Watson for Oncology learns the treatment decisions from trainers, which currently are a couple dozen physicians at New York’s Memorial Sloan Kettering Cancer Center (MSK), one of world’s leading cancer centers.
The marketing strategy of IBM is to promote Watson as a world-changing technology. At HIMSS17, IBM CEO Ginni Rometty said when she became CEO in 2012, soon after Watson won Jeopardy!, she decided using Watson to change parts of health care would “be our next moonshot.” In media, we can frequently see articles about Watson with headlines in quixotic ways, e.g. “IBM’s Watson Supercomputer May Soon Be The Best Doctor In The World.”
This means that IBM presents Watson for Oncology as a “sustaining innovation” to satisfy the most demanding and sophisticated customers. In fact, Watson for Oncology is being used by more than 50 hospitals around the world, which are large medical centers and hospitals in general. This is a “rational” decision given IBM’s size and appetite because by charging the highest prices to the most demanding and sophisticated customers at the top of market, IBM would achieve the greatest profitability. For example, MD Anderson, among IBM’s first partners and the early face of Watson in health care, spent more than three years and $60 million — much of it on outside consultants — to create its own expert oncology advisor by using Watson before shelving the effort.
Unfortunately, an STAT investigation has found that the Watson for Oncology isn’t living up to the lofty expectations IBM created for it. This indicates the failure of the business strategy that prompts Watson as a sustaining innovation despite its advanced technology. Like any other supervised machine learning system, Watson learns a complicated function that maps hundreds of attributes to a set of categories (treatment decision here) from the training data. Therefore, Watson doesn’t have knowledge beyond the training data. As Dr. Sujal Shah, a medical oncologist, said in the STAT investigation that Watson gave him more confidence that using a specific chemotherapy was a sound idea. But the system did not directly help him make that decision, nor did it tell him anything he didn’t already know. In other words, Watson doesn’t provide better solutions than its competitors and existing service providers: human physicians.
Another issue with Watson for Oncology is the one-size-fit-all strategy. So far, Memorial Sloan Kettering is the only trainer of Watson. Although it is one of the world’s most renowned cancer hospitals, Memorial Sloan Kettering’s training (recommended treatment) is not always the best practices in other parts of world. Obviously, the patient population at any single hospital doesn’t reflect the diversity of people around the world. Beyond science, Watson doesn’t take into account the economic and social issues such as medical insurance.
Although Watson for Oncology faces aforementioned challenges, it may become a promising business if IBM repositions it as a disruptive innovation. Disruptive innovation, coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.
To be a disruptive innovation, Watson for Oncology should target the right segment of market, i.e. the bottom of the market. Or even better, the non-consumptions. Although well trained oncologists don’t need to ask Watson about the treatments, there are many small hospitals in rural areas across the world that don’t have any oncology specialists. Patients in those areas either have to travel to big cities for treatments with high expense or would be treated by generalists with little cancer training. With Watson, they can benefit from top-level expertise at afford cost. Besides making treatment plan, Watson can also give patients a comprehensive information package including relevant scientific articles. Patients can do their own research about their treatments. In addition, hospitals with few specialists can also benefits from Watson.
To make this new strategy work, IBM needs to create a variety of localized Watson to accommodate the diversity of patients around the world and associated economic and social issues. This is not only to provide more personalized service but also is important to make the new business model viable. Since few small institutes can afford expensive consulting fees and linking with electronic medical records, Watson simply needs to cover sufficient customers so that a plain per-patient fee business model works out.
IBM used to be a master in disruptive innovation. When the mini-computer disrupted the mainframe, only IBM made it into the mini-computer business while all other mainframe computer makers were killed. IBM kept making the mainframes in Poughkeepsie but went to Rochester Minnesota to make the minis with a different business model. It is because the gross margins in mainframes were 60 percent but the gross margins in the minis were 45 percent. When the personal computer disrupted the mini-computer, IBM went to Florida and set up yet again a different business model that could make money at 25 percent gross margins.
IBM can be the master of disruptive innovation again with Watson for Oncology. They have to forget the fact of consecutive quarters of declining revenue and put their attention to what brings customers values rather than just big fat contracts. The sales rep should stop making overreach claims but search for non-consumptions. So far Watson focus only on the treatment decisions. But the fight with cancer is a long and painful process. A complete consideration of whole user experience will bring much more values to patients. Besides the function part of treatment, the emotional and social part of the job to be done needs to be covered too.