We need some new disruptive ideas!
Sounds familiar? Have you heard this sentence in your company before? Well, I certainly did, a number of times. Everybody is talking about how disruptive innovation can lead to phenomenal growth and that everyone should pursue it. And then – nothing. Some ideas are tossed around, but none is pushed further in the end. Why is that so? Well, first and foremost because disruptive ideas and big companies seldom get along very well. But it does not have to be that way. Let’s look at the term disruption first.
What does “disruptive” mean?
One of my favorite authors, Clayton Christensen (check out my book recommendation in the library) did an excellent job in defining the term. Basically there are two kinds of innovation:
- Sustaining innovation
- Disruptive innovation
You all know sustaining innovation very well. This is the kind of “hey, we have a good product or service, let’s make it better” kind of stuff. A candy bar which now has more nuts in it, washing powder which makes your clothes cleaner than ever, or the a free drink while you are waiting at your favorite hairdresser. This kind of innovation is good and necessary. You need to stay ahead of your competitors and provide something new to your customers from time to time. The main topic of sustaining innovation is to improve on attributes of your product or service that customers already know.
Disruptive innovation is something fundamental different. Disruptive innovations do not aim to improve the already known, but bring something new and different into being. Often these innovations satisfy an existing customer need in some different way, sometimes they are triggering yet unknown customer needs. You know the old saying from Henry Ford:
If I had asked people what they wanted, they would have said faster horses.
Yes, sometimes the customers themselves do not know what they want or need. How should they? Your disruptive product or service did not exist before, and people tend to stick with the known.
Another characteristic of disruptive ideas is that the products and services they offer are often inferior to existing solutions, but add some other value. Sometimes they are just cheaper. Sometimes they are easier to use. Every time they are different. But while being inferior to existing solutions, they are just “good enough” for the average customer. See, if you constantly improve on your products and services, you inevitably reach a point where only a small portion of your customers can actually make use of these improvements. For the major part of your audience these improvements are just irrelevant. For example, I’m writing this blog entry on an old desktop PC, equipped with an ancient Pentium 4 processor and 1 GB ram. That may sound funny to some of you, since I am deeply rooted in the IT-world, but hey, it’s good enough to write blog posts, mails and checking my bank account. I do have a modern laptop, a smartphone and all this stuff, but I think I will sick with my old-fashioned PC for quite a while. If I would be a hardcore gamer, which I am not, it would be a totally different story. Then I’d crave for the last bit of performance and this super-new graphic card with the latest GPU and plenty of Ram.
Christensen illustrated that quite nicely:
You probably think: “Ok, now I have an inferior product at a potentially low price, with attributes customers don’t know about. What’s so great about that?” Answer: Your product will move upwards the market, getting better over time, attracting more customers and finally threatens the existing solutions. One nice thing about this is that your competitors-to-be, means the vendors of the existing solutions, will not recognize your product or service as a threat until it is too late. One of my favorite examples to illustrate all that are digital cameras.
Kodak and the digital revolution
Do you remember the first digital cameras? They were crap. The resolution of the taken images was a joke, images were pixelated and the colors were awful. They could store only a couple of images on the internal memory. And, especially in the beginning, they were pricey. I can almost see the managers at Kodak laughing their ass off while talking about this new technology, going like “Who wants to buy this overpriced crap, when you can have a decent SLR which takes much better pictures for just a fraction of the price”. But look at the market now. Apart from some enthusiasts, no one is using analog SLRs anymore. Even professional photographers mostly use digital equipment. What was it that the managers did not see?
Advantages of digital cameras
First, they did not see the advantages of digital cameras, and that these advantages truly mattered for the customers.
- You can see the results immediately
- You can delete crappy shots immediately
- You can copy your pictures to your computer, immediately
- You do not need to bring the film to the laboratory
- The cost per photo is virtually non-existent. Copy the images to your PC or Mac, and reuse the internal memory for the next shots
These are just a few attributes that really differentiated the digital cameras from their analog pendants. People loved it. And it changed the way that photographs are taken. Since an analog film roll was only capable of capturing so many shots, you carefully chose your motive and waited just for the exact moment to push the activator. Now you just take 20 snaps and chose the best one afterwards. And that brings me to the second thing Kodak missed.
Advancements of digital cameras
Now we are at the low-end of the market. Only few people notice the advantages of your product, and revenue is still small. But as the theory of disruptive innovation predicts, the product will constantly improve until it attracts the mainstream. Slowly creeping upwards. And that was also the case with digital cameras. Due to technical improvements the resolution got better and better over the time. The color problem was solved, and memory cards capable of storing thousands of images are available for a couple of bucks. No what – suddenly your disruptive product is as good as the existing solutions, while still having all the extra benefits it always had. And that’s when you start to disrupt existing markets and, if you’re clever enough, make a lot of money with your product. Kodak did not see that. They believed that digital cameras will always be inferior to analog cameras and that customers cared more about excellent quality of their pictures than about seeing the results immediately (to just pick one advantage randomly). In January 2012, Kodak filed for Chapter 11 bankruptcy protection. Please do not regard this as some kind of cynical statement – it’s always sad when a company has to file for bankruptcy and a lot of employees lose their jobs. I just want to show how disruption works in real markets.
Disruptive innovation in big companies
While thinking about disruptive innovations, I always wondered why not all companies put all their effort in finding and implementing them. Also here Christensen provides some sharp thoughts on the subject. In his opinion, you can only start disruptive innovations while your core business is prospering. If your business is on a decline, it’s already too late. Why?
Because we start at the low end of the market, the revenue you can produce in the first year, or couple of years, is way lower than the revenue you achieve with the core business. That’s why most of the time disruptive innovations do not seem attractive to the company, especially for the finance guys. Why would you invest your resources in such a small business, when you can make substantially more money by shifting them to your core business? The fact that you have a big opportunity at hand, but that might pay off only after a long period of time does not play well with our “quarterly earnings” kind of attitude. Shareholders want profit and dividends, and they want it know, not in one year, not in two years. So, many opportunities are missed to satisfy other people. Sad but true story.
Second, when your business is on the decline, the pressure from your shareholders to get back on the growth trajectory is just too big to start new disruptive ideas. They will simply not tolerate it: Get your business back on track, then we can talk. This is a very stupid attitude in my opinion. As Peter Drucker noted a long time ago, business models are not valid forever. They have to be changed. Sticking with the old and known will only guarantee success over a limited period of time:
Every organization … has a theory of the business … Some theories of the business are so powerful that they last for a long time. But … they don’t last forever, and, indeed, today they rarely last for very long at all. Eventually every theory of the business becomes obsolete and then invalid.
(Drucker, Peter: Was ist Management: Das Beste aus 50 Jahren. 6. Econ Verlag, 2010. Page 95)
So, is there no way that existing and potentially big companies can benefit from disruptive innovations? Will they remain the prey of younger and more flexible start-ups that do nothing else than inventing disruptive ideas all the time? No, that is not the case, and there are some big companies that are very successful in implementing disruptive innovation. But disruptive innovation must be separated from the day-to-day business, that’s the most important advice I can give. How to implement the “disruptive growth engine” (Christensen) in existing companies will be the topic of another article. For now I leave you with an appetizer quote from Raynor & Christensen:
If you’re slated to lead a new venture and corporate management says you need to become very big very fast, what you really are hearing is that management is going to make you cram your disruptive technology into an established market. When you sense this, don’t take the job. You are very likely to fail.
(Raynor, Michael E.; Christensen, Clayton M.: The Innovator’s Solution: Creating and Sustaining Successful Growth. Harvard Business Press, 2003. Page 291).