Disruptive Innovation: The Need for a Better Methodology

The Innovator’s Solution tells you what you need to do to cannibalize the markets of incumbents and create entirely new markets, by focusing on the needs of over-served customers and non-customers. But it’s a lot harder in practice than in theory, and it needs some unique skills and hard-to-obtain knowledge.
[Posted from Orlando]

In previous articles, I’ve summarized Clay Christensen’s approach to innovation (established companies focus on what he calls ‘sustaining’ innovations while new entrants focus on ‘disruptive’ ones), and about the research approach that he suggests for identifying and assessing innovation opportunities.

His second book, The Innovator’s Solution, looks in greater detail at disruptive innovation, which he breaks into two types:

  • Low End Disruptive Innovation: This entails offering a lower-cost product to existing over-served customers, which incumbents don’t care about because they’re at the low-margin end of their customer base; then as technology improves, the disruptor gradually eats into the incumbents’ primary markets from below. The classic example of this is steel minimills, which initially focused on the low-end, low-margin rebar market (which the integrated steel makers were pleased to vacate), but then used new technology to move upscale to the point they have now stolen even the high-end market (sheet steel) from the giants. To achieve this, it’s essential that the innovation not be suitable to or adaptable by the incumbents — that they don’t find the disruptor’s initial business model attractive; otherwise, the incumbents will bring their considerable resources and strong customer relationships to bear to make the innovation a ‘sustaining’ one for them, and ward off and defeat the disruption attempt.
  • New Market Disruptive Innovation: This entails developing and offering a product with benefits previously not available at all or which are very inconvenient to customers, and hence creating entirely new markets for entirely new groups of customers. The personal computer and personal copier are examples of this. In some cases a New Market Disruptive Innovation can later be applied to become a Low End Disruptive Innovation as well.

The part of Innovator’s Solution that most intrigued me was the section on how to identify potential disruptions and how to identify customers for them. To identify potential disruptions, he suggests, you should ‘segment’ the market by the circumstances of use of the product or potential product (i.e. what the product gets ‘hired to do’ or what ‘job it does’ that needs to be done), rather than by customer identity (demographics) or product attributes (category). The focus is therefore on when/why/how it would it be used, not what it would feature or who would use it. This is a needs-driven strategy, requiring a lot of research & cultural anthropology. It means discovering who needs ‘coolth’, and when and how they need it, not who needs an air conditioner.

This is hard for established, risk-averse, inflexible companies to do because:

  • they have a fear of too much focus (putting all their eggs in one basket, in case it’s the wrong basket);
  • their shareholders and existing line managers insist on being able to quantify outcomes in advance;
  • their existing channels are organized by product or customer demographic, not circumstances of use; and
  • their advertising and branding are also done by product or customer demographic.

Hence it is often best to have the innovation in established companies done by a new, autonomous division or group, free from the constraints, prejudices, risk-aversion and ‘why rock the boat’ thinking of the existing operations.

To identify customers for disruptive innovations, Christensen says you need to look for:

  • People and companies who have a need but lack the money or skill to meet it with existing products;
  • People and companies who have no alternative way today to do the job your product or service could help them do; and, of course,
  • People and companies who are over-served, interested in a lower-cost, simpler product without all the extraneous and rarely-used bells and whistles of current products.

It’s important that these potential customers perceive the product to be ‘foolproof’: easy to use, easy to learn, easy to buy (though if the product is for recreational use, customers may buy a product with a steeper learning curve if the learning is fun).

Equally important is that there be available, and hungry, channel partners (sources of supply, distributors, retailers, marketers etc.) to help you get it to market — if these partners and their materials and skills are scarce, or disinterested in you, customers may give up on you before you’re able to deliver reliably.

The rest of the book provides suggestions on the right roles for your company in developing the innovation, how to partner with other appropriate companies to optimize competencies and synergy, how to find the non-commodity, high profit points in the customer value chain, the importance of setting up the right people, process, values, alliances and organizational structure for innovation, how to align your strategy to support innovation (using an emergent, complex system-friendly strategy), and how to address financing and risk issues in innovation ventures.

The final section addresses the role of senior management in disruptive innovation. Leaders, he says, must exercise three key responsibilities: (a) allocate appropriate, patient resources; (b) establish a process to continuously generate disruptive innovations; and (c) detect and adapt to changes in markets and other elements of the system. The four elements of a ‘disruptive growth engine’ therefore are:

  • start before you need to (don’t wait for a crisis);
  • put a senior manager in charge (executive sponsorship is essential);
  • create an expert team of movers and shapers (and allow them to ‘self-manage’ the people, processes, and values to keep them in sync with the commercialization process for disruptive innovations); and
  • train the troops (i.e. customer-facing people to discover and tap into emerging and potential needs)

In these areas, Christensen is on comfortable and solid ground.

But I keep coming back in my thinking to how an organization can actually apply his earlier advice on how to identify potential disruptive innovations and how to identify customers for them (and which comes first anyway?) It’s a lot easier in theory than it is in practice, as I can tell you from personal experience.

Let’s take the example of a company that has expertise in the textile industry, for example. They have an established market in specialized blankets, and some scientific expertise in weaving and in thermal properties of materials. If they’re threatened by new low-cost Asian competitors in this mature market space, how would they go about becoming a disruptive innovator? They wouldn’t talk to existing customers — that’s for sustaining innovation not disruptive innovation. They wouldn’t do competitive analysis — except perhaps if they could identify some over-served customers. Other than raw imagination and a lot of serendipitous reading and lateral thinking, it’s hard to imagine how such a company, even with a separate, empowered innovation team, could begin to identify either the unmet needs within their competency to deliver, or the customers that have these needs.

What Christensen needs to add is a whole process to surface these needs and customers. Who, other than established buyers of blankets, might be interested in textiles with thermal properties? Hospitals and doctors dealing with hypothermia? Insulation companies? Gardeners and farmers seeking to protect crops from frost? Swimming pool cover manufacturers? Expedition outfitters? And since good thermal properties also insulate against heat, should we also consider cooler manufacturers, refrigerators, umbrella makers, UV-ray protectors etc.? The possibilities are endless. How do we effectively brainstorm and then filter the potential customers and potential opportunities?

The answer, I think, is a discovery process, but one somewhat different and more dependent on brainstorming, creativity, very broad environmental scanning, research, cultural anthropology and exploratory conversations than the one I have suggested for achieving understanding in complex situations.

How, do you think, should such a discovery process be structured? If it were your job to develop the process to find new customers for new products meeting new untapped needs, that are within your company’s competency to provide, how would you go about it?

This process just might be the holy grail of entrepreneurship.

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3 Responses to Disruptive Innovation: The Need for a Better Methodology

  1. Paul Sloane says:

    Great article Dave. Well argued. I have read Christensen’s books and he focuses in on the core problem very accurately. But like you I found his proposals in the Innovator’s Solution to be rather theoretical. I help orgnizations improve innovation and my advice is to use internal and external sources for new ideas leading to radical innovations. If you can define problems and ideal outcomes then you can throw down a challenge to a team to come up with outlandish proposals. They often need help with methods to force them to be bizarre and approach the problem in new ways. At the same time you need someone who is charged with trawling outside for ideas and technologies that might be relevant. Sometimes this combination can lead to the radical innovation you need.

  2. Dave, I also find it helful to distinguish between different types of disruptive innovations to help businesses understand the disruption process. In a blog posting about types of disruptive innovations I describe the difference between disruptive technologies, disruptive products, disruptive processes and disruptive business models. They all have different all have unique characteristics and consquences…

  3. Airliners have been bedeviled by bloated pension/health care costs, cutthroat competition, and nosebleed energy prices for the last couple of years.That meant investing in airliners was equivalent to getting body slammed by the Roc. On a fire hydrant. Twice.Apparently, with fuel prices stabalizing, a turnaround is on its way; several household name airliners have seen their shares edge higher on the news.On Monday, Prudential (PRU) raised its earnings estimates for some carriers to reflect “reduced fuel price assumptions.”Everyone’s got their eye on the big name domestics, but we could care less — we’re all over the Brazilians like a bad rash.Meet Gol Linhas Aéreas Inteligentes (GOL).The small South American airliner has shrugged off fuel costs, emptied people off Brazil’s crowded buses, and seen its share price pop.Shares are up 12% since we recommended the stock three weeks ago (12/6).We’ll refresh your memory:”…the low-cost, low-fare airliner has been profitable since 2002 and now commands about 28% of Brazil’s airline market. What’s Gol’s secret formula? It’s their structure — a mix of Southwest’s (LUV) efficiency and Jet Blue’s (JBLU) value proposition.Gol keeps things simpler than Thoreau: one Boeing fleet, one class of service. In addition, Gol manages fuel and labor costs better than its US counterparts. For instance, Gol’s average pilot salary is $35K; in comparison, Southwest drops roughly $200K on each of its pilots. That explains Gol’s juicier operating margins.The skies of Gol’s future certainly look bright — Gol has plans to expand heavily, but not beyond it core, underserved South American market…there are over 500 million people in South America to which Gol can offers its peanuts. Gol has first-mover advantage, which will be its leg up on the competition as it strives to maximize revenue-per-seat and amass market share. If fuel costs stabilize even further, expect to see shares of Gol really soar in 2006………”Gol is a veritable success story because it’s both a low end and a new market disruptor.__________________________________________

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