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What Disruptive Innovation Really Is

What Disruptive Innovation Really Is

GUEST POST from Geoffrey A. Moore

I recently read an article in ZDnet by Sherin Shibu discussing disruptive innovation, primarily through the lens of Clay Christensen’s work at the Harvard Business School. The article itself is very sound, and yet I found myself disagreeing with it on a number of points. In this blog, I want to interleave what Shibu says (presented in standard font) with my own commentary (inserted in italics) so that readers can develop their own point of view from the interaction.

What is disruptive innovation?

Disruptive innovation theory is a cautionary concept for large, established companies: There’s danger in becoming too good at what you do best. Delivering to the mainstream market is good and all, but a disruptor could target a market underserved by your current product with a new business model.

For me, disruptive innovation has a much bigger footprint because it also underlies virtually all venture capital investment. Its fundamental promise is to release an enormous amount of trapped value by reengineering an established system or process. The reason it is a cautionary concept for large established companies is that they are the custodians of the legacy systems and processes that are trapping the value. Yes, they can reduce the overhead by optimizing what they have, but no, they cannot compete with a categorically better way of doing things.

Harvard Business School professor Clayton Christensen developed the concept of disruptive innovation in the 1990s with his groundbreaking book The Innovator’s Dilemma, and the theory became wildly popular in the decades to follow. But in some respects it has become a victim of its own success: “Despite broad dissemination, the theory’s core concepts have been widely misunderstood and its basic tenets frequently misapplied,” notes The Harvard Business Review.

Disruptive innovation is a process by which entrepreneurs break into a low-end or new market and create business models that are different from existing ones in those markets. Disruption has occurred when their business model becomes mainstream.

So, a new company targets an overlooked customer base — and manages to deliver a better product at a lower price point. At first, the incumbents don’t take the threat seriously, which allows the potential disruptors to gain a foothold. Then the disruptors target the incumbents’ mainstream customers. If the potential disruptors create something that the mainstream adopts in volume, they have successfully disrupted the market.

I think this reading of the model overemphasizes the need to attack the low end of the market. Yes, that is a proven path, but it is not the only one. The iPhone disrupted from the high end, for example, as has Tesla.

What is disruptive innovation not?

Defining disruptive innovation isn’t easy and not everyone is going to agree on every example. Classic disruptive innovation should not simply describe just any situation of upheaval. If a new company shakes things up a bit for incumbent competitors, that scene is not necessarily one of disruptive innovation — that could simply be a breakthrough. In order for this theory to have power and be used as an analytical and predictive model, it needs to be precisely defined.

My definition of disruptive innovation is one that overthrows and is incompatible with the existing business model or operating model of an industry. In the case of the iPhone, it was Apple’s ability to go over the top of the carrier to provide products and services directly to the consumer. In the case of Tesla, it is its ability to bypass the dealership model not only in sales but in services as well.

Christensen, for example, argued that Uber is not a disruptive innovator according to his definition. It fails to meet two requirements, in that it did not start in a low-end or new market. Instead, it built a name for itself in a mainstream market and then started drawing unserved customers with less expensive solutions. And being less expensive or creating an app to hail rides sustains the existing model rather than disrupts.

This is just wrong and shows the limitations of the “start at the low end” concept. Uber reengineered both the operating model and the business model of on-demand car transportation, allowing consumers to call a taxi to themselves, and allowing Uber to build a fleet of cars and drivers at no capital expense.

Not everyone thinks that’s the case and other perspectives can be found that argue Uber actually is a disruptive innovator. From this perspective, Uber started with a low-market foothold by offering on-demand black car services. It was only when the startup introduced UberX, a low-end market offering, that it was able to move into the mainstream.

What counts as disruption is up for debate, especially as Christensen’s theory is applied to shifting contexts.

In the case of Uber, focusing on the low end simply misses the point.

Why is it important to define disruptive innovation?

Disruption isn’t a fixed point; it’s the evolution of a product or service from the fringes of customers to the mainstream. It’s important to define it this way because then it becomes more about the experimental nature of the process than about the output. See, disruptive innovations don’t always succeed and not every successful company is a disruptor. The process is about building new business models previously unseen in the target industry and appealing to a more niche customer base at first.

In my view, disruptive innovation is a function of a breakthrough technology intersecting with a pool of trapped value, enabling the reengineering of a system or process that eliminates one or more whole categories of spend in its value chain. It is a categorical innovation as opposed to a product or marketing innovation.

Is disruptive innovation the primary way innovation operates?

No, it is not the primary factor of innovation. According to HBR, “disruption theory does not, and never will, explain everything about innovation specifically or business success generally.” It does, however, help predict which businesses will succeed and it provides a solid foundation for further research – it’s captured academic attention for 27 years.

I agree with the point that disruptive innovation is not the primary type. Most innovation is sustaining, meaning that it improves an existing system rather than overthrowing it—evolution, not revolution. What I disagree with wholeheartedly, on the other hand, is the notion that the theory helps predict which businesses will succeed. Historically, the advantage has gone to start-ups because they are unconflicted in their commitment to the new way. Established enterprises, however, have learned that they can neutralize start-ups if they are willing to be fast followers. Microsoft’s Azure is a superb example of a company that has done this. Disney’s response to Netflix is another good example, and it appears as if General Motors is on a comparable path toward neutralizing Tesla.

What is an example of disruptive innovation?

Netflix was around since 1997, and at first, it didn’t appeal to Blockbuster’s core clientele. Renting movies usually happened in person, and Netflix was all online. Plus, Netflix took a few days to deliver movies because selections came through the mail. Blockbuster could easily ignore Netflix because it didn’t have the brick-and-mortar infrastructure needed to dominate the market at that time.

This glosses over what was the initial disruptive innovation that Netflix provided with its home delivery model based on DVDs. The key differentiator at the beginning was designing out late fees.

Over time though, as streaming technology developed, Blockbuster’s target clients were drawn toward Netflix. The same impulsiveness that made renting a movie right away more desirable than getting a movie a few days later translated into wanting to watch movies with a click of a mouse instead of going to a physical location to rent a DVD. Disruptive innovation technology, in this case, streaming, goes hand in hand with implementing innovation.

There is another story playing out in Netflix’s transition from DVD shipping to streaming. It required the company to disrupt itself. This is an extraordinary ask, as most successful disruptive innovations attack someone else’s profit pool, not one’s own. Reed Hastings deserves enormous credit for leading the company through this change, and I would encourage the academy to focus its research lens on how in the world he was able to do so when so many CEOs have fallen short.

Are there any disruptive innovation technologies to keep an eye on?

Online learning is a technology to watch because it’s reaching a population that in-person learning can’t reach at a lower price point.

The main technologies to keep an eye on are the ones that tackle an underserved market and have the potential to expand their offerings to appeal to the mainstream.

Something like autonomous vehicles, for example, can seem innovative, but they aren’t disruptive according to the theory because they’ll be quickly absorbed into existing industries. The incumbent advantage is strong.

The important thing to remember is that innovation does not always lead to disruption.

I strongly support the idea that online education delivery has the power to disrupt the education market—again, a breakthrough technology intersecting with a boatload of trapped value. I think the point about autonomous vehicles is interesting as well because I agree they will be absorbed into the existing industries. But while they may not disrupt the automotive industry, I do think they can reengineer transportation and logistics.

Overall, I support Shibu’s main thesis which is that we have come to take disruptive innovation for granted and have become careless with how we apply the term. And while we part ways on how best to apply it, I still endorse Clay’s breakthrough insights in The Innovator’s Dilemma, which had a huge impact on a whole generation of companies in Silicon Valley.

That’s what I think. What do you think?

Image Credit: Pexels

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The Reality Behind Netflix’s Amazing Success

The Reality Behind Netflix's Amazing Success

GUEST POST from Greg Satell

Today, it’s hard to think of Netflix as anything but an incredible success. Its business has grown at breakneck speed and now streams to 190 countries, yet it has also been consistently profitable, earning over $12 billion last year. With hit series like Orange is the New Black and Stranger Things, it broke the record for Emmy Nominations in 2018.

Most of all, the company has consistently disrupted the media business through its ability to relentlessly innovate. Its online subscription model upended the movie rental business and drove industry giant Blockbuster into bankruptcy. Later, it pioneered streaming video and introduced binge watching to the world.

Ordinarily, a big success like Netflix would offer valuable lessons for the rest of us. Unfortunately, its story has long been shrouded in myth and misinformation. That’s why Netflix Co-Founder Marc Randolph’s book, That Will Never Work, is so valuable. It not only sets the story straight, it offers valuable insight into how to create a successful business.

The Founding Myth

Anthropologists have long been fascinated by origin myths. The Greek gods battled and defeated the Titans to establish Olympus. Remus and Romulus were suckled by a she-wolf and then established Rome. Adam and Eve were seduced by a serpent, ate the forbidden fruit and were banished from the Garden of Eden.

The reason every culture invents origin myths is that they help make sense of a confusing world and reinforce the existing order. Before science, people were ill-equipped to explain things like disease and natural disasters. So, stories, even if the were apocryphal, gave people comfort that there was a rhyme and reason to things.

So it shouldn’t be surprising that an unlikely success such as Netflix has its own origin myth. As legend has it, Co-Founder Reed Hastings misplaced a movie he rented and was charged a $40 dollar late fee. Incensed, he set out to start a movie business that had no late fees. That simple insight led to a disruptive business model that upended the entire industry.

The truth is that late fees had nothing to do with the founding of Netflix. What really happened is that Reed Hastings and Marc Randolph, soon to be unemployed after the sale of their company, Pure Atria, were looking to ride the new e-commerce wave and become the “Amazon of” something. Netflix didn’t arise out of a moment of epiphany, but a process of elimination.

The Subscription Model Was an Afterthought

Netflix really got its start through a morning commute. As Pure Atria was winding down, Randolph and Hastings would drive together from Santa Crux on Highway 17 over the mountain into Silicon Valley. It was a long drive, which gave them lots of time to toss around e-commerce ideas that ranged from customized baseball bats to personalized shampoo.

The reason they eventually settled on movies was the introduction of DVD’s. In 1997, there were very few titles available, so stores didn’t stock them. They were also small and light and were easy to ship. Best of all, the movie studios recognized that they had made a mistake pricing movies on videotape too high and planned to offer DVD’s at a level consumers would buy them.

In the beginning, Netflix earned most of its money selling movies, not renting them. However, before long they realized that it was only a matter of time before Amazon and Walmart began selling DVD’s as well. Once that happened, it was unlikely that Netflix would be able to compete, and they would have to find a way to make the rental model work.

The subscription model began as an experiment. No one seemed to want to rent movies by mail, so they were desperate to find a different model and kept trying things until they hit on something that worked. It wasn’t part of a master plan, but the result of trial and error. “If you would have asked me on launch day to describe what Netflix would eventually look like,” Randolph wrote, “I would have never come up with a monthly subscription service.”

The Canada Principle

As Netflix began to grow it was constantly looking for ways to grow its business. One idea that continually came up was expanding to Canada. It’s just over the border, is largely English speaking, has a business-friendly regulatory environment and shares many cultural traits with the US. It just seemed like an obvious way to increase sales.

Yet they didn’t do it for two reasons. First, while Canada is very similar to the US, it is still another country, with its own currency, laws and other complicating factors. Also, while English is commonly spoken in most parts of Canada, in some regions French predominates. So, what looked simple at first had the potential to become maddeningly complex.

The second and more important reason was that it would have diluted their focus. Nobody has unlimited resources. You only have a certain number of people who can do a certain number of things. For every Canadian problem they had to solve, that was one problem that they weren’t solving in the much larger US business.

That became what Randolph called the “Canada Principle,” or the idea that you need to maximize your focus by limiting the number of opportunities that you pursue. It’s why they dropped DVD sales to focus on renting movies and then dropped a la carte rental to focus on the subscription business. That singularity of focus played a big part in Netflix’s success.

Nobody Knows Anything

Randolph’s mantra throughout the book is that “nobody knows anything.” He borrowed the phrase from the writer William Goldman’s memoir Adventures in the Screen Trade. What Goldman meant was that nobody truly knows how a movie will do until it’s out. Some movies with the biggest budgets and greatest stars flop, while some of the unlikeliest indy films are hits.

For Randolph though, it’s more of a guiding business philosophy. “For every good idea,” he says, “there are a thousand bad ideas it is indistinguishable from.” The only real way to tell the difference is to go out and try them, see what works, discard the failures and build on the successes. You have to, in other words, dare to be crap.

Over the years, I’ve had the chance to get to know hundreds of great innovators and they all tell a different version of the same story. While they often became known for one big idea, they had tried thousands of others before they arrived at the one that worked. It was perseverance and a singularity of focus, not a sudden epiphany, that made the difference.

That’s why the myth of the $40 late fee, while seductive, can be so misleading. What made Netflix successful wasn’t just one big idea. In fact, just about every assumption they made when they started the company was wrong. Rather, it was what they learned along the way that made the difference. That’s the truth of how Netflix became a media powerhouse.

— Article courtesy of the Digital Tonto blog
— Image credit: Unsplash

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Your Brand Isn’t the Problem

Your Brand Isn't the Problem

GUEST POST from Mike Shipulski

Cigarette companies rebranded themselves because their products caused cancer and they wanted to separate themselves from how their customers experienced their products. Their name and logo (which stand for their brand) were mapped to bad things (cancer) so they changed their name and logo. The bad things still happened, but the company was one step removed. There was always the option to stop causing cancer and to leave the name and logo as-is, but that would have required a real change, difficult change, a fundamental change. Instead of stopping the harm, cigarette companies ran away from their heritage and rebranded.

Facebook rebranded itself because its offering caused cancer of a different sort. And they, too, wanted to separate themselves from how their customers experienced their offering. The world mapped the Facebook brand to bullying, harming children, and misinformation that destroyed institutions. Sure, Facebook had the option to keep the name and logo and stop doing harm, but they chose to keep the harm and change the name and logo. Like the cigarette companies, they chose to keep the unskillful behavior and change their brand to try to sidestep their damaging ways. Yes, they could have changed their behavior and kept their logo, but they chose to change their logo and double down on their unhealthy heritage.

The cigarette companies and Facebook didn’t rebrand themselves to move toward something better, they rebranded to run away from the very thing they created, the very experience they delivered to their customers. In that way, they tried to distance themselves from their offering because their offering was harmful. And in that way, rebranding is most often about moving away from the experience that customers experience. And in that way, rebranding is hardly ever about moving toward something better.

One exception I can think of is a special type of rebranding that is a distillation of the brand, where the brand name gets shorter. Several made-up examples: Nike Shoes to Nike; McDonald’s Hamburgers to McDonald’s; and Netflix Streaming Services to Netflix. In all three cases, the offering hasn’t changed and customers still recognize the brand. Everyone still knows it’s all about cool footwear, a repeatable fast-food experience, and top-notch entertainment content. If anything, the connection with the heritage is concentrated and strengthened and the appeal is broader. If your rebranding makes the name longer or the message more nuanced, you get some credit for confusing your customers, but you don’t qualify for this special exception.

If you want to move toward something better, it’s likely better to keep the name and logo and change the offering to something better. Your brand has history and your customers have mapped the goodness you provide to your name and logo. Why not use that to your advantage? Why not build on what you’ve built and morph it slowly into something better? Why not keep the brand and improve the offering? Why not remap your good brand to an improved offering so that your brand improves slowly over time? Isn’t it more effective to use your brand recognition as the mechanism to attract attention to your improved offering?

In almost all cases, rebranding is a sign that something’s wrong. It’s expensive, it consumes a huge amount of company resources, and there’s little to no direct benefit to customers. When you feel the urge to rebrand, I strongly urge you to keep the brand and improve your offering. That way your customers will benefit and your brand will improve.

Image credit: Pixabay

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