Disruptive Innovations

[The_Liquid_Laser]

I've become interested lately in disruptive innovations. What is a disruptive innovation? Well I'm glad you asked. A disruptive innovation is a new process or technology that is viewed as inferior, but over time it comes in and dominates the whole market. This is because the new technology is accompanied by a new business model which is a better fit for what the customer's needs are. From the perspective of an established market leader, a disruptive technology looks like insanity. The established player is selling the highest quality products and using conventional business wisdom, and they see their business gradually fall apart. (Disruption is a topic of several books by Clayton Christenson. If anyone has read any of these books then please post and give your impression of them.)

Here are some key features of disruption:
1) The disruptive technology is viewed as inferior. However it also has some advantage that the established technology does not such as being cheaper or easier to use.
2) The disrupting company has new values that are different from the market leaders. These values are more in tune with the customer's needs. This is also why a small "David" company can defeat an established "Goliath". The established company can replicate the new technology, but usually do not understand the values that go with it.
3) The disrupting company targets customers that are viewed as marginal in the established market. The established leaders willingly yield these customers to the disruptor, because they are not particularly profitable to begin with. Over time though the disruptor starts to gain more and more market share.
4) Time is on the side of disruptor. This is because technology improves faster than people's ability to desire new technology. The established players have the best products, but in effect the products are "too good". Some customers want something that is just "good enough" while being cheaper or easier to use. Over time the "good enough" technology improves to the point that it is good enough for even the most demanding customers.

A couple examples:
Alexander Graham Bell tried to sell his invention, the telephone, to the telegraphing company Western Union, but they refused. The problem was at the time the telephone was only effective for relatively short distances, i.e. the telephone was inferior for communication. However the ability to hear the other person's voice was a new feature that the telegraph didn't have. It didn't take long for the range of the telephone to improve and the rest is history. An important lesson to take away from this is that Western Union was actually behaving rationally in refusing to buy the telephone. The telephone didn't meet the needs of its current customers. Instead the telephone was successful because it appealed to an entirely new type of customer.

A modern example is the Nintendo Wii. This is an interesting example because we can see what disruption looks like as it happens. The Wii is viewed as an inferior product, because it doesn't have the speed or HD graphics of a PS3 or XBox360. However it is also cheaper and most importantly its controller is a lot easier to use. Consequently it is now the market leader for home consoles. Soon both Sony and Microsoft will start selling their own wireless motion control devices and games, but if the priciple of disruption holds true these devices will not be particularly successful. This is because Nintendo's new values of appealing to marginal customers are just as important as the technology itself.

Here are some videos explaining disruption even further:

[youtube=xKDTYzVtSmU]Disruption part 1[/youtube]
[youtube=aLOdMxVQ5UI]Disruption part 2[/youtube]
[youtube=nBB5t-2VPLw]Disruption part 3[/youtube]

 

[Southern Kross]

That's interesting. I didn't know there was a term for that sort of thing. I guess it shows you that the way forward can often seem like a step backwards.

So would texting be one? SMS is inferior to a phone call because it has to be short, simplified and isn't in real time (ie. isn't immediate communication like a phone call), as well as writing it takes more time than just speaking it would and its impersonal. But its cheaper to make and people have overcome the time consuming aspect (eg. simplfying sentences, removing vowels and learning to do it fast). On top of this, it turns out people liked its simplified, delayed and impersonal aspects.

What about selling bottled water to people in developed nations (even though they have easy acess to clean water)?

 

[The_Liquid_Laser]

That's interesting. I didn't know there was a term for that sort of thing. I guess it shows you that the way forward can often seem like a step backwards.

So would texting be one? SMS is inferior to a phone call because it has to be short, simplified and isn't in real time (ie. isn't immediate communication like a phone call), as well as writing it takes more time than just speaking it would and its impersonal. But its cheaper to make and people have overcome the time consuming aspect (eg. simplfying sentences, removing vowels and learning to do it fast). On top of this, it turns out people liked its simplified, delayed and impersonal aspects.

I don't know enough about how texting came into existence to say. If it started by itself from small company and then later expanded onto phones I would say yes. If it's just a feature that phone companies added then I'd say no.

What about selling bottled water to people in developed nations (even though they have easy acess to clean water)?

That's an interesting one, and I think that would probably be disruptive. I imagine it really cut into sales of diet sodas and other low calorie beverages. I remember the guy in the video mentioned Red Bull as one type of disruption, but I'm not sure if a beverage disruption is as dramatic as a more tech oriented one. One feature of disruption is that technology improves over time, and I don't think that would play a part in a beverage market like it would in a tech market such as a phone or blackberry.

 

[yenom]

Past:

railroad
electricity
steam engine
computers
internet
gunpowder
paper

Future:

clean efficient energy
nanotech
cybernetics and neurotechnology
space technology
biotechnology

 

[The_Liquid_Laser]

Past:

railroad
electricity
steam engine
computers
internet
gunpowder
paper

Future:

clean efficient energy
nanotech
cybernetics and neurotechnology
space technology
biotechnology

You may correct. I don't really know what the future will look like. But just to play devil's advocate let me give you a hypothetical situation involving cybernetics.

Let's say in the future when someone loses an arm, they can choose one of two procedures. One choice is they can have a cybernetic arm to replace their old one. Another choice is that stem cell technology has advanced so that people can grow a new arm that resembles the old one they lost. If most people choose the second option, then cybernetic technology will largely be ignored and not develop further. Even if the cybernetic arm is far stronger and more durable than the fleshy regrown arm people may simply decide, "what I really want is just to have my old arm back."

In this hypothetical case cybernetics will not develop and the stem cell technology will develop further, because it appeals to what consumers really want. And that is really what determines which technologies develop. It is not the technology that looks superior on paper, but the technology that comes the closest to giving people what they really want.

 

[INTJ123]

so it's just the fault of the big company's mindset that is their downfall. They are unwilling to change and stagnate even though they push forward with the newest best products that in itself is it's own philosophy, to keep pushing hard and with new products. The customers don't necessarily think that way and do not always desire such products, so the big company failed to recognize this and it was their own faults for forgetting that customers are #1, they acted in vain.

 

[IrishGuy]

How about dual graphics card slots. That technology was available in the early-mid 90's (voodoo graphics cards I think) but it was thrown under the table for the better part of a decade by AGP slots which were faster in the short term. Later as single graphics cards became more expensive some gamers began buying two cheaper graphics cards to get the same performance as people had in the early to mid 90's (PCI Express)

You may correct. I don't really know what the future will look like. But just to play devil's advocate let me give you a hypothetical situation involving cybernetics.

Let's say in the future when someone loses an arm, they can choose one of two procedures. One choice is they can have a cybernetic arm to replace their old one. Another choice is that stem cell technology has advanced so that people can grow a new arm that resembles the old one they lost. If most people choose the second option, then cybernetic technology will largely be ignored and not develop further. Even if the cybernetic arm is far stronger and more durable than the fleshy regrown arm people may simply decide, "what I really want is just to have my old arm back."

In this hypothetical case cybernetics will not develop and the stem cell technology will develop further, because it appeals to what consumers really want. And that is really what determines which technologies develop. It is not the technology that looks superior on paper, but the technology that comes the closest to giving people what they really want.

You make an interesting point here. I think a good current example of this is the fuel cell engine. It's a great technology but all electric vehicles and hybrids and more efficient conventional engines are beating it out due to monetary costs.

 

[IrishGuy]

I agree that big corporations tend to be much more risk averse and less innovative. Would Microsoft be a good example? Big company that a lot of people do not like but still consume their products out of a "necessity."

 

[The_Liquid_Laser]

How about dual graphics card slots. That technology was available in the early-mid 90's (voodoo graphics cards I think) but it was thrown under the table for the better part of a decade by AGP slots which were faster in the short term. Later as single graphics cards became more expensive some gamers began buying two cheaper graphics cards to get the same performance as people had in the early to mid 90's (PCI Express)

I don't really know a lot of the business details, but that does sound like a good example based on your description.

You make an interesting point here. I think a good current example of this is the fuel cell engine. It's a great technology but all electric vehicles and hybrids and more efficient conventional engines are beating it out due to monetary costs.

I agree. I also think it is currently more convenient to buy a fuel efficient hybrid or conventional engine or electric than it is to have to worry about replenishing a fuel cell. It would take quite a while to get the infrastructure in place, so I doubt it will happen given our current conditions.

I agree that big corporations tend to be much more risk averse and less innovative. Would Microsoft be a good example? Big company that a lot of people do not like but still consume their products out of a "necessity."

Yeah I think Microsoft is a prime example in fact. (I can't remember if this was in the video but) I believe Google has come out with a real low quality word processor and spreadsheet that some people are starting to use. Microsoft office really has "advanced" too far. Me and my collegues at work do a lot of complex calculations using Excel, and yet we haven't upgraded past the 2003 version yet. I actually downloaded a trial of the latest version at home, but I found the setup wasn't as intuitive as the 2003 version and I don't really need any of the new features. When the most demanding consumers don't want their product then they are very vulnerable to disruption.

And lets not forget Windows 7. Most of the IT guys I work with would be content to stick with Windows XP, and yet Microsoft tries to force a new OS on the public every few years. Again even the most demanding customers don't really want it. I would love to see someone come up with a stripped down competing OS that has features something like this:
1) Just as user friendly as the various Windows OS's.
2) Cheaper because it has less features or stripped down features.
3) Takes up less space and is less of a resource hog in general.
4) Comes with Firefox or some other browser installed.

I think there would be quite a few people that would go for something like that.

 

[ygolo]

I have been a student of Disruptive Innovations for a long while. Already read both the Innovator's Dilemma and the Innovator's Solution.

You seemed to have hit the main points mentioned in the Innovator's Dilemma in the OP.

If you have dreams of creating a disruptive innovation of your own, I suggest reading Crossing the Chasm, as well as Drucker's classic Innovation and Entrepreneurship.

I used to have his list of the markers for opportunities for innovation memorized. I had to look this up:

1. Unexpected occurrences
2. Incognuties
3. Process Needs
4. Industry and market changes
5. Demographic changes
6. Changes in perception
7. New knowledge

Also, the Innovator's Solution has a good web-site:

A Template for Shaping Disruptive Ideas

New market disruptions follow a remarkably consistent pattern, regardless of the type of industry or the era in history when the disruption occurred. Here is a template managers can use to identify promising new customers and markets, and shape nascent ideas into disruptions that drive profitable growth:

1. Target nonconsumption. Look for a set of consumers who are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach. Powerful competitors will typically ignore you, because you’re targeting customer they consider unattractive.
   Example: When Sony introduced the world’s first battery-powered, pocket transistor radio in 1955, it targeted the product not to the buyers of tabletop radios (produced by giant electronics companies like RCA)—but to a huge segment of the music-loving marketplace who couldn’t afford to buy tabletops: teenagers.The beautiful thing about competing against non-consumption is that in order to delight your customers, your product needs only to be better than nothing.
   
   
2. Leverage the low performance hurdle. Since these new customers compare the disruptive product to having nothing at all, they are delighted to buy it even though it may not be as good as other products available.
   Example: Compared with the vacuum tube tabletop radios, the sound from Sony’s transistor was tinny and static-laced. But teenagers didn’t mind. Infact, they were thrilled to buy it, because it was cheap, and because it enabled them to listen to their rock and roll music in a new venue: out of the earshot of their parents.
   
   
3. Make it “foolproof.” Deploy technology not to make the product more sophisticated, but rather to make it as “foolproof” as possible so that customers with less money and little training on the product can begin using it.
   Example: The personal computer enabled everyday people who lacked degrees in engineering and computer science to begin computing for themselves. Whenever hardware and software have made sophisticated and difficult applications more foolproof, it has created new waves of growth.
   
   
4. Lock in and take over. As a new value network forms around the new consumer market, certain channel partners will come to depend on your product to fuel their own need for disruptive growth. In addition, consumers will begin to use the product in new venues. Over time, the disruptive product will improve in quality, attract more customers, and take over the leadership position in that category.
   Example: Vacuum tube-based appliances were sold through appliance stores that made most of their profits replacing burned out vacuum tubes in the products they sold. Sony’s transistors had no vacuum tubes, so the company had to create a new channel through which to sell their product. These were chain stores like F.W. Woolworth and discount retailers like K-Mart, who were previously unable to sell radio and televisions because they couldn’t service them. The channel partnerships were win-win, because each was helping the other to succeed on their disruptive path. By the time RCA and other big competitors realized the threat, the shelf space at these new channel distributors was taken—and so was the market share.

How to Turn the Innovator’s Dilemma into the Innovator’s Solution

1. Target only those customers and markets that look unattractive to every established competitor. If an idea is sustaining (an improved version of an already available and popular product) relative to even a single competitor, the idea will not succeed as a disruption.
   
   
2. Try to compete against nonconsumption: customers who are currently unable to use currently available products at all, either because they can’t afford them or are too inexperienced to use them. These markets have the most potential because these customers will compare your product to having nothing at all, and so will be thrilled to buy it even if it’s inferior to currently available products.
   
   
3. If there are no nonconsumers available, explore the feasibility of a low-end disruption instead: customers who can’t use all the functionality they currently have to pay for and who won’t pay premium prices for upgraded products. If this isn’t possible either, and you’re not an industry incumbent, don’t invest in the idea.
   
   
4. When searching for ideas with disruptive potential, look for ways to help customers get done more conveniently and inexpensively what they are already trying to do. Don’t invent new problems for customers to solve—they won’t reprioritize what’s important in their lives just because your product is available.
   
   
5. Don’t segment markets according to readily available data such as product type, price point, or demographic category. Segment the market in ways that mirror the jobs that customers are trying to get done.
   
   
6. Watch the low end of the market for changes in the basis of competition—that’s where the new opportunities usually lie.
   
   
   
7. Focus on developing competencies where the money will be made in the future, not on the skills that made you successful in the past. Future profits will be made at the point in the value chain where the product or service is not yet good enough.
   
   
8. Don’t rely on your snap judgment about your firm’s core competencies when determining where a new venture should “live” and how it should be structured. The resources, processes, and values that allow your core business to thrive may well prevent great new ideas from succeeding.
   
   
9. Ensure that the channel companies that will distribute your new product also have the processes and values—the right methods and motivations—to enable success.
   
   
10. The managers in your organization who have most consistently delivered results in the past may be the least skilled at delivering success in new-growth businesses. When choosing the new management team for your venture, ensure they’ve already grappled with the same kinds of problems they’re likely to encounter as they guide your new venture.
    
    
11. Don’t assume that your initial strategy is the “right” strategy for a potential disruption. Create a plan to accelerate the emergence of a viable strategy in terms of products, customers, and applications—and don’t invest irrevocably in any strategy before there is evidence that it works.
    
    
12. Be impatient for profits, but patient for growth. Enduring years of substantial losses in the belief that it will help a new business become huge and profitable is a bad idea. Demanding early profitability will save years of losses that come from pursuing the wrong strategy for a long time—and help your team hit upon a truly viable strategy more quickly.
    
    
13. Keep your company growing while it is robust and profitable. Disruption requires a long runway before a steep ascent is possible. Waiting until corporate growth slows down often raises the pressure to grow very fast—which can lead to big and often fatal mistakes.

Crossing the Chasm has a wikipedia entry.
Crossing the Chasm - Wikipedia, the free encyclopedia

It has been a while since I read it, but Moore uses a D-Day analogy...creating an invasion force, establishing a beachhead, etc.

This pdf, is a good summary:
http://www.parkerhill.com/Summary of Crossing the Chasm.pdf

 

[The_Liquid_Laser]

Thanks for all the links and resources, ygolo. Very interesting and informative.

 

[The_Liquid_Laser]

In my first post I mentioned how Nintendo is using the Wii as a disruptive innovation. Interestingly BusinessWeek just named them the "World's Best Company of 2009". Behold the power of disruption!

World's Best Companies 2009 - BusinessWeek

What are some traits of the World's Best Companies? A commitment to innovation, diversified portfolios, aggressive expansion, strong leadership, and a clear vision for the future.
...
Japanese electronics maker Nintendo claims the No. 1 spot this year. Its sales have risen 36% annually over the past five years, while its value growth averaged 38%. Despite the hard times of the past year, Nintendo's continued emphasis on innovation has helped the company develop must-haves such as the DS handheld game machine and the Wii console, which outsold rival offerings from Sony and Microsoft.

 

[Feops]

Very interesting clips.

Nintendo Wii is a good example, but I don't think they were disruptive primarily because it was cheaper and easier. Cheaper and easier are things all products strive for. I bet Sony would have loved to sell their units for $50 cheaper, yet they couldn't for what they offered, which was hardware capable of satisfying "serious gamers".

I think Nintendo took advantage of an existing market where Sony and Microsoft were clubbing each other over the head for the "serious gamers" and presented a product that appealed to children, families, and group activities. It's funny because children and groups were the original market that gaming just happened to outgrow, so Nintendo just returned to it as it became niche.

 

[The_Liquid_Laser]

Very interesting clips.

Nintendo Wii is a good example, but I don't think they were disruptive primarily because it was cheaper and easier. Cheaper and easier are things all products strive for. I bet Sony would have loved to sell their units for $50 cheaper, yet they couldn't for what they offered, which was hardware capable of satisfying "serious gamers".

I think Nintendo took advantage of an existing market where Sony and Microsoft were clubbing each other over the head for the "serious gamers" and presented a product that appealed to children, families, and group activities. It's funny because children and groups were the original market that gaming just happened to outgrow, so Nintendo just returned to it as it became niche.

Yeah you are right. Cheaper and easier have to do with the technology, which is important, but a company's values are even more important in making the disruption work. Microsoft and Sony can come up with a cheap easy to use controller, but that won't make them successful (especially if they keep focusing on the hardcore crowd). Nintendo's values make them target a forgotten market, and their technology is a manifestation of those values.