Friday, January 28, 2011

Disruptive Innovations

Everyone wants to build a disruptive technology or a disruptive business. But what does that really mean? An article by Clayton Christensen, Mark Johnson and Darrell Rigby 'Foundations for Growth: How To Identify and Build Disruptive New Businesses' provides a description of disruptive, and identifies key requirements for disruptive businesses.

Christensen et al. distinguish disruptive innovations from staining innovations in that the latter only target existing customers in established markets. In contrast, disruptive innovations create new markets and generate new ways of doing business that effects established markets. Further clarifications:
  • Industry incumbents aren't always the first to market with a sustaining innovation, but they almost always end up on top due to superior resources and high stakes.
  • Innovations that help incumbent companies sell better products to their best customers are sustaining, not disruptive.
  • Established businesses move towards the more profitable customers (see above), providing asymmetric motivation for entrants to attack less profitable customers (down-market)
  • 'Down-market' are typically small and undefined but hold the best prospects for growth
According to the article, new growth business has a 10x better chance of success with a disruptive strategy. How do you know if you can follow a disruptive strategy? In essence the recommended requirement is a open, simple, low-cost product.
  1. Can you create a new market base?
    • Does it enable customers who could not previously DIY for lack of money or skills? That is, can it become mainstream rather than specialised?
    • Is it targeted at customers who want a simple product?
    • Will it allow customers to do more easily and effectively what they are already trying to do? i.e. Is it fulfilling an existing need/want, rather than creating a new one?
  2. Can you disrupt from the low end?
    • Are prevailing performance good enough? If not, then a simpler product will not succeed.
    • Do you have a business model that targets thin profit margins and high net asset turns. Do competitors already outsource fabrication and assembly to the lowest-cost sources?
Now that you know your innovation has the potential to be disruptive, do you have the resources, processes and values you require for success?
  • Resources: Do you have the best people and sufficient cash? A manager who is radically different from those established with core business who has the correct experience? Are you aware of the challenges the manager will face? Too much cash can allow bloat that weakens the product (remember our tight profit margins), too little and the product may never see the light of day.
  • Processes and Values: Traditional and established processes can hamper a disruptive enterprise, an independent business unit that emphasises the key values of simplicity and low-cost is best.
For established companies you will want to:
  • Start before you need to grow, while you can afford it (ie: while your company is still growing)
  • Create an aggregate project plan with strategic objectives
  • Train employees to scout for well positioned small companies that will help accelerate and improve your disruptive product
A successful disruptive product should generate profits almost immediately, but needs to be cautious to not out-grow your capabilities: new markets take time to emerge.

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