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Don't try to develop disruptive innovation

Tue, 02/17/2015 - 09:23 -- KevinMcFarthing

Disruptive innovation is the best type, isn’t it?  New, exciting and the Rolls Royce of the innovation showroom?  The one to aim for?  Well, not quite….

I’ve read some interesting articles lately which all seem to point to one key conclusion, which is that disruptive innovation is actually what happens to large companies, not something they can plan to do to others.  It’s like shareholder value – a dumb idea if that is what drives you. 

While on a long flight last month, I read Tim Harford’s excellent book, Adapt.  Many of you may also have read Soren Kaplan’s excellent article on why disruptive innovation is not a strategy.  I agree with the sentiment of Soren’s article, and much of what is in Tim’s book, namely this – planning to develop disruptive innovation won’t work.  Focusing on really good innovation that meets and builds new markets might just get you there.


WHAT IS DISRUPTIVE INNOVATION?

First, a definition – a disruptive innovation is “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors” (Clayton Christensen).  Or as Wikipedia puts it “disruptive innovation helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology”.

As Greg Satell pointed out, much disruptive innovation starts out really crappy.  Or as the title of Tim Harford’s book states – “Adapt, why success always starts with failure”.  Early digital cameras weren’t very good; early mobile phones were like carrying a house brick in terms of both weight and functionality; Netflix’s business took a while to take off because the bandwidth wasn’t there.  The key thing is that those early innovators learnt a lot themselves, and taught those coming up behind them.

In the oft-quoted examples, large companies don’t disrupt, they are disrupted.  The battle stories are written from the perspective of the disrupted such as Kodak and Smith Corona.  There’s also an element of failing to see the writing on the wall.  As Greg puts it - disrupted companies fail not because they get worse, but that they continue to get better and better at things people care less and less about.

It’s not about technology; it’s usually about things that make a user’s life better or easier, or a product or service becoming less and less relevant to people’s lives; where technology is the enabler for the new entrant.

These thoughts struck me again when I read about the recent fortunes of Mattel.  Is it an issue of company performance or is it a market disruption under way?  Are some toys less relevant in an age where kids can have hours of play using tablets and consoles using cheap apps?  It seems that the best CEO in the world would find the role challenging if we are seeing real disruption.


HOW MARKETS ARE DISRUPTED

Many different things need to happen before a market is disrupted by innovation.

1.  The insight must be seen.  This doesn’t mean that the opportunity for disruption is seen.  I doubt that the leaders in digital photography started off with the idea that they would destroy Kodak.  Indeed, Kodak was one of the technology leaders for a time.  No, the insight is that consumers would be interested in an offering that works better, is more convenient or significantly reduces cost.

2.  The advantage gap between the new and existing offerings becomes significant in key parameters, in favour of the new.

3.  The technology and performance supporting the innovation moves beyond the “crappy” stage.

4.  Market leading incumbents are reluctant to adapt.  Tim Harford exemplifies this in a different setting.  He quotes one senior military officer reputed to have said about fighting guerilla warfare in Vietnam, “I’ll be damned if I permit the Unites States army, its institutions, its doctrine, and its traditions to be destroyed just to win this lousy war.”  This exemplifies the inertia and often lack of leadership that allows disruption to happen.


WHAT TO DO ABOUT IT?

First, the phrase “disruptive innovation” should be removed from any strategy documents and project portfolio definitions, unless it describes an external threat.  Ironically the best way to achieve it is not to aim for it.  Choose a different term for your innovation on the edge.  Which leads on to…

Second, focus on the right portfolio mix of innovation.  Clayton Christensen has a good approach for the classification of innovation types:

-  Performance Improving – replace old products with new;

Efficiency – improve cost and performance;

-  Market creating – transform products radically to create a new class of consumers or a new market.

The mix is key; you will remain a potential disruptee if you don’t have any market creating projects.

Third, take the right approach to developing and testing.  Tim’s book quotes the Russian engineer, Peter Palchinsky, who developed some key principles for innovation and new ventures in the early years of Stalin’s rule back in the 1920s:

1.  First, seek out new ideas and try new things.

2.  When trying something new, do it on a scale where failure is survivable.

3.  Seek out feedback and learn from your mistakes as you go along.

There is eminent common sense in these Palchinsky rules.  Unfortunately for Peter, his rational approach and willingness to tell the truth often produced data and recommendations that went against the prejudices of the communist dictator.  You won’t be surprised what happened to him.

image credit: Deloitte

Comments

Submitted by Paul Paetz (not verified) on

Everything about this is wrong.

1. Disruption can, and should be engineered by design.

The best application of disruption theory is to use it for prediction (which products/companies are likely disruptive and which aren't) for investment purposes, and to create a deliberate strategy to disrupt. In fact, these are the only applications that make sense. Using it as a label to tag something that's already happened is next to useless. The reason why? Virtually all real economic growth after accounting for inflation can be shown to be the result of disruption. Without disruption, companies and economies stagnate and eventually fail.

2. Disruptive innovation is not "the Rolls Royce" of innovation. It's simply the first phase of market change. After successful disruption, there are many cycles of sustaining innovation to capitalize on the opportunity created by disruption. Sustaining innovation isn't bad, and disruptive innovation isn't inherently better. They are simply different phases of the same thing. Also, both are relative terms. Sustaining innovation only becomes the wrong thing to do when a) the existing market is over-served (customers are unable to absorb the pace of innovation), or b) emerging technology or a different business model enables a new way to solve the problem that radically reduces cost or broadens the market. At this point in the product lifecycle, further sustaining innovation contributes to commoditization, and higher costs which customers aren't willing to pay for resulting in lower margins. As the proverb says "there is a time to every season, and a time to every purpose" -- but you do need to understand when one or the other is more appropriate and how to be on the watch for disruptive opportunities or disruption coming at you.

3. To create disruption on purpose, you have to understand what causes it. Christensen described the pattern that indicates disruption has happened or is happening. He never articulated why it happens. If you know what the necessary precursors are, you can absolutely make it happen by design.

4. Not all opportunities have disruptive potential. Again, you can't do it on purpose unless you understand this. You first have to choose the opportunities to pursue wisely, and then recognize that you have choices about how to implement product and marketing strategies and business models, and that the same idea can be disruptive, or not disruptive, depending on your choices. A simple example -- if you price above what the market is willing to pay, you have no chance of disrupting anything, no matter how well you address unmet needs. If Google had decided to charge for their search engine because it was "better" than the alternatives, they would not have disrupted anything, and may not have survived. This is only the most obvious choice, but it illustrates how the strategic decisions of the business model can dictate whether you are disruptive or not.

5. Disruptive innovation doesn't always start off as crappy or take root at the bottom of the market -- this exemplifies only one type of disruption, namely low-end. This is a very common misunderstanding of the theory, and one that Christensen has helped to propagate with ambiguous language. Regardless, what's important is that to the existing customers/market, the innovation appears deficient on at least one of the attributes that they consider critically important. So, to printers of high end glossy brochures, laser printing was the equivalent of photocopying, and not a threat to offset presses. But, there was nothing crappy about laser printers -- they simply served a different purpose, and enabled a whole new class of users to create better quality documents than they had previously been able to. Home users and small businesses adopted this technology, which grew in capability over time to the point that it disrupted all but the most sophisticated of printers. The key: the new product targeted a different job that a new market of customers needed done, and also attacked the low-end of the business printing market, and then moved into adjacent markets as it expanded in capability. The problem with using words like crappy or inferior is that they cause incumbents to dismiss the potential disruptive innovation as a toy, and to not realize the impact it will have until it is too late to do anything. It also causes people to turn up their noses as if to say that such innovation is beneath them, even though it usually serves customers better in the long run, and at lower cost.

6. "I doubt that the leaders in digital photography started off with the idea that they would destroy Kodak." Wow. It's obvious by this statement that you don't know that Kodak actually invented digital photography in 1975. Unfortunately, to the leaders in film chemistry and sophisticated paper and processing products, the low resolution image was seen as not good enough to occupy a space in the market, and they also recognized that if it was successful, it would undermine their film, paper, photofinishing and chemistry businesses. In other words, they recognized the potential for market disruption even before that concept had been described. So, they put the product on the shelf and let Sony release the first commercial product 6 years later. Of course, in the technology world, a 6 year lead is a virtual eternity, so by sitting on their invention Kodak completely missed the opportunities (or didn't see them) to create inkjet inks, printers, photo papers for inkjet printing, sharing sites like Instagram. In fairness, most of the world wasn't connected via the internet in the 1970s, so posting digital images to the web wasn't yet a need that anyone had, and that was the killer app that made digital photography explode. Still, Kodak had the opportunity to be the market leader, as it had been with every previous disruption in the photography market for over 100 years, but passed on it, and got disrupted.

I could go on and belabor this further, but the important thing to note is that ignoring disruptive opportunities is one of the key reasons that incumbents get disrupted. They do so because in the beginning the markets seem small and the way big companies justify investment based on IRR often leads them to reject potentially disruptive projects, even when they see the technology coming.

So, let me finish by asking you a question. If you had a great idea to solve a market need that no one else either does or can adequately address, would you choose to implement strategies that would enable market disruption, or would you play it 'safe' and try to target the large mainstream market and play on the incumbents turf? Which option do you think has the greater potential for success?

By the way, we don't disagree that smart innovation starts with focusing on needs (or things that customers want to get done, but can't), and figuring out the best way to solve that problem. That always has to be the core. But, when implementing the strategy to do so, you absolutely can (and should, if possible) try to disrupt if the potential is there. Why wouldn't you?

If you're interested in understanding how, I suggest you pick up a copy of "Disruption by Design".

Submitted by Kevin McFarthing (not verified) on

Hi Paul,

Thanks for the comment. Just to reiterate the thrust of what I’m trying to say; I have the strong impression that “disruptive innovation” is a much over used term, often used to describe innovation that the originator believes will be big (hence the Rolls Royce reference). It seems to be devaluing the true disruptions. That’s why I advocate focusing on insight, and organising portfolios in the way I mention.

One omission from my article is clear; I should have clarified that it’s written from the perspective of a large company.

Now to some of your points….

The prediction vs post hoc analysis is an interesting one. There is a quote from Clayton Christensen in Soren Kaplan’s blog; when asked how to do disruptive innovation, he replied “I don’t know how, I just know how to describe it.” It seems that disruption is only apparent when the outcome is in sight. Otherwise smart people in the disrupted companies would have acted. Or maybe not……

I agree with your point 2. Innovation is good, whatever type, as long as it is appropriate for the time and lifecycle. That’s why I’ve written in praise of incremental innovation and radical stuff. My overall conclusion is wanting to shout the word “portfolio” loudly from the rooftops. Assuming they have a good choice of options, balancing a portfolio in an appropriate manner is the most important thing that large companies can do for innovation.

I agree that sometimes, disruption can be targeted as the overall objective, particularly the rebellious upstart startup targeting stale competitors. The danger I am articulating is that, if disruption is the focus, the be-all and end-all; then it may not happen, simply because the company takes its eye off the most important things to do at each stage, starting with insight (user/consumer/customer). An early obsession with insight will most likely deliver later disruption if everything else falls into place.

And there’s the nub. A lot of things need to fall into place.

Again, I agree with your point 4. Not all opportunities have disruptive potential, which is why I don’t like to see the term used inappropriately.

No 5 – agree! That’s why I said “much”, not “all”, including the examples I quoted. Using words like “crappy” is a comfort for the incumbent and, whilst often true, should be inducing corporate paranoia and the appropriate reaction.

I’m disappointed by your comment in #6. Of course I knew about Kodak; that’s why I said they were technology leaders in the blog. They made a big mistake by running the business on percentages, and ignoring the outside world.

Finally, your question. If I could see a disruptive opportunity, then absolutely I’d pursue it. But as I said earlier, I’d focus obsessively on the user insight, not on the eventual disruption. I wouldn’t call it disruptive until I had some traction, to ensure everyone else on the team did the right thing. And if I was in a large company, I’d follow the Palchinsky rules.

Thanks also for the reference to your book, I’ll take a look.

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