Mastering Disruptive technology and business models for disruption

How do you create disruptive change ?

How do you identify targets for disruption opportunities ?

What approaches can achieve sustainable advantage and disruption ?

What does disruption really mean ?

Disruption is not just better, cheaper and faster.

What Disruption Really Means

Just being “better, cheaper, faster,” does not mean they are disruptive.

A disruptive product addresses a market that previously couldn’t be served — a new-market disruption — or it offers a simpler, cheaper or more convenient alternative to an existing product – a low-end disruption.

An incumbent in the market finds it almost impossible to respond to a disruptive product. In a new-market disruption, the unserved customers are unserved precisely because serving them would be unprofitable given the incumbent’s business model. In a low-end disruption, the customers lost typically are unprofitable for the incumbents, so the big companies are happy to lose them.

Thus, the innovator’s dilemma. Incumbents appropriately ignore the new product because it is uneconomic to respond, but the incumbents’ quiescence can lead to their later downfall.

Far too often, companies spend most of their innovation dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book “The Innovator’s Dilemma” (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.

While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak.

What most people don’t know is that Kodak invented digital photography!

They were the first to create the technology, and the first to apply it. But they didn’t really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.

Music Disuption

Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of “over-serving” customer needs. Microsoft spends 8 times as much Apple on research and development, but gets less innovation and
disruption from it.

How much a company spends on innovation doesn’t matter, because what’s important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn’t spend enough on breakthrough innovation for mobile products or games – non-PC innovations.

Google: Disrupting online advertising

Most people correctly refer to Google as disruptive but don’t understand why. Google’s search algorithm wasn’t disruptive. It was AdWords, its advertising service. In contrast with Yahoo, which required advertisers to spend at least $5,000 to create a compelling banner ad and $10,000 for a minimum ad purchase, Google offered a self-service ad product for as little as $1.

The initial AdWords customers were startups that couldn’t afford to advertise on Yahoo. A five-word text ad offered inferior fidelity compared with a display ad, but Google enabled a whole new audience to advertise online. A classic new-market disruption.

Disruption is at least ten times better

* 10x better
* 10x faster
* 10x cheaper
* 10x better customer service
* 10x better distribution
* 10x more convenient
* 10x other important factors

Why 10x?

* Switching costs are too high for 20% improvement
* Cost of customer acquisition will be too high and the rate you can acquire too slow
*Competitors can take defensive moves to lock in or leapfrog
* Your competitive advantage is unlikely to be sustainable

Evaluating Opportunities

* How do you make money?
* How large is the market? How large is it really? (segment)
* Who will buy the dog food? Why will they buy? How much will they pay? How long does is the sales cycle? Is the sales process repeatable and scalable?
* Where will the market be in 3-5 years?
* Will the customer enable you to profit?
* Can your team execute on the idea? What’s missing?
* If it doesn’t work, can you fail fast with minor losses?

Disruption targets

Business models, not products, are disruptive. People sometimes say a technology is disruptive. It’s more appropriate to call the business model disruptive. In order for a company to disrupt, the revenue and cost structure of the incumbents that the company faces must keep them from responding. It’s easy for other companies to add Kayak-like technology to existing products. The business model, not the technology, usually determines whether it is uneconomic for the incumbent to pursue the disruptor.

* Find incumbents, pick off a vertical and do it better (e.g. as OKCupid, Airbnb and Freelancer has done to Craigslist, Etsy has done to eBay)

* Look for industries with lots of infrastructure (e.g. Harvey Norman, LJ Hooker) and do it without it (e.g. Kogan, Leasate)

* Look for industries where their business model has made them unable to innovate (e.g. Harvey Norman, LJ Hooker and their franchise models)

* Dirty industries are great (less competitors). Vice is nice.

* Real Estate
* Legal
* Accounting & Tax
* Recruiters
* Craigslist
* Paypal
* eBay
* Telecoms (PSTN)
* Media
* Guns
* Keys
* Wallet

The scale of disruption for a really great new company is a market that is a billion dollars or more. However, there needs to be an analysis of disruptive emerging countries. China is targeting trillion dollar industries for disruption and sustainable advantage.

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