Summary
Using disruptive technologies to create new growth businesses is not as random, risky, or unpredictable as has been thought.
There are clear causal factors influencing the probability of success in launching new growth businesses. These include: employing well-researched theories of cause and effect to guide management decisions; conducting market research based on consumer circumstances , not attributes ; targeting the most appropriate customer segments; putting in place the right organizational resources, processes, values, and leadership; and utilizing a "bubble up" strategy-development process to determine and lock in the optimal strategy.
Successful companies must pursue major disruptive innovations even when their core business is healthy and flourishing, or they will be beaten to the punch.
Key Learnings
• Disciplined use of theory can decrease risk and improve results.
Using explicit, well-researched theories, with practical techniques suited to a specific circumstance, can have tremendous value to managers and significantly decrease risk in pursuing new growth businesses.
• There are two types of innovations: sustaining and disruptive.
- Sustaining innovations are incremental in nature and deliver better products with improved margins to existing customers in established markets. Sustaining innovations rarely alter the competitive landscape in a market; the market leaders after a sustaining innovation were usually the market leaders before it. Most innovations are sustaining, and most organizations are organized to deliver sustaining innovations.
- Disruptive innovations cause fundamental shifts in or creation of markets and change the basis for competition. Disruptive innovations do not require tremendous technological breakthroughs or sophistication. In fact, they are usually simple, low-cost applications of technologies for underserved consumer segments.
• There are two types of successful disruptive innovation strategies. Both strategies leverage an "asymmetry of motivation" where the motives of established leaders can cause them to act in ways that benefit new entrants by exiting and ignoring certain markets or segments. The two types of disruptive strategies are:
- Low-end disruption, which results when a new entrant, with a lower-cost business model, disrupts a market by initially targeting the least demanding customers in the market with an adequate and lower-priced product. Existing players will choose to exit an unattractive, unprofitable market/segment, leaving the new entrants to compete among themselves, resulting in margin erosion. This will cause the new entrants to look up-market in pursuit of higher-margin business where they can compete with the higher-cost entrenched players. The pattern will repeat itself with new entrants continuously moving up-market in pursuit of higher margins. By the time the large players understand the threat, it will be too late to respond. Low-end disruption does not create entirely new markets, but can create new growth businesses resulting in new entrants killing existing players. Examples include mini-mills in the steel industry and Dell.
- New-market disruption, which occurs when an innovation is targeted to a segment of previously ignored consumers. These consumers may be more easily satisfied, even by poorly performing products, since they previously had no products available to them. This strategy competes with nonconsumption, creating entirely new markets. This can happen without appearing on the radar screen of an established player since the new entrant is not threatening the existing company's current customers. Examples include a series of Sony consumer products, Southwest Airlines, E-Trade, Cisco, Oracle, and Nokia.
• Industries, products, and value chains evolve predictably. The pattern of innovation, basis for competition, and profit migration follow a repeatable course in the following sequence:
- Initial products fall short of customer needs. Companies respond by innovating rapidly to improve product performance, focusing on the needs of their most demanding, most profitable customers. At this point in a market.s evolution, large, established, vertically integrated firms tend to dominate because all of their units communicate under one roof. End-user products constitute the most profitable point on the value chain.
- Eventually, product performance exceeds the demands of mainstream consumers. The pace of technological progress outstrips the ability of mainstream customers to absorb and utilize innovation, with companies continuing to innovate for their demanding high-end customers. With the large, dominant players focused on existing customers in the high-end and mass markets, the door opens for disruptive companies to enter the low end and to create new markets.
- Value chain profits migrate from end-use products to components and subsystems—which still have interdependent internal architectures. Companies become .modular. and mix and match the best components. The companies that control the interdependent links in their industry value chain dominate and capture the largest amount of profits.
• Keys to building new growth businesses include:
- Choosing the right target market. Market research and segmentation are more effective when based on consumer circumstances, situation, and needs, not on demographic, attribute-based criteria. The ideal target for a disruptive innovation is a segment of consumers whose circumstances are not being addressed by current products. Targeting consumers with no alternatives is an easier sell. An example is Sony's introduction of the pocket radio, which targeted teenagers who had no alternative products. Despite the product.s relatively poor transistor technology, the innovation was successful in creating a new market from previously underserved customers.
- Creating the right organizational capabilities. Sometimes disruptive innovations fail not because the idea, technology, or strategy wasn't right, but because the organization wasn't capable of success. Many organizations focus on "core competencies," but this is a misleading term. It is important for an organization to disaggregate and assess its capabilities and then determine which capabilities are necessary to launch a new growth business. Capabilities are grouped as: 1) resources; 2) processes; and 3) values. Resources are things such as people, technology, equipment, brands, and cash; resources tend to be flexible. Processes are the ways organizations work together and include product development, resource allocation, and planning and budgeting. Processes tend to be inflexible. Values are the criteria used to guide employees in making prioritization decisions and are usually very inflexible.
- Having senior leadership with relevant experiences. Managers are more likely to be successful in launching a new growth business if they have experience wrestling with similar problems and challenges. However, often in corporate settings, even the best managers have not been in situations relevant to launching a disruptive new growth business. They are often chosen based on attributes rather than circumstances, and despite strong track records, are often not adequately equipped for success.
- Following an effective strategy development process. The initial strategy of a new growth business is unlikely to be a strategy deployed long-term. A study of successful entrepreneurs found that 93% achieved success using a different strategy than that which was used at the company's outset. Successful enterprises launch an idea with an initial strategy in mind, but during the first one to two years, they actively listen to customers, experiment, and let new ideas .bubble up. through the organization, making sure that the company's strategy is not imposed from the top. But, once a clear and effective strategy has emerged, management stops the "bubble up" process and focuses the organization on the specific strategy.
- Getting the timing right. It is critical for successful, leading companies to pursue disruptive strategies even when their business is healthy and thriving. If they don't, a new entrant will inevitably and successfully pursue a disruptive strategy at the expense of the once thriving leader. By the time the leader even realizes the momentum of the disruptive innovation, it will be too late.
• Model applies across industries. Examples of similar innovation and value chain evolution patterns are visible across wide segments of the technology industry, healthcare, transportation, consumer products, and all other industries studied.
• Cannibalization is usually overestimated. Organizations often fear cannibalization, but disruptive innovations when marketed correctly don't cause cannibalization and actually can strengthen the core brand. Successful companies provide specific purposes and messages to clearly differentiate their disruptions to consumers. Examples are Marriott, which has launched disruptive and clearly distinctive brands at the lower end of the market, while strengthening its core brand. Kodak feared its low-priced ready-use camera would cannibalize its film business, but named the product the "fun saver," giving it a specific purpose and positioning. The product was a success and strengthened its core brand.
• A portfolio approach is not the best way to mitigate risk. Conventional thinking has required a portfolio to hedge risk. However, disciplined analysis of industry value chain evolution and profit migration, use of theory, and targeting strategies should decrease risk and thereby decrease the need for a broad portfolio.
• Not always necessary to create a spin-off. The appropriate corporate structure is guided by the assessment of organizational capabilities (referred to above) and by the determination of those capabilities necessary for the new growth business. In most instances it makes sense to create a separate business having distinct resources, processes, and values. However, creating a spin-off is not always essential and is based on the particular circumstances.
Biographies