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By Andrew Rudin, MS (Published
July 9, 2007)
“I just saw our software demo,” I said to my company’s
VP of Sales, “and I can see how its features will be valuable
for our customers.”
“It’s disruptive!” he replied proudly, without
enlightening me about what that meant or why it mattered. In fact,
any accolades were moot, because the company suffered sustained
financial losses, and in the process it churned the VP of Sales,
the majority of his sales force, and most of the senior management
team. What went wrong? I’ll get to that in a moment.
What makes an innovation disruptive?
An innovation is disruptive when it impacts the hegemony of the
market-leading company, companies, or prevailing technologies for
a specific market. One example is digital photography, which replaced
film. Netflix also upended Blockbuster through an innovative business
and logistics model for video rentals and forced the complacent
market leader to relinquish a significant source of profits from
late fee charges. And UPromise offered a unique way of saving for
college to a segment of consumers who lacked the resources or discipline
to invest regularly in traditional securities.
The term disruptive innovation was introduced by Clayton Christensen
in an article entitled Disruptive Technologies: Catching the Wave.
Christensen expanded on his idea by describing low-end disruption,
in which a technology or a business model enables a less-expensive
product version for a price-sensitive segment of a market (e.g.,
desktop publishing), and new-market disruption, which creates demand
in markets untapped by the dominant offerings.
The magnitude of the disruptive impact can take many years to develop,
partly because the influence of many variables is unknown at the
outset. The consequences from nascent innovations such as iPhone,
Linux, and digital media file sharing, are still unknown.
What conditions are needed for disruption?
1) The market for the product or service is or will soon experience
increased demand through social, business, or regulatory change.
2) The economic outcomes from providing, acquiring, or adopting
the product or service must be better than prevailing offerings.
3) The business model or core technology used for the innovation
must be fundamentally different from prevailing offerings, and sustainable.
The multiple variables that influence the disruptive status of
a product or service can take place across long timeframes, so the
VP of Sales was premature in proclaiming disruption. Products and
processes by themselves have little capacity for creating meaningful
change; rather, it is strategies that enable market disruption,
and those strategies include product innovation. Skills play a role
as well, and successful managers know that working with potentially
disruptive innovations requires the economic insight of Alan Greenspan,
the inspirational leadership skills of Martin Luther King, the communication
skills of Ronald Reagan, the perseverance of Thomas A. Edison, and
the entrepreneurial vision of Steve Jobs. If that sounds like a
daunting combination, take solace in the fact that these individuals
took risks and failed repeatedly before achieving success.
So what went wrong for the Sales VP and the rest of the
company?
Despite its highly innovative supply chain software product and
group of bright, seasoned developers and managers, the company couldn’t
generate enough sales to cover expenses. It had scant market presence
or brand recognition. The partner strategy was formulated as an
afterthought to the sales program, and the product’s value
was poorly understood so it could not be communicated. Compound
those problems with high adoption costs along with unproven financial
and operational outcomes, and the result was a sure failure when
it came to generating sustainable profits.
What are the elements of a successful disruptive strategy?
1. An understanding of the economics of the product innovation
in the context of the prevailing competitive economics. Companies
that have created market disruption have exhibited a keen understanding
of the laws of supply and demand. They understand the connections
among costs, pricing, adoption rates, and market growth.
2. Leadership for facilitating change. Displacement of entrenched
competitors—whether they are loved, reviled, or something
in between—requires the displacing organization to lead change.
In the book Changing Minds (Harvard Business School Press, 2006),
Howard Gardner outlines seven levers of change: reason, research,
resonance, representational re-descriptions, resources and rewards,
real world events, and resistances. These seven levers relate to
different ways visions and ideas can be communicated in order for
people to be inspired, motivated, and moved to action. Leading change
requires appeals at multiple levels: emotional, factual, and symbolic.
3. Communication and process pathways that are congruent with how
people acquire information and act on related ideas. Effective disruptive
strategies are based on an outside-in view of the innovator’s
organization, which means that communications and sales processes
are based on the perspective of how customers buy—not how
sellers sell. Many companies struggle because they establish sales
and marketing processes based on the resources and competencies
they already have, or based on methods they have used—even
if those processes don’t work. In those scenarios, only serendipity
would ensure compatible processes between provider and customer.
Most often, however, the resulting sales pathways are disconnected
or fragmented. Processes break down and opportunities are lost.
4. Providing purchase motivators. Those motivators are based on
managing two product attributes: 1) reduced price compared to current
offerings, and 2) an expectation of increased benefits—or
a combination of the two.
5. Reducing adoption barriers. Similar to purchase motivators, reducing
adoption barriers has two components: 1) minimizing switching costs,
and 2) ensuring availability (synchronizing supply with demand,
for those who like buzzwords)—or a combination of the two.
Many companies formulate compelling purchase motivators, but fail
to consider the huge impact that adoption costs have on purchase
decisions. Many great products have failed in markets because adoption
economics have favored staying the course, or the new product simply
wasn’t available at the right time.
6. Demonstrable thought leadership. Thought leadership involves
being a champion for the change you wish to see in the world—however
that might be defined. It’s easier to be known as the market
leader because you’ve said so from the beginning, rather than
reminding customers of that fact when the market is saturated. Innovators
who seize an early opportunity to become thought leaders can dominate
the industry buzz for their product or service, elevate the value
their prospects perceive for their product or service, and solidify
their role as the innovation pioneer. This connection is valuable
for creating brand equity as the market matures, because many innovations
eventually become devalued by their ubiquity (the fax machine is
a notable exception), particularly after competitors enter the marketplace.
Thought leadership can be demonstrated in a variety of ways, including
white papers, industry press, and speaking engagements at industry
events.
What are the lessons learned?
First, market disruption does create value for customers. Before
there was disruption in the music industry, consumers had to accept
music in the form of complete albums—from artists that record
companies wanted to record, in the order they recorded them, on
the media they provided, from retail channels they controlled, and
at the prices they wanted to charge. Digital technology changed
the power in the industry so much that if you told a 16-year-old
today what you had to do in 1980 to own (and play) the songs on
the Beatles’ Abbey Road, he wouldn’t believe you. Describing
how you managed to play just the songs you liked would make your
account sound even more incredible!
But here’s the second lesson: customers are not interested
in disruptive products per se; they’re interested in the outcomes
those products provide. Chasing the objective of creating a disruptive
technology will almost surely divert management’s attention
from achievement of more worthwhile goals. Why? Because market disruption
is a byproduct of other strategies that are inherently more meaningful
to define, measure, and control. Those goals could be achievement
of a targeted return on investment, revenue milestones, or a specific
customer adoption rate.
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