5 things you should know about Disruptive Innovation that most people don’t understand | Data Driven Investor
Do you really understand the principles described in Disruptive Innovation by Clayton Christensen? Here is a quick guide to help you.
In January 2020, the business world lost a great thinker and practitioner about why good, and even great companies, lose out to new companies that introduce disruptive technologies. Clayton Christensen wrote the Innovator’s Dilemma in 1994. This was followed by many articles in the Harvard Business Review and several other books to help companies understand where disruptive technology comes from and how to at least stay in step and possibly learn how to create their own disruptive technology. With all of the words written by Christensen, most still don’t understand what disruptive innovation means and misapply the concept or miss the concept altogether. Here are 5 things you should know about disruptive innovation to make your company be a better innovator.
Disruptive technology does not mean just new technology or the technology industry
Christensen provided examples of how the disk drive industry changed over the years and how the really good companies still missed great opportunities due to changes in technology. But what Christensen was describing included not only products but manufacturing principles and techniques, utilities, surgery, insurance, schools and universities, order processing, shopping, stock exchanges, and more. Technologies as described by Christensen as “the processes by which an organization transforms labor, capital, materials, and information into products and services of greater value.” Examples include Walmart as the disruptive technology to Sears; arthroscopic surgery versus open surgery; out-patient centers instead of hospitals; online retailing versus brick and mortar retailing; mobile telephony versus landline technology; distance learning versus campus-based learning. Disruptive technology is the opposite of sustaining technology or continuing to do what we already know. This is an extension of what Peter Drucker described in his book Innovation and Entrepreneurship.
Disruptive technology means more than just adding your own low-cost version of an existing product
At one company I worked with, the idea of disruptive technology was to create a low-cost version of the high end model. The idea was to make the exact same product with fewer features so that it would be cheaper to make and cheaper to buy. The development staff would say that we need to disrupt our own product before someone else does. The short sightedness of that philosophy ignored that customers would be interested in something that changed how they did their business not in just saving money. Great companies make customer closeness a priority to maximize sales and profits. However, companies will overlook what their least profitable customers initially embrace which turns out to be the disruptive technology. Competition between similar widget companies is not disruptive, it is the company that no one had any cause to pay attention to that is disrupting markets.
Disruptive Innovation starts at the fringes or margins
All disruptive innovation starts in very small markets, even markets that don’t really exist. Because the markets are so small or don’t exist, established companies have a hard time justifying why they should spend time and money on something new. Traditional return on investment calculations don’t work. Growth is small compared to what a large company needs in order to be successful. A $10 million company only needs $2 million to achieve a 20% growth but a $500 million company needs $100 million to achieve 20% growth. Bigger companies generally ignore small or fringe markets until that market is established before they jump in, but at that point they lose the first mover advantage and industry leadership and become an “also ran” company.
Disruptive technology companies are learning companies
Good and great companies have established strategy and planning approaches to maximize the efficiency of the organization. But disruptive technology companies are more about discovery-based planning. By starting with the notion that forecasts and strategy are wrong, or may be wrong, management invests in understanding the underlying principles and then embarks on a plan to learn what needs to be known. It goes to the old idea of “we don’t know what we don’t know”. More can be understood about this concept by reading a book from Peter Senge, The Fifth Discipline – The Art & Practice of The Learning Organization.
Disruptive technology generally performs worse than existing technology – at first
Disruptive technology usually has a very different value proposition and a longer time horizon. Your leading customers want more performance out of an existing product. When the performance then exceeds the value, meaning that you create something more than what the customer actually needs or is willing to pay for, they will then switch to the disruptive technology and leave you out. Disruptive technology generally starts with performance below existing products but has different features. This is then dismissed by the established company until their customer needs those new features. The cycle will then continue until this new technology is overvalued and something else comes in to disrupt that technology. A different take on the traditional product lifecycle.
So, what can you do to be more proactive and not get caught by disruptive technologies?
First – Understand that data only exists in the past. You must carefully observe the past. Collect narrative customer interactions with the customer service agents and salespeople. Constantly collect information from trade shows, conferences, articles, committees, about anything new, different, interesting, startling, disturbing. Learn about new companies and customers entering a market. Who are they, who were they, why did they join in? Learn about the odd ball ideas that your existing management would say is useless or impossible. You never know where the data points come from so collect them and try to categorize them and put them someplace that can be easily retrieved and more importantly browsed.
Second – Spend time with your customers and just observe with no judgments, prejudices or ideas to help the customer. You want to be the fly on the wall even though she knows that you are there. What is the total job they are doing? How does your product integrate into what they are doing? What are some of the adjacent tasks they are doing? What are the preceding and succeeding activities that are being performed? Try to document these in a way that can be reviewed and browsed.
Third – Understand that the customer doesn’t know what they want or need when it comes to a specific new product. Sometimes the customer doesn’t even know what they need to do. When you have a new product idea, don’t go to your existing good customers because they will most likely not understand what you are making or doing. Remember that we didn’t know that we needed an iPod, but Steve Jobs was convinced that it was a great idea, along with the Macintosh, the iPhone, and others.
Lastly – Be a learning organization. Spend time learning new things, read, take an online course, study ideas, philosophies, techniques, markets, customers. By learning you are growing. When you grow your mind and capabilities, you can conquer anything. To paraphrase a Maslow quote, if you are not growing, you are dying.
In closing, Clayton Christensen wrote “Skate to where the money will be”, a play on Wayne Gretzky’s success quote of “skate to where the puck will be”. Success meets you where you step, not where you stand. So, keep collecting data and keep learning.