The classic book on disruptive business strategy is “The Innovator’s Dilemma”. Christiansen makes a distinction between which technologies are sustaining and which are disruptive. He also points out that disruption can occur when the pace of technological progress outstrips what markets need. He also assets that customers and financial structures of successful companies color the heavily the sorts of investments that appear to be attractive to them, vis-a-vis certain types of entering firms. The “Impact of Sustaining and Disruptive Technology Change” figure shows concisely the issue. Disruptive technological innovation is a step change gap in the relative performance vs. cost that two different technologies offer. The impact of performances demanded at the high and low end of the markets is also a gap to be exploited.
The reason why disruptive business strategies are not undertaken by existing companies is because for them, investing aggressively in disruptive technologies is not a rational financial decision for them on three accounts. First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and initially can’t use, products based on disruptive technologies. It is not until emerging technologies capabilities increase of the point where they intersect the low-end of another market that disruption occurs as shown in the ”Intersecting Trajectories Of Capacity Demanded Versus Capacity Supplied In Rigid Disk Drives” figure. Disruption occurs because the increase in technology’s ability to deliver performance outstrips the market’s capacity to absorb that increased performance.
Another way to look at this graphically is to look at the “Disruptive Technology S-Curve” figure. Note that graphing disruptive innovation is a bit tricky because by definition the vertical axis of product performance must measure different attributes of performance than those relevant in the established value network. Because a disruptive technology gets its commercial start in an emerging value network before invading establish networks, the S-curve framework is needed to describe it. Disruptive technologies emerge and progress on their own uniquely defined trajectories, in a home value network. If and when they progress the point where they can satisfy the level of performance demanded in another value network, the disruptive technology can then invade it, knocking out the established technology and its established practitioners with stunning speed. Although this is being described as technical innovation, disruptive business models have the same effect.
One of the best stories about conducting strategic planning for transformational and breakthrough growth comes from Hamel and Prahalad who shared one of President Reagan’s favorite stories. Waking up on her 10th birthday, a young farm girl rises before the sun and runs out of the barn, hoping her parents have bought her a pony. She flings open the barn door, but the in the dim light can see no pony, just mounds of manure. Being an optimist she declares, “With all his manure around there must be a pony in here somewhere”. Similarly, companies that create the future say to themselves, “With all his potential customer benefit, there must be a way to make some money in here somewhere”. A company that cannot commit to emotionally and intellectually creating the future, even in the absence of a financially indisputable business case, almost certainly will end up as a follower. The important point is that the commitment to be a pioneer precedes an exact calculation of financial gain. A company that waits around for the numbers to add up will be left flat-footed in the race to the future. A laggard is a company were senior management has failed to write off its depreciating intellectual capital fast enough, and is underinvested in creating new intellectual capital. A Laggard is a company where senior managers believe they know more about how the industry works than the actually do, and where what they do know is out of date.
Creating a future is about finding the limits of current economic engines. It’s about understanding four things. 1. What customers and needs aren’t we serving? 2. Can profits be extracted at a different point in the value chain? 3. Might customers’ needs be better served by an alternate configuration of skills and assets? 4. What is our vulnerability to new rules of the game?
Strategic planning for transformational and breakthrough growth requires changing the lens through which the corporation is viewed (core competencies versus strategic business units), only by changing the lens through which the markets are viewed (functionalities versus products), only by broadening the angle of the lens (becoming more inquisitive), only by cleaning off the accumulated grime on the lens (seeing with a child’s eyes), only by peering through multiple lenses (eclecticism), and only by occasionally disbelieving what one actually sees (challenging price-performance conventions, thinking like a contrarian) can the future be anticipated. The strategic plan is about both seeing the transformation that needs to take place and establishing the core competencies internal to the organization and available through partnering to make the transition happen.
When looking at strategic planning for Disruptive Breakthrough innovation and growth, the process is somewhat different because of several additional unknowns. In “The Innovator’s Guide to Growth” planning is divided into three parts. These are Step 1. Identifying Opportunities. This consists of identifying non-consumers, identifying overshot customers, and identifying jobs to be done. The next Step 2 of the planning process is to Formulate and Shape Ideas. This consists of developing disruptive ideas and assessing a strategy’s fit with a pattern. The last part of the integrated business technology strategy for disruptive innovation is to “Build the Business”. This step 3 consists of mastering emergent strategies, and assembling and managing project teams.
An error people often make is to assume that a great leap forward in performance is synonymous with disruption. Do not confuse breakthrough with disruption. Disruptive innovations are all about making a different set of trade-offs: offering lesser performance along one dimension in exchange for new benefits related to simplicity, convenience, and low prices. Companies that think they can successfully crack into a market by leapfrogging existing competitors and selling to the most sophisticated market tiers often end up sorely disappointed.
To test various disruptive business strategies the key is to identify what is desirable (what you want), what is discussable (up for consideration), and unthinkable (out of bounds). Making these parameters very clear at the outset and being willing to consider changing them as new information comes in can help ensure that teams focus on the right strategies and activities. The “Goals and Boundaries” figure uses a simple visual method to capture the corporation’s goals and boundaries with respect to alternative disruptive strategies.
When looking at hundreds of historical disruptions it has been found that the most successful growth businesses share a few key elements. The “Conditions for Success” figure describes the 12 key items Christiansen’s research and Innosight’s field experience suggest are critical components of successful new growth strategies. The first nine elements are universally applicable; the last three are specific to established companies seeking to create new growth businesses. The table lists the item and the rationale for why they are important.
Assessing a disruptive business strategy fit with a pattern of success the checklist supplied in the “Disruption Analysis” figure is helpful. It’s a self-assessment questionnaire that asks whether the assessor strongly agrees or not with the questions. Adding up the different points that come from each answer, the total gives a quick assessment of how well a strategy adheres to the successful “Conditions for Success” listed above. This allows a high level comparison of various proposed disruptive business strategies.
Another way of looking at Disruptive Business Strategy is to look for Opportunities versus Ideas. This concept by Pam Henderson focuses on “Six Sources of Opportunity” as shown in the figure. Each of these six areas is undergoing constant change and finding opportunity within them requires looking at each of these six areas carefully. Understanding the Opportunity Dimensions in each of the six areas helps in knowing where to strategically grow. As examples, Dimensions might be extensions in the age of consumers served, the wealth of consumers served, the health of consumers served, etc. By following up looking at trends within dimensions provides clues for business strategy. Note however that switching from business strategies based on new ideas to those based on new opportunities typically requires skilled facilitators’ help. But when an organization is really strapped for performance, getting such help is well worth the time and expense of doing so.
In summary, planning for breakthrough or disruptive growth is often more about setting the environment for good ideas and then adopting solid creative thinking at the Level 6 and Level 7 Thought discussed in the previous chapters. The trick for senior management team is to (1) identify that the gap exists, (2) to own the fact that the gap will need to be filled by a something that will be very different from what the company has been doing in the past, (3) with creative teams bring forward solid solutions, and (4) have the guts to fund them. The latter step is one where many companies fail. The senior management team has a hard time distinguishing how one builds on their core competence versus when the new ideas are outside the core competence that they can build. Many times it is the expertise of the senior managers that needs to change. It is a senior management that needs to be replaced, not the lower levels of the organization. Having senior managers remove themselves from a company is something that’s rarely ever done until it is far too late for the company to succeed. More often than not it’s a merger or acquisition that takes the appropriate action. Such appropriate actions rarely come from within.