Seeing What's Next

1. Disruptive innovations create new markets and reshape industries

Disruptive innovations introduce a new value proposition. They either create new markets or reshape existing markets.

New value proposition. Disruptive innovations offer a different package of attributes that may initially appeal only to a small segment. They are often simpler, more convenient, or less expensive than existing products. Two main types:

• New-market disruptions: Create entirely new markets by making it easier for people to do something that previously required deep expertise or great wealth. Examples:

  • Kodak camera
  • Personal computers
  • eBay online marketplace

• Low-end disruptions: Target overserved customers at the low end of an existing market with a "good enough" product at a lower price. Examples:

  • Walmart discount stores
  • Vanguard index funds
  • Steel minimills

Industry reshaping. As disruptive innovations improve, they often take over mainstream markets, forcing incumbents to retreat upmarket or go out of business. This process drives industry change and creates new growth opportunities.

2. Asymmetries of motivation and skill drive disruption

Disruptive attackers to enter a market, grow without incumbent interference, and mitigate the incumbent's response when it is finally motivated to counterattack.

Asymmetric motivation. Disruptors target markets that are unattractive to incumbents, allowing them to grow without interference. Key factors:

• Small market size relative to incumbent needs
• Less profitable customers
• Business model incompatible with incumbent values

Asymmetric skills. Disruptors develop unique capabilities suited to their new market context. As they improve, these skills become competitive advantages:

• Ability to profit from lower prices
• Processes optimized for speed and flexibility
• Values aligned with serving new customer segments

Incumbent blindness. Large companies often dismiss disruptive threats because:

• Small markets don't solve their growth needs
• Their values prioritize serving existing customers
• They lack the right processes to compete in new contexts

3. Incumbents often fail to respond effectively to disruptive threats

The company should not give the separate organization too much financing, because the key to success is the creation of a business model whose cost structure enables profits to be earned at low price points.

Reasons for failure:

• Resource dependence: Existing customers control resource allocation
• Processes designed for the old business model
• Values that prioritize high-margin opportunities

Ineffective responses:

• Cramming: Forcing a disruptive innovation to fit the existing business model
• Spinoffs without autonomy: Creating separate units but constraining them
• Delayed action: Waiting until the threat is obvious, but too late

Keys to effective response:

• Separate organization with autonomy to develop new processes and values
• Patient for growth but impatient for profitability
• Leadership with relevant experience in the new market context

4. Overshooting customer needs creates opportunities for disruption

Companies innovate faster than customers' lives change.

Overshooting defined. Products improve faster than customer needs evolve, eventually exceeding what many customers can use or are willing to pay for.

Signs of overshooting:

• Decreasing premiums for product improvements
• Customers not using all product features
• Complaints about complexity or high prices
• Growth of "good enough" alternatives

Opportunities created:

• Low-end disruption: Serving over-served customers with simpler, cheaper products
• New-market disruption: Bringing high-end functionality to new contexts
• Modular solutions: Specialization in parts of the value chain
• Convenience and customization become new competitive priorities

Examples:

• Personal computers disrupting minicomputers
• Discount retailers disrupting department stores
• Index funds disrupting actively managed mutual funds

5. Emergent strategy and the right preparation regimen are crucial for disruptors

The level of one's insight is not strictly a function of the level of one's access to unique or proprietary information.

Emergent strategy. In uncertain new markets, companies must:

• Start small and adapt based on market feedback
• Be flexible in business model and target market
• Learn through experimentation rather than detailed planning

Preparation regimen components:

1. Strategy-making process:

   • Encourage bottom-up ideas
   • Test assumptions quickly and cheaply
   • Adapt based on real-world data

2. Hiring decisions:

   • Look for relevant "schools of experience"
   • Value problem-solving skills over industry expertise
   • Seek leaders comfortable with uncertainty

3. Funding sources:

   • Patient for growth, impatient for profitability
   • Aligned with emergent strategy approach
   • Willing to fund learning and experimentation

6. Value networks and business models influence disruptive potential

Overlapping value networks with choke points can limit the ability to create asymmetries.

Value network defined. The context within which a firm identifies and responds to customers' needs, solves problems, procures inputs, reacts to competitors, and strives for profit.

Importance for disruption:

• Separate value networks shield disruptors from incumbent response
• Overlapping networks increase the risk of co-option or imitation
• Business models must fit the new value network to be sustainable

Key considerations:

• Suppliers: Can you source inputs compatible with a disruptive model?
• Channels: Are there ways to reach customers that incumbents don't control?
• Complementary innovations: What other changes enable your disruption?
• Profit model: Can you make money in ways incumbents find unattractive?

Examples:

• Southwest Airlines' point-to-point model vs. hub-and-spoke networks
• Dell's direct-to-consumer model vs. traditional retail channels
• Netflix's subscription model vs. pay-per-rental

7. Nonmarket forces shape the landscape for innovation

Motivation, defined as market incentives to innovate; and ability, defined as the capability to obtain resources, craft them into products and services, and offer those products and services to customers.

Nonmarket forces. Factors outside of direct market competition that influence innovation:

• Government regulation
• Industry standards
• Intellectual property regimes
• Cultural norms

Motivation/Ability framework:

• Motivation: Incentives to innovate (market size, profit potential)
• Ability: Capability to bring innovations to market

Four scenarios:

1. Hotbed: High motivation + high ability = innovation flourishes
2. Looking for a target: High motivation + low ability = focus on removing barriers
3. Looking for money: Low motivation + high ability = create incentives
4. Dilemma: Low motivation + low ability = major intervention needed

Policy implications:

• Identify barriers to motivation or ability
• Target interventions to address root causes
• Avoid actions that create unintended consequences
• Encourage disruption in heavily regulated industries

8. Disruption follows predictable patterns across diverse industries

Good theory provides a robust way to understand important developments, even when data is limited.

Common patterns:

1. Initial foothold in new or low-end markets
2. Improvement along a different trajectory than incumbents
3. Eventual movement upmarket as performance improves
4. Incumbent retreat to highest tiers or exit

Industry examples analyzed:

• Education: Online learning, corporate universities
• Aviation: Regional jets, discount airlines
• Semiconductors: Customized chips, foundry model
• Healthcare: Retail clinics, home diagnostics
• Telecommunications: VoIP, wireless data

Key insights:

• Disruption is relative: The same innovation can be sustaining to one firm and disruptive to another
• Context matters: Industry structure influences how disruption unfolds
• Nonconsuming contexts are powerful launch points
• Overshooting creates openings in established markets

9. Incumbent responses: co-option, spinouts, or building a disruptive engine

The spinout organization's processes and values must be allowed to coalesce around a business model that can make money at low price points.

Co-option. Integrating the disruptive innovation into the main business:

• Often fails due to conflicts with existing processes and values
• Can work if the innovation is sustaining to the incumbent

Spinouts. Creating separate organizations to pursue disruptive opportunities:

• Must have true autonomy to develop new processes and values
• Need appropriate funding and performance metrics
• Can be acquired later if successful

Building a disruptive engine. Developing internal capabilities to repeatedly create disruptions:

• Requires senior leadership commitment
• Separate processes for disruptive and sustaining innovations
• Cultivation of emergent strategy skills

Key success factors:

• Recognition of disruptive threats early
• Willingness to cannibalize existing business
• Patience to allow new ventures to find footing
• Appropriate resource allocation to both sustaining and disruptive efforts

10. The "jobs to be done" framework reveals untapped opportunities

Products are successful when they connect with a circumstance.

Jobs-to-be-done concept. Customers "hire" products to help them accomplish specific tasks or make progress in particular circumstances.

Benefits of the framework:

• Reveals non-obvious competition
• Identifies overshot and undershot jobs
• Suggests new market opportunities
• Guides product development priorities

Applying jobs-to-be-done:

1. Identify the circumstance: When and where does the job arise?
2. Define the job: What progress is the customer trying to make?
3. Uncover pain points: What makes the job difficult or unsatisfactory?
4. Analyze current solutions: How do customers currently get the job done?
5. Innovate: How can you help customers do the job better?

Examples:

• Milkshakes "hired" for commute entertainment and appetite control
• Minute Clinic hired to quickly treat simple health issues
• eBay hired to turn unwanted items into cash

11. Leaping to the bottom of the market pyramid enables massive growth

The lower in the pyramid you start, the greater the up-market potential.

Market pyramid concept. Dividing potential customers by income/wealth:

• Top: High-income, demanding customers
• Middle: Average consumers in developed markets
• Bottom: Low-income consumers, often in developing countries

Benefits of targeting the bottom:

• Massive untapped markets (billions of potential customers)
• Less competition from established players
• Opportunity to move upmarket over time
• Potential for disruptive business models

Strategies for success:

1. Identify jobs-to-be-done for non-consumers
2. Develop simple, affordable solutions
3. Build business models profitable at low price points
4. Leverage local knowledge and distribution
5. Be patient for growth, allowing the market to develop

Examples:

• Tata Nano ultra-low-cost car
• Grameen Bank microfinance
• Aravind Eye Care System's low-cost surgeries

Last updated: October 4, 2024