Dealing with Disruption

In my previous posting titled Are All Reverse Innovations Disruptive?, I discuss two key factors that help determine whether a "reverse" innovation has the potential of becoming disruptive - the sustainability of a low cost advantage and the effectiveness at closing of the performance gap.  Both of these provide insight into not only how the disruptor might behave but also as to how the "disruptee" should counter behave in response. For example, by understanding the underlying cause of competitive advantage, the "disruptee" might be able to change the definition of what consumers perceive as "value" thereby "disrupting the disruptor."

The December 2012 issue of the Harvard Business Review (HBR) has a couple of articles that take the above discussion further. Dealing with disruption essentially consists of two parts - identifying the source of disruption and executing a strategy to overcome its potential impacts. In the first article, Surviving Disruption, authors Maxwell Wessel and Clayton M. Christensen explain how disruption is less a single event than a process that plays out over time, sometimes quickly and completely, but other times slowly and incompletely. Therefore dealing with disruption requires a systematic way to chart the path and pace of disruption so that you can fashion a more complete strategic response. They propose the following three steps to help determine whether the disruption will hit you dead-on, graze you, or pass you altogether, you need to:

1. Identify the strengths of your disruptor’s business model;
2. Identify your own relative advantages;
3. Evaluate the conditions that would help or hinder the disruptor from co-opting your current advantages in the future.

To help evaluate the relative sustainability of the advantages identified in bullets # 1 and 2 above, the authors propose a systematic assessment of five kinds of barriers to disruption, listed below from easiest to overcome to hardest.

1. The momentum barrier - Status quo is a difficult thing to change.
2. The tech-implementation barrier - Does existing technology suffice?
3. The ecosystem barrier - Also known as the platform advantage.
4. The new-technologies barrier - The technology needed to change the competitive landscape does not yet exist.
5. The business model barrier - The disruptor would have to adopt your cost structure.

Perhaps, most important though, according to the authors, is for the "disruptee" to understand and segment their customers by the "job" they want to get done. As an example, they discuss the ongoing battle between online grocery retailers and the brick-and-mortar grocery stores. Out of the three job categories the authors identify - "emergency item" shoppers, "dinner" shoppers, and "non-perishables & brand" shoppers - only the last category is currently susceptible to disruption based on the three step and five barrier analysis presented by the authors. The two crucial questions then become "what can the disruptor do to win over the other two categories of shoppers?" and "what can traditional stores do to keep all three categories of shoppers to themselves?"

The answer to the second question is provided in the next article titled Two Routes to Resilience in the same issue of HBR. The authors Clark Gilbert, Matthew Eyring, and Richard N. Foster explain that companies facing disruption (such as the grocery stores above) need to reinvent themselves in response to disruptive market shifts, technologies, or start-ups. But rather than a complete upheaval they propose that companies under assault pursue two distinct but parallel efforts: 

• Transformation A should re-position the core business, adapting it to the altered environment. 
• Transformation B should launch a separate, disruptive business that will be the source of future growth. 

Such an approach allows the company to realize the most value from its current assets and advantages, while giving the new initiative the time it needs to grow. Fueling both transformations is a “capabilities exchange” that allows both efforts to share resources without interfering with the mission or operations of either. The authors walk readers through the dual transformations of three companies that were facing massive disruption: the Deseret News, which was losing advertising to online upstarts; Xerox, whose copier business had been eroded by Asian rivals; and Barnes & Noble, which was threatened by e-books. 

The Bottom Line

Dealing with disruption has no silver bullet. It is a complex undertaking with the appropriate response being vastly different on a case-by-case basis. Yet, there are guiding principles that can help. Understanding your consumers and their "jobs" is crucial to pinpointing the segment of your consumers that are most vulnerable to disruption. Next is identifying the source of the disruptor's competitive advantage and how sustainable it is in the face of the five barriers discussed above with respect to each consumer segment. Finally, executing the response strategy is best thought as two discrete and parallel transformations - rebuilding the core and disrupting the core - with a well thought out capabilities exchange fueling both.

Are All Reverse Innovations Disruptive?

Vijay Govindrajan is one of management's top thinkers today. One of his more recent insights lies within a concept that he has called "Reverse Innovation" in which innovation is driven from developing countries to the developed ones in contrast to the typical, and perhaps more intuitive, globalization model that drives innovation the other way around. The traditional flow of innovations in our economy has been from the developed to the developing nations. Vijay calls this phenomenon "glocalization" in which companies take successful products that they have created for customers in their Western markets and modify them, most often by stripping off many of their features, for distribution all around the world at lower price points. And while glocalization has proved effective in reaching the top segments of the market in developing nations – buyers with needs and resources similar to those in the developed world, it has not proved to be an effective market penetration strategy. The reason – most growth opportunities in emerging markets are not at the top but in the middle market and below, where the gaps between customers’ needs and those of their developed-world counterparts are enormous. While success in ripe developing markets might be reason enough to embrace reverse innovation, there is more good news. Because the global economy is richly interconnected, innovations developed for emerging economies can be extended to the developed world. Such "extensions" generally occur in two phases - first in under served, niche areas of the developed markets and then "disruptively" in the mainstream markets.

Hence the question - Are all Reverse Innovations Disruptive?

I found the answer to that question in a recent article titled "How Disruptive Will Innovations from Emerging Markets Be?"  in the MIT Sloan Management Review. In his informative article, the author Constantinos C. Markides eloquently describes the two conditions that any "reverse" innovation must satisfy to become disruptive. First, it must start out as inferior in terms of the performance that existing customers expect, but superior in price. Second, for the innovation to truly become disruptive, it must evolve to become “good enough” in performance (attracting mainstream customers from the earlier generation of incumbent products) while at the same time remaining superior in price. In other words, it must become “good enough” in performance and superior in price. So essentially, as the author summarizes, one must answer the following two questions:

1. Will the emerging-market innovators continue to have a significant price advantage over competitors from more developed countries?
2. Will the emerging-market innovators succeed in closing the performance gap so that customers in more advanced economies come to see their products as “good enough”?

There are many success stories that illustrate the disruptive nature of reverse innovations. Disruptive innovation has been credited as the strategy that led to Japan’s dramatic economic development after World War II. Japanese companies such as Nippon Steel, Toyota, Sony and Canon began by offering inexpensive products that were initially inferior in quality to those of their Western competitors. This allowed the Japanese companies to capture the low-end segment of the market. As the performance of their products improved, they began to move upmarket, into segments that allowed them more profitability. Eventually, they captured most of these segments and pushed their Western competitors to the very top of the market or completely out of it.

What many people do not realize is that there are many stories where reverse innovations have failed to be disruptive. In the razor business, Bic emerged as a huge, low-cost disruption to Gillette in the 1970s and quickly succeeded in capturing 25% of the disposable razor market by the early 1980s. Yet Gillette countered with its own line of inexpensive disposable razors, and Bic ceased being a major threat to Gillette in razors by the early 1990s.

So why do some reverse innovations disrupt industries while others don't? Once again, the answer lies in how well the reverse innovation stands up to the two fundamental questions posed by the author above.

As the author explains in his article, the first indicator of success lies in the source of the "low cost" advantage of the reverse innovation. If the source of the cost advantage is low labor costs or a reengineered product that requires fewer or cheaper components, incumbents can find a way of neutralizing these advantages. However, there is one source of cost advantage that is more sustainable than others. This is the business model of the disruptors. A cost advantage that comes on the back of a business model that is not only different from but also conflicts with the business model of the established companies is more sustainable than other cost advantages. This explains, for example, the success of low-cost airlines over traditional airlines.

The second indicator of success is the reverse innovator's ability to close the "Performance Gap" between their innovation and the mainstream product/service. As the author explains, reverse innovators have a number of options in how they go about closing the performance gap. However, less obvious is the proposition that whether the reverse innovator's products come to be seen as “good enough” depends not only on what they do, but also on what incumbents do to influence consumers’ expectations of what is “good enough.” As an example, consider how Nintendo dealt with the onslaught of gaming consoles in its bread and butter market space. Nintendo’s response to all of this was a classic strategy of shifting the basis of competition and changing consumers’ perceptions of what is “good enough” in this market. Rather than follow Sony and Microsoft down the performance trajectory, Nintendo introduced the Wii on the basis of family entertainment, a benefit that the disruptors were not paying attention to. Nintendo’s strategy was essentially to expand the market by developing consoles that would support simple, real-life games that could be learned quickly and played by all members of the family, including the very youngest and the very oldest. By 2007, the launch of the Wii led to household penetration of consoles rising for the first time in 25 years. The console outsold the PS3 three-to-one in the Japanese market and five-to-one in the United States.

The Bottom Line
Reverse innovation is a powerful force for good in developing countries. Not only does it benefit the innovator but it serves to uplift the lives of all those to whom mainstream products were simply inaccessible or impractical. Longer term, many (but not all) reverse innovations have the potential to disrupt mainstream markets and incumbents. Success, however, depends on two critical factors – 1. basing the cost advantage on a sustainable and "hard-to-imitate" source (such as a business model) AND 2. becoming "good enough" in the eyes of the "mainstream market." Conversely, incumbents must constantly be on the look out for reverse innovations that have the potential to be disruptive and proactively undermine them by redefining "good enough" and/or changing the rules of the game.

Are all "Big Ideas" really that "Big"?

Today I finally got a chance to catch up on some reading. First up was my November 2012 issue of the Harvard Business Review (HBR). I quickly turned to the "Big Idea" section that had caught my attention earlier. Titled "Accelerate!" and written by the well-regarded author, John Kotter, the "Big Idea" he discussed was how the most innovative companies capitalize on today's rapid-fire strategic challenges and still make their numbers. Frankly, I was not too impressed with the article. It seemed to primarily regurgitate and re-package concepts that we have been talking about for close to 20 years.

Here's my paraphrased version of the basic premise of the article:

• Companies are designed for efficiency not innovation.
• Companies must find a way to manage the present while also creating their future.
• In a rapidly changing environment, what is value-adding "context" today can quickly become "vanilla" core tomorrow.

This premise should be of no surprise to anyone who has not just crawled out from under a rock. So, what is Kotter's advice to deal with these obvious conditions? He recommends creating a second "operating system" devoted to strategy and innovation. Kotter defines a company's operating system as the collection of its organizational hierarchies and processes. Since the primary operating system is too focused on day-to-day tactical operations, a secondary operating system is essential to ensuring that an all important focus on strategic initiatives is not lost. Here's why I am not at all excited by these suggestions - there's nothing new here. For decades companies have had a "second operating system" to deal with the "new and unexpected." This second operating system has been called many things including the all too famous "skunkworks". And based on years of various success (and failure) case studies, we now know that such skunkworks initiatives can be made much more effective by integrating them within the core of an organization's culture and strategy. In fact, even I talk quite extensively about this in Part two of my recent book, Living in the Innovation Age.

So, I am sorry Mr. Kotter. Although, I am still a fan of your writing, I am unimpressed by your latest article in HBR. 

Why Innovate When You Can Litigate?

Over the past few months, I have written several blog posts about a topic that I call the "Legal Side of Innovation" and I first covered in my book, Living in the Innovation Age. The "Legal Side of Innovation" is a phenomenon in which companies are increasingly using patents and other intellectual property (IP) as a way of attacking each other in highly innovative and competitive areas such as smartphones and tablets. Essentially, IP law has become a double-edged sword that on the one hand protects an innovator's hard work and yet on the other hand creates impediments in the very road to innovation that it seeks to promote.

Now it seems that companies have learned how to use IP laws to their advantage not only as a way to stop their competitors from innovating but as a "revenue generator." Indeed, the new mantra appears to be "why innovate when you can litigate." Just recently, Samsung and HTC together have paid Microsoft $792 million in "patent royalties" in a single quarter. And in August, Apple won an overwhelming victory over rival Samsung in a widely watched federal patent battle, a decision that some worry could stymie competition. The jury, after three days of deliberations in the complex U.S. District Court trial in San Jose, awarded Apple more than $1 billion after finding that Samsung had infringed on six patents by copying the look and feel of its mobile devices.

The Bottom Line -
The "Legal Side of Innovation" is real and here to stay. So, what's a technology geek to do? One option - Consider getting a law degree instead of that PhD in rocket science or even in lieu of a plain old MBA. :)

Innovation - Does Size Matter?

Does [company] size matter in innovation?

That's a question that I have been asking for a while in my blog (see my postings from September 28 and October 3). The opinions in the HBR blog postings have been all over the map, sometimes contradicting one another in a matter of days (and you thought flip flopping only happened in politics!). My opinion has always been that company size and innovation do not have a strong correlation - positive or negative. Ultimately, successful innovation is a function of organization strategy and culture alignment with the desire to innovate.

Well, finally, a blog posting in HBR that supports my position and challenges that wavering positions on size vs. innovation within the HBR blog postings. The posting titled,
Innovation Isn't Tied to Size, but to Operating Rules, by Nilofer Merchant concludes that if an organization knows what principles of innovation work, then innovation follows - regardless of size.

May I recommend my book, Living in the Innovation Age - Five Principles for Prospering in this New Era, as a starting point for which principles of innovation do work? :)