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Over 20 years ago, Clayton Christiansen coined the term “disruptive innovation”. In a very specific definition, he identified disruptive innovations as those that introduced new business models to change how a product or service is delivered in the marketplace. A disruptive innovation may involve new technology, but a technical leap is not necessary to result in widespread market changes. Instead, how a company approaches a market, the product, and delivery of the product or service to the market is where the disruption occurs.
One workshop that I frequently facilitate is on the topic of disruptive innovation. One of the biggest learnings is that disruptive innovations are easy to recognize in hindsight but tremendously difficult to identify with foresight. To address this conundrum, companies must adopt a WAGILE innovation management strategy that provides both profit and flexibility. I call these elements the 3Es of disruptive innovation:
- Explore, and
Businesses must make money. There is no business or company, even a non-profit or government agency, that can exist without financial inputs. When the monetary outputs exceed the inputs for an extended period of time, the business goes bankrupt and folds. So, all companies must pursue sources of revenue.
In a typical life cycle, a company grows from its start-up roots to a local or regional company. (Read about innovation life cycles here.) Successful firms “cross the chasm”, and manufacture products and deliver services to a larger mainstream market as part of the growth life cycle. Geoffrey Moore defines “crossing the chasm” as a move by a company to transition from selling to technology visionaries to selling to a group of “early adopters”. These latter customers are willing to accept some risk, yet still expect a high standard quality and reliability from products and services.
As products and companies mature, the market and competition grow. Firms begin to add features and improve product performance in order to sell more. At this point in a product life cycle, the vast majority of the market has adopted the technology or product solution as a basic standard.
It is also at this point that companies should exploit the business models, products, and services. Profitability is high and steady. Processes to continually improve product performance are well-known and customer expectations are satisfied with the additional features and/or pricing schemes. This is what Christensen termed a sustaining innovation.
Companies should exploit these sustaining innovations to generate cash flow. In some cases, the life of a sustaining innovation may span several decades and serve as a core product for a firm. Think about Coca-Cola, for example. Different flavors (like cherry or vanilla) are simple sustaining innovations and exploit the brand name.
On the other hand, as Christensen has carefully documented, it is at the point of maturity in a product life cycle that firms begin to lose their focus on serving customer needs. A business model that worked in the past may not be ideal for the future. New technologies arrive that change how customers interact with products and with their purchasing decisions.
While there is no magic bullet to identify disruptive innovations in advance, growing companies need to maintain and balance exploration with exploitation. The largest and most successful firms continually study customer needs to draw new insights for future product development. Procter & Gamble is a master at market research, identifying consumer trends leading to changes in hair care products and housecleaning solutions for widening spans of demographics., for instance.
The increases in both aging and young populations require product development needs that are different than the past. Product solutions and technologies may be similar, yet marketing, product delivery, and profit formulas (the business model) may require vastly different approaches. Generation X, for instance, is notoriously resistant to traditional forms of advertising. Successful innovation depends on matching technology with marketing needs.
As firms grow and mature, it is essential to establish policies and procedures to maintain quality and to manage costs. Again, firms don’t stay in business long if they do not exploit their profit potential. However, strategies are not written in stone. As market research demonstrates areas of interest for the firm to explore, a company should experiment with its business models and new product development (NPD) processes.
Not all experiments will work. In fact, a firm should expect that a large number of business trials will fail. Yet, experimentation allows a mature firm to try small bets in new arenas with new business models. These small experiments will yield further insights into customer/market trends and allow the firm to better understand the framework to explore innovations.
Lego, for instance, has used 7-year-old boys to experiment around a new business model for the Ninjago series of toys, books, and games. Presenting the children with simple storyboards allowed the NPD team to conduct dozens of experiments in a short span of time. And who better to indicate interest in a product than the end-user? Experimentation leads to better customer insights for business model and product development.
The 3 Es of disruptive innovation
Innovation is hard work. Disruptive innovation is even harder. A company needs to develop a new idea into a going concern that generates profits. The firm must exploit those sales in order to stay in business. Yet, a company must also simultaneously explore new opportunities introduced by new technologies and market trends.
These opportunities need to be tested – quickly – as a way of experimentation and alignment with the long-term strategy. A company that intends to grow cannot expect to leave innovation behind. Disruptive innovation takes advantage of exploiting current business models but explores and experiments with new approaches constantly.
To learn more about innovation processes, please join the Innovation Best Practices and NPDP Certification workshop starting 6 October. Register here.
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