Disruptive Innovation in a Web 2.0 World
NOT ALL INNOVATION IS THE SAME
There’s sustainable innovation and then there’s disruptive innovation. This theory was first posited by another professor/student collaboration (this time from Harvard) in THE Innovator’s Solution: Creating and Sustaining Successful Growth. In it, Professor Clayton Christensen and Michael Raynor argue that incumbent companies are very innovative contrary to what most people would believe. The only problem is, because they have a huge customer base to protect, their innovations tend to run along a sustainable line. They encourage incremental improvements to their existing products or services as opposed to creating an entirely new line, especially one that could cannibalize their existing market.
So while big companies are protecting their turf and expanding it slowly but surely, small companies with nothing to lose are not restricted to creating incremental innovations. They can create an entirely different set of products and services to meet market needs, creating a disruption in an otherwise orderly world. Big companies often ignore these small players in the beginning because they tend to serve different markets. Big companies like to service premium, high-end users, while small companies cater to low-end users who just want very basic functions and services.
THE PROBLEM FOR THE COMPANIES ARISE …
when the “disruptive innovation” created by the small companies reaches a critical mass which enables it to invest in its own incremental innovations to reach the same quality as the big companies do. Having the same quality, and often at a lower price point, the premium market shifts allegiance and displacement occurs, often driving prices down.
CASE STUDY: RETAILING
For the longest time, full-service department stores ruled the retailing world. They carried a wide variety of goods and employed well trained sales personnel to explain the different products and services to customers. For their beautifully decorated, well-maintained, well-staffed stores, they needed to earn 40% gross margins. They serviced a large swath of the population, but an even larger percentage could not afford or did not wish to buy at those prices.
ENTER THE DISRUPTIVE DISCOUNT STORES
In the 1960’s, discount retailer Wal-Mart started providing the same kinds of goods as the department stores, but in sparsely decorated, out of the way establishments, with very few sales-only staff. In particular, they started providing nationally branded paint, hardware, kitchen utensils, toys, and sporting goods- everyday stuff that customers did not need a well-informed sales staff to explain functions and uses.
They were also the first company to centralize inventory management by computer, allowing it to enjoy economies of scale across all its stores, regardless of size. Their business model enabled them to only need to earn 23% to meet similar profit levels as the department-store model, passing enormous savings to the consumers. Soon, even those who preferred the nice malls flocked to the discounted stores to make their purchases. As a result, discounted stores flourished while department-stores languished.
IN THE WEB 2.0 WORLD
“Disruptive Innovation” is key for small companies (because big companies can always do better than small companies along the Sustainable Innovation line). So stop mimicking the big guys and risk looking like them, only not as good. As the current Web 2.0 World now makes available crowdsourcing, crowdfunding, free marketing (via social networks) and lots of free technology, small companies should take advantage of all of these long tail sources to create something that truly makes a difference.
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Why Men are Losing their Jobs while Women are Keeping Theirs
I remember my college Economics professor telling us that you can tell when there is recession by looking at women’s skirts. The shorter they are, the worse off the economy is. Apart from the fact that you save on fabric costs by having shorter skirts, the men (who control the fashion business) become happier in sad times. We laughed and found no truth to the matter since a quick look at history will show that short skirts in the 1920s and 1960s in the USA correlated with boom times, while longer dresses in the 1930s and 1940s came during a bear market. It’s just a FUN theory.
BUT THIS ONE, ON THE OTHER HAND, IS TRUE
According to Businessweek, from last November through April this year, “American women aged 20 and up gained nearly 300,000 jobs, according to the household survey of the Bureau of Labor Statistics (BLS). At the same time, American men lost nearly 700,000 jobs.”
What is causing this phenomenon? It seems that men are concentrated in two sectors that are doing the worst in the US right now: manufacturing and construction. Women, on the other hand, are concentrated in sectors that are still growing, such as education and health care. Unfortunately, the pay in the growing sectors (at least for women) has remained stagnant, making them unable to be the main bread winner in the family.
As globalization continues its forward momentum, we (the world), need to figure out how to get out of the mindset of nation-states that are poised against (instead of with) each other. Jobs will continue to come and go. The business cycle of boom and bust is just that, a cycle.
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The Problem with the Blue Ocean Strategy
I have great respect for Kim and Mauborgne, a former teacher and student duo (now both professors at INSEAD), and had read their articles on value innovation in the Harvard Business Review. So when their book, Blue Ocean Strategy, came out, I quickly picked it up. Unlike many others who write about employing great strategy to great ends, Kim and Mauborgne don’t just theorize about great strategy, they give you the actual tools to use in which to achieve great strategy.
AND THERE LIES THE PROBLEM
Once someone has made something “easy” and “possible” for every tom, dick, and harry …well, every tom, dick, and maryjane will actually employ those tools, won’t they. And if they do that, then we’re back in the RED OCEAN we’re trying to avoid, aren’t we?
WAIT, WHAT’S THE BLUE OCEAN STRATEGY?
In a nutshell, Kim and Mauborgne (K & M)assert that the businessworld is a red ocean where everyone is trying to gobble up the same fresh meat- thus the bloodiness of it all. Business strategy is fraught with terms of military engagement because it is derived from philosophies of war. So K & M suggest that instead of fighting it out with the rest of them where it is bloody red, go where there’s no competition instead, i.e, where it is blue.
Businesses mistake that where there is no blood (not red), there are no customers, and therefore stick to where there is frenzied activity. K & M assert that this notion is delusional. The fish (customers) are everywhere and they are simply untapped- which means if you are able to get them, profit growth and margins will mean enormous smiles for everyone. They go ahead and use examples like Southwest Airlines, Cirque du Soleil and Starbucks to show how these companies were able to establish themselves in the blue parts of ocean and thrive.
DO YOU SEE THE PROBLEM?
Yes, let’s look at Southwest Airlines and its no-frills strategy. Ehrm … isn’t the world filled with value-for-money-no-frills airlines, right now? Do I hear chomping? Cirque du Soleil … ehrm … let’s look at the acts in Vegas, in Broadway, off-Broadway, in the Esplanade. Starbucks? Coffee Bean & Tea Leaf? Seattle’s Best Coffee … I mean who are we kidding here? The ocean is bloody, bloody red.
THERE IS NO FORMULA
So, I maintain again, in business “there is no formula”. And the minute there is one for a particular business, it is time to get out, not to get in. More and more so, as the internet makes more consumers able to voice their opinion on what works, how it works, and what will work, we will see innovation as a collaboration between customer and producer. Superior products and services in the market will NOT come from lots of sophisticated charting and analysis.
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