Disruptive Innovation in the Digital Age – No One Size Fits All

Companies nowadays don’t have a choice to re-invent themselves to keep up with competition, new entrants to the market and everchanging technology enabling new business models even if the economy is trending towards a downturn.

Of course the concept of disruptive innovation is not new, but the difference is that in our time innovation happens exponentially faster where smaller companies can compete with established organizations enabled by cloud, mobile and digital technology and global reach.

It is important to understand the different types of innovation because strategy, profit formulas and approach are wildly different depending on what type of innovation you are targeting.

It is a mistake to apply a one size fits all approach to innovation

By doing that you can pretty much guarantee that important innovation investment and strategic initiatives are off to a rocky start or not going achieve the full potential of the opportunity you are targeting.

Here are the driving factors that need to be adjusted based on the type of innovation:

Clayton Christensen of Harvard University author of the innovators dilemma and other books about innovation strategy distimguishes 3 main types of innovation:

• Sustaining Innovation
• Low level entry innovation
• New market innovation

1. Sustaining Innovation (Incumbents typically win)

• Sustaining innovation is applicable for a market that is already well defined with products and solution serving a need or a job to be done well
• Products and services are well established and serving the most demanding clients and customers with focus on the highest profit margins
• In order to compete in this market place continous innovation is necessary to improve on an existing product or service
• The solution is not changing drastically, but gradually and strategies include to modularize your services and solutions to be more cost efficient, deliver more value to clients and to lock your clients and customers into your solution by differentiation

2. Low entry/ disruptive innovation (New entrants win)

• This is the kind of innovation that serves a basic need better and cheaper than the incumbent solutions on the market
• Incumbents are looking for higher margin opportunities and large clients and opportunities which collides with this approach and get disrupted by low entry innovations serving their client base with a product that is just good enough
• this is where the profit formulas and sales strategies of large incumbents don’t reward selling and promoting this low end business model

Traditional innovation is often focused on sustaining innovation, but the key point is that low end innovation and sustaining innovation server a different market:

The challenge here is that profit formulas, resources, sales approaches and processes geared towards sustaining innovation where products and services are improved upon discourage introducing a low end version of the product.

A way to overcome this is to spin out a different business unit or a seperate organization with a different profit formula and sales strategy.

That does not mean that certain resources cannot be shared across an umbrella organization just like EMC did when they bought Data General with their Clarion product to break into the low to mid tier market.

Trying to merge sales strategy initially only incentivized selling the higher profit margin EMC products and bundeling offerings.

After course correcting and implementing a different profit formulat and processes they were able to achieve their low entry goal or as Joe Tucci of EMC put it:

Sometimes parent companies can “hug” a new acquisition so tightly that they take its breath away

3. New market disruption/ breakthrough innovation (new entrants win)

• This is the type of innovation that addresses a market that has not been served before
• To win these customers over simplicity and convenience is paramount
• Profit formula: 1st phase: small investment, must make money at lower price per unit with initial volumes being small 2nd phase: larger investment to fule explosive growth and heavy investments once it has taken off

Often the path towards innovation is not clear cut and decisions need to be taken to adjust when environmental aspects such as regulations, technology and preferences change.

This is where a deliberately planned strategy needs to take into account emergent trends in the market and throughout the lifecycle of innovation enter different modes to keep the eye on the ball or as the hall of fame ice hockey player Wayne Gretzky put it as his success formula

Businesses need to do the same and look to the future taking emergent trends into account. This is why sustaining strategy cannot be your only strategy for innovation.Successful companies are creating a culture of innovation, continously exploring new alternatives and taking input from employees, clients and markets that they are not yet serving.

Amazon is a good example of a systemic culture of innovation setup by Jeff Bezos. They are doing this by doing 1000 experiments a year quickly moving on and only picking the successful proof of concepts.

As Jeff Bezos put it:

Given a ten percent chance of a 100 times payoff, you should take that bet every time”

and Amazon is investing billions of dollars into experiments where only 50% make an impact on a target metric.

A good starting point to get organized is leveraging the STREET process of analysing innovation opportunities all the way to rolling out the new product and service as laid out in this Gartner illistration:

The point is that there needs to be a culture of experimentation and research which can then lead to innovation opportunities with real payoffs in existing markets, but also uncovering and capturing new markets, clients and market share which is laid out in the graph below:

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