I thought I had a pretty good understanding of disruptive innovation, as a new product that is so different to what is currently on offer that the market place is forced to change quite significantly in order to remain competitive. Discussions focus on the formation of new markets and new customer segments at the expense of existing business models.
In this crystal clear talk from the father of disruptive innovation, Clayton Christensen, the term is described as follows:
- most industries start out with a complicated, expensive and largely inaccessible product
- first the product is disrupted with something simple and cheap
- then the business model is disrupted making the core product available to the masses
Clay tells us that disruptive innovation is not about new products at all, it is about finding new ways to solve existing customer problems cheaply and effectively. What interested me here was the response to how businesses come up with and execute new business models. Using the example of IBM, we are taken through a real life business reinvention in four simple steps:
- start with the new value proposition (a more affordable and effective way for customers to do what they have already been trying to do some other way). In IBM’s case the mainframe was superseded with the more accessible mini computer and later on the even more accessible personal computer
- then develop a profit formula (margins, speed, price points to deliver the model profitably). For IBM this meant establishing entirely new businesses that could operate at lower margins to produce cheaper products on faster build cycles
- then figure out what resources we need to do this. For IBM this meant finding product development skills, different production lines and new distribution models (that could deliver millions of products instead of a few hundred)
- and finally, figure out which processes will codify all of this for a scalable (reinvented) business model
It’s a great example of a business reinventing itself to face a disrupted market, and a great reminder that new products come with new business models if they are to be successful. To reinforce the impact of reinvention we are reminded that simply repurposing existing assets will probably not work, instead producing a new product through an existing business model. What we really need is a complete over-hall of the business model from operating costs to the resources needed to deliver those products profitably.
So what stops business model innovation from working and why do new entrants so often win? According to HBR it’s both a lack of knowledge of how to innovate the business model (and not just the product) and lack of knowledge about what your current business model actually is.