Disruptive innovation in the value system

When a new technology comes along it is often described as ‘disruptive’. The usually unasked question is, who exactly is it disrupting and why?

I studied disruptive innovation to find out whether I could use it to develop a potentially disruptive business, rather than just recognise one ex-ante. The key ideas I took from Christensen’s disruptive innovation work and which are applicable to the analysis of all sorts of innovation, are:

  • analysing the capabilities of an innovation against substitutes (not just direct competitors) using the Good-Enough/Not Good Enough approach, and mapping these to potential uses;
  • the Jobs to be Done segmentation approach to identify new market opportunities or product improvements, including unsatisfied or over-served users that could be satisfied by a cheaper solution as in my earlier blog on the business continuity solution;
  • the Resources, Processes and Values framework to identify whether a particular industry or target business can accept an innovation, or how a business can be designed so that industry incumbents cannot respond without hurting their revenues and their stakeholders short-term interests.

Thinking about disruption alongside other business concepts led to some other insights. Thinking about fragmentation of the value systems that make up a market led to the understanding that, for a new innovation (disruptive or not) to be adopted, every business that remains in the new value system must be better off or it won’t be adopted. I’ve seen this happen with a number of potentially-disruptive innovations – the developer cannot get into the market because it is not in the best interest of one of the parties that would be involved in getting  the product to the customer. This is usually because the innovator is looking for a high growth route to an existing customer base.

The value system is the flow of products and services that go to make up the entirety of a product or service to the end-user, which could be an individual or a business. In the early days of the industrial revolution, and particularly before the development of the computer, companies were usually vertically integrated – they designed and built all of the parts of the products they manufactured and either sold directly to the end-user or wholesale to retailers. The computer and global communications changed that. Now a complex product like a mobile phone is the result of the combined efforts of several hundred different competing and co-operating businesses that form a market value system. If it is a fully-competitive market (ie, there is no dominant brand, natural monopoly or other factor limiting competition) then the average price will be closely related to costs.

These thoughts led to game theory and the Nash equilibrium via a little-known but very interesting book, “The slow pace of fast change” by Bhaskhar Chakravorti. I realised that competitive markets settle into a metastable equilibrium in which everyone tries to do the best they can, given what everyone else is doing. Businesses in the market system compete and co-operate to minimise two main things – input costs and risk. Lots of individual businesses fail because of poor execution or wrong resources, but on the whole the market is stable – as measured by average product price. When a new market innovation comes along that removes significant cost from the value system there is a relatively quick step change in price (once the disrupted incumbents exit) and the product settles on a new, lower average price. This seems to have happened sequentially in the PC industry, for instance, where home desktop computers were initially in the £4000 region and have dropped in steps to a price of around £300-£400 today – and are likely to disappear from most homes completely.

So who is being disrupted depends on where in the market value system the innovation is introduced and what costs are being substituted. For a new market disruption, such as the transistor radio, Honda’s Cub motorbike or Ebay auctions, a whole new value system with new customers may have to be created. The disruption is then an underperforming (by the values of the existing market products) substitute to the main markets’ products, but one that is good enough for the unserved and overserved. The tools of disruptive innovation can help us to understand whether our innovation is new market or cost-reducing, who we should be bringing along with us from the existing value system (if any), and what our proposition to them should look like.

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