The theory of disruptive innovation contains several tools that are very useful ways of looking at the market potential of all types of innovation. I’ll use yesterday’s example to show how I used the tools to develop the idea.
Unserved/overserved. Disruptive innovations start with the unserved – those that cannot afford the existing product – and the overserved – those who do use the existing product, but would welcome a less-functional but lower cost alternative. In disaster recovery (DR) I found a sizeable group of mid-size businesses who either did not use DR centres or who found them too expensive for the service provided, and were dissatisfied with the available alternatives.
Jobs to be done. This is a market segmentation approach that identifies the causes of a purchase – what jobs the buyer is ‘hiring’ your product to do. This is a different approach to traditional attribute-based segmentation which seeks to match attributes of the product to characteristics of the buyer market but offers and gives information about correlation between features and buyer types, but offers no help with improving the product. Looking at what customers are using the product for leads to better products. For the DR service the customers I was targeting were not only interested in getting their business operating again after an incident, but also help with the recovery process and minimising their unavoidable excess costs, which they were well aware could mean the difference between the survival or failure of their business. Bigger companies have the resources to handle this themselves. The smaller businesses also wanted a scalable response which provided a proportionate response to the nature of the emergency – flooding of the computer room was an invokable event but didn’t necessarily require evacuation of all of the staff.
The Resources, Processes and Values framework. Resources, processes and values are the reasons that the existing market players cannot respond to the disruption. Their current customers aren’t interested in the new product; the salesforce wouldn’t make enough commission selling it; the price is too low for their cost structure to make a profit; the company’s core skills are wrong, etc.
The incumbents in the DR market incurred high capital costs to provide all of the IT systems that their customers required, which had to be recovered as a service rental. We created a business model with a lower capital cost and slightly higher operational costs. Our customers were going to have much lower service subscription costs but with the operational costs covered by the insurance element. The insurance company benefited from shorter recovery periods. Our model was also different in its overbooking of facilities – with standard DR services two customers in the same geographic location cannot be allocated to the same DR facility because of the risk of one disaster affecting both companies. By removing the fixed facility from the model we would have been able to share resources much more effectively.
Good enough/not good enough. A disruptive innovation is always not good enough in at least one capability required by the market incumbent’s customers. The low-cost airlines use the same planes as the incumbents, but take costs out by reducing service, using less convenient airports and charging for extras. They under-perform in customer service for the customers that are prepared to pay for better service to service the customers that want a cheaper flight.
In the DR service we were careful to ensure we were keeping our fixed costs low by, for instance, only offering a limited range of IT systems. The customers we were attracting either used only these IT systems or were prepared to work around this limitation to get a lower-price, more complete service.
Using these tools will help create a disruptive business.