I like to focus on the next markets. Imagine how the world of tomorrow will be, and try to create solutions for the next set of users. Better still, pick up those who are non-consumers. This ensures that one does not have to worry about competition for at least a while, till one gets the various elements right. Our ally in this quest is Clay Christensen and his theories on disruptive innovations. A must-read is his recent book, co-authored with Michael Raynor: The Innovators Solution: Creating and Sustaining Successful Growth.
In Christensens world, there are two types of innovations: sustaining innovations and disruptive innovations. The sustaining innovations are those which focus on established markets and bring better products and services to the user base. So, Microsofts bringing Windows XP and Office 2003 to market are examples of sustaining innovation. By contrast, disruptive innovations focus on two possibilities: low-end disruptions address overserved customers with a lower-cost model, and new-market disruptions compete against non-consumption. Linux is an example of a disruptive innovation which is giving overserved customers (in comparison with Microsoft Windows) a cost-affective alternative.
As we think, it is useful to apply the litmus tests for disruptive innovations that Christensen and Raynor outline in their book:
Executives must answer three sets of questions to determine whether an idea has disruptive potential. The first set explores whether the idea can become a new-market disruption. For this to happen, at least one and generally both of two questions must be answered affirmatively:
Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them? To use the product or service, do customers need to go to an inconvenient, centralized location?
The second set of questions explores the potential for a low-end disruption. This is possible if these two questions can be answered affirmatively:
Are there customers at the low-end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price? Can we create a business model that enables to earn attractive profits at the discount prices required to win the business of the overserved customers at the low end?
Once an innovation passes the new-market or low-end disruption test, there is still a third critical question to answer affirmatively:
Is the innovation disruptive to all of the significant incumbent firms in the industry? If it appears to be sustaining to one or more significant players in the industry, then the odds will be stacked in that firms favor, and the entrant is unlikely to win.
This is a good set of questions for every entrepreneur to answer.
Tomorrow: Creating Disruptive Innovations (continued)
TECH TALK My Mental Model+T