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September 1, 2009

DISRUPT YOURSELF

Find the foothold market no one else sees.

NO ONE’S BUYING.

Consumers and companies have to become more price conscious. And therein lies the opportunity for disruptive innovation.

Disruptive innovations are created when mainstream companies overshoot some of their customers. They develop a new set of customers and open up new markets. Take Southwest Airlines, for example. When the company first emerged, its competitors, the mainstream air carriers, offered first-class and priority seating, frequent-flyer programs, meals—all sorts of bells and whistles that more price-sensitive customers didn’t care about. Southwest flew out of small airports, but its flights were on time; what it lacked in bells and whistles it made up for in enthusiasm on the part of its flight crew. A lot of passengers switched because what they cared about was dependable transportation.

What happens in a down economy is a lot of people who haven’t switched to the disruptive innovation do so. They start flying Southwest. In a down economy, new customers will go to “almost as good” or “good enough” for a lower price. Last year, the Dallas-based airline flew more passengers than any other carrier.

Most disruptive innovation is disruptive to mature industries. When mini mills came along, that was a disruptive technology. They started with rebar so they didn’t compete with big mills. Disruptive stuff stays below the radar for a long time. Sometimes it takes a real down market to make others pay attention.

We have examined more than 100 companies and found that the track record for large, incumbent companies that try to innovate to create new markets is dismal—to say 10% of those businesses succeed would be generous. They are more likely to improve their core, existing market. The flip side is there’s a very common pattern among those that do succeed.

  1. You are never able to innovate if you keep the new unit, product line or service within core operations. There are plenty of examples of those who do it outside core operations and don’t make it, but there are no examples of those who did it within and made it. You have to separate everything: The profit-and-loss accounting should reside within a separate division with a separate general manager. That way you can fail fast and fail cheap.
  2. You have to be extremely committed. You have to be satisfied with starting small. Big companies always say, “I need growth and I need it now.” They don’t have the patience for innovation. But patience in years one and two yields big growth in years three and four.
  3. You have to establish yourself a foothold market, and then find the non-consuming customer.
  4. Your product has to be innovated on a different dimension than your core product, with staff released from obligations to the parent organization.
  5. You have to be willing to change your business model. Starting in a foothold market such as rebar means you don’t have to compete. You learn lessons. You learn how to make money. The customers who come in then move up as the new technology moves up. Price is very important because when you innovate for a nonexistent market—in most cases, the new innovations are “good enough.” As the innovation matures and gains customers, good enough becomes better and better, but the price difference remains. Mini computers were cheaper than, but almost as good as, mainframes; personal computers were cheaper still.

In the current economy in the metals industry, disruption will happen in pockets. There may be innovations in metals themselves. We’ve gotten some metals with such high tensile strength that lower cost options could be good enough. There will be some switch where there is pressure to use plastics instead of aluminum, for example.

Many times, it’s a process innovation—a change in the way a product or service is manufactured or distributed—that’s the breakthrough. Mini mills were an innovation in process. It could be molding. It could be ingredients in metals, how it’s made, how it’s delivered. Integrated steel is a great example.

Disruptive innovations are never massive resource sucks. Big companies think they’ll have to put all their money into it, but spending a little to learn a lot is what you do.

New competitors often have an advantage because incumbent companies are so entrenched, they can’t see the opportunity. There is an asymmetry in vision, not in resources. It doesn’t take a massive amount of resources to do disruptive innovation. They require investment but a fraction of overall capital expenditure. It’s modest investment in proven foothold markets.

In this difficult economy, metals company executives are wondering what to do, and fear has paralyzed many. Instead, they could be looking for the non-consumer, for the proven foothold that no one else has the vision to see. In any economy, but certainly in one as uncertain as this one, you can let the market disrupt you or you can disrupt yourself.


Clark Gilbert is director of Boston, Massachusetts-based research firm Innosight, a former professor of entrepreneurial management at Harvard Business School and author of From Resource Allocation to Strategy.