Wednesday, September 26, 2007

Check your assumptions

We all like a little context in our lives. We wake up each day expecting the sun to rise, to have oxygen to breathe and so forth. These are things we expect to be true, and we go to bed each night assuming these factors will remain the same the next day.

Most businesses act the same way. They operate each day with a certain set of assumptions. To be fair, it would be difficult to operate in any other way, since considering everything a variable makes decision making much more difficult. But what happens to many firms is that they take their assumptions for granted. Over time, these assumptions become givens, or are considered as fixed points that can't be changed. In fact, many organizations within the same industry will work to erect these factors to bar others from entering. A good example is legislation that bars companies from entering a certain industry or sets high requirements that not many firms can meet. Unfortunately, many firms go to bed each night expecting those factors to remain constant, in a world where few things are constant.

Innovators and disrupters on the other hand assume nothing is fixed or constant. In fact they will seek to break down or disrupt the very items that a firm or industry has erected, since they gain two benefits from doing so. First, they attack a firm at an assumed point of strength and second, they attempt to change a market in such a way that only the disrupter can benefit. Think for a minute - if every firm in an industry has accepted some criteria as a "given", then they have all based their operating models on that given. Disrupters, on the other hand, will disrupt a market specifically on these fixed attributes or boundary conditions, since these points are often ignored by the existing firms and create artificial boundaries.

Firms "safely" ensconced in an existing market seek to extend their market share or dominance in the market, and erect barriers to entry. Innovators seek to dramatically change a market in a way that an existing firm will have a hard time responding to or wants to protect.

Let me provide an example. One of my consulting clients is entering a market competing with several large, established competitors. These competitors are recognized as industry experts, and have close ties with their customers. The new entrant can't gain credibility very quickly over an entrenched competitor. However, the existing competitors have based their business model on consumer consumption. If the consumers acquire and use the product, then the competitors make money. There's no incentive to change the consumer's behavior in this market for the entrenched competitors, and it's not clear to them why a consumer would change their behavior. We're attacking this market on the basis of limiting or eliminating consumption and transitioning that consumption to another set of products and services. The existing competitor can't and won't do this because their business model assumes a growing consumption of the product and that's the way the firm makes money. We are attempting to disrupt the market not based on stronger distribution models or lower prices or tighter customer relationships, but by changing the consumer dynamic - the one place we believe the competitor cannot change its spots.

Look at your firm and the assumptions it makes about its markets, the "givens", the barriers to entry and how it competes. Just about any industry can be disrupted, and most will be disrupted in areas they don't expect. Banks right now are worried about Google, PayPal and other online transactional firms rather than investment firms or mutual funds. The digitization of music and movies will dramatically disrupt the recording labels. With some simple legislative changes the Democrats could completely change how we acquire and use health care in the next election. What do you take for granted in your market as a boundary or a fixed attribute that could be changed, skirted or disrupted?
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posted by Jeffrey Phillips at 2:01 PM


Anonymous Corey Julihn - Innovation said...

I agree! We need to check our assumptions. Too quickly an assumption can become a trap.

For those who are interested, I wrote a blog post about Five Common Assumptions that Kill Innovation.

Thanks for bringing up the issue of assumptions!

Corey Julihn
Director and Experience Designer
CE Studios Inc.

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