Monday, February 07, 2011

Why disruption is the preferred innovation outcome

I've given some thought lately to the idea that there are three types of outcomes that any innovation can create.  These three "outcomes" are cannibalization, disruption or market creation.  In this blog post I'd like to explore each of these and discuss why none of them seem all that attractive, but any one seems better than the others.

Regardless of your idea, it will have one of these three outcomes - cannibalization, disruption or market creation.  Cannibalization is simply replacing an existing product with a product or service that's far better than what you produce today.  Disruption, however, is the typical goal of many innovation efforts.  That is the attempt to create a product or service that disrupts another market or customer segment rather than your own.  Finally, market creation, the "holy grail" of innovation, introduced to us by Blue Ocean Strategy, seeks to create an entirely new "blue ocean" of customers.  Since these customers aren't being served, there is no cannibalization or disruption.

From the viewpoint of any senior executive, innovation goals are focused on what we can do to grow revenues and create distinctive products and services in the marketplace.  That viewpoint is constrained by the value of existing products and services and the consistent revenue they generate.  In this regard, senior executives generally expect innovation to impact another firm or another industry, not the existing set of products and services.  Cannibalization is frowned on, since it disrupts an internal product offering that is generating revenue and profits now.  While the mantra of "cannibalize your own products or someone else will" may make sense to us innovators, it is hard to sell to executives.  Cannibalization is probably the easiest innovation to do, because we already understand the issues, needs and challenges, and already participate in those markets, but is the hardest to accomplish, because of the internal constraints and pressures.

Since the focus is on disrupting some other firm's products or services, the "disruption" approach is the most typical.  That approach walls off the firms own product offerings and seeks to disrupt someone else's products or services.  However, this is a difficult reach for many firms, to create a new product or service that solves a problem for a group of customers or a market 1) already served by another firm that 2) the disrupter may not fully understand.  While disruption seems obvious on the surface, it can be hard to do since the firm doesn't have nearly as much expertise about the market it seeks to disrupt as does its competitors.  While disruptive innovation is the most common goal, it is also the most often dissatisfying.  A disrupter reaching into another market has many external barriers that can trip up a new offering, from clear understanding of customer needs to appropriate marketing channels. 

The "holy grail" of innovation is establishing a "blue ocean" of customers who were unserved previously.  This typically doesn't cannibalize existing products since the customers weren't served by the firm, and often doesn't disrupt competitors who weren't aware of the market or its needs.  The firm that identifies and serves the market first can establish itself as a dominant player, but eventually other firms will enter the space and innovation will take one of the former types (cannibalization or disruption) in that market from that time forward.  While the concept of identifying and serving a new segment sounds enticing, it too is exceptionally difficult.  Most "blue ocean" examples are firms that intentionally designed business offerings in opposition to the established norms and whose business models are quite different from their competitors.  That means that many firms that open a "blue ocean" often have little stake in the existing markets and can resist market pressures to conform to standard industry practices. 

Frankly, all of these outcomes are valuable, but none are easy.  The easiest, cannibalization, is often the least palatable internally, as it impacts existing revenue and reduces the power and control of other executives.  Disruption, the most palatable, asks the firm to innovate (create new products) in a market or space that's already competitive and where the firm often has little experience.  This means the firm enters a new space, in new markets, with new products where competitors are already active.  These "new" factors compound the likelihood for failure, or at least for ho-hum products.  Creating a new "blue ocean" is very attractive, but exceptionally difficult, since it means having a great insight into customers that an industry or firm have overlooked, and offering products and services with a business model that's different from the established norms.  Those factors are exceptionally difficult for larger, established firms.

So, most executives will resolve not to cannibalize their own products.  While the easiest innovation outcome, it has the most near term negative financial impact, not to mention the political and turf implications.  Most executives, while they pine for "blue oceans" aren't willing to change their business models and offer radically different products to untested markets that haven't been validated.  So, the predominant outcome sought by innovators remains disruption of another firm's or industry's products or markets.  Disrupting another market offers the least best outcome of the three but the one with the least risk and uncertainty.  By disrupting someone else's market we believe we protect our own, and we don't place new products and services into untested and unvalidated new markets.

Cannibalization is ruled out because it distracts from current revenue and creates anger and dissension in the executive ranks.  Creating new markets is ruled out because the "blue oceans", while attractive, are unproven and require different offerings and business models.  This leaves disrupting another existing market or segment as the only outcome many firms will choose to pursue.
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posted by Jeffrey Phillips at 6:13 AM

5 Comments:

Anonymous Thomas said...

I see a grey line between disruption and Blue Ocean. If a company chooses to disrupt another market in which that company has little experience is there not the chance that their disrutption could lead to a Blue Ocean in the market that is disrupted? Potentially a new value is created by the disruption or the rules of market are altered making the disrupting company a leader.

11:15 AM  
Anonymous Clive Bosnyak said...

Very nice note and interesting from a CEO's perspective. Perhaps this same set of catagories should be looked at more from the point of view of the type of people within a given company - have starters or innovators been driven out of the company because of maturity/commodity/cost driven approaches? This leaves a company with a highly risk or change-averse population. Hence the easiest path is one that is least innovative and more of what they are doing today? This leads companies to accept that if they are to take a Blue Ocean view they need to do so by starting or acquiring the venture completely anew and separate from the existing people.

1:12 PM  
Anonymous Martin Pattera said...

Hi Jeffrey, I agree with your analysis, but not with your conclusions! In fact what you did is a job description of innovation management. No matter what type of innovation a company wants to pursue: it takes management skills and combined efforts to achieve successes. All your three types of innovation are proofed successful in practice. Now what should be the conclusions of your analysis from my point of view: Innovation is FIRST OF ALL 50% analysis of potential target markets and needs within that markets AND ONLY THEN 50% creation of solutions to satisfy those needs. That solutions maybe products, services or even new business models. The reason why innovation is so risky is that markets and needs within that markets are not analyzed satisfactorily before coming up with new solutions. That is where the risk comes in the innovation process. Every new product release is cannibalizing last years products. Based on that understanding it should not be considered risky, but the basis of long term business success, to cannibalize your existing products with new products that better satisfy market needs with higher profitability to your company. Second, it is possible to minimize risk of disruptive innovation when knowing exactly what you're doing BEFORE you do it. When disrupting other markets the main job is to precisely analyze opportunities, contexts and framework conditions in that markets - which is possible! Let me recommend the publications of Clayton Christensen and Anthony Ulwick (Outcome-Driven Innovation) that introduce a very practical approach to this. Cheers Martin

1:29 AM  
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7:17 AM  

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