Recent times have seen a wave of disruptive innovations, sometimes coming from completely unexpected quarters, with effects so profound that they change the basis of competition and upend the existing order in the process

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10 Δεκ 2013 (πριν από 3 χρόνια και 7 μήνες)

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1


Since 1999, The Foundation has
been
helping businesses address growth challenges through
innovation. With the help of Simon Caulkin, former Management Editor for the Observer,
w
e wrote this
piece inspired by work we have done with a number of clients in sectors that face disruptive challenges
that are looking increasingly serious. The excitement of innovation has been replaced with a much more
down
-
to
-
earth sense of threat.


We
tend to work with big companies dealing with disruptive threat
s
, although there is nothing to stop
them becoming disruptors too.
Examples include
M&S with Plan A and soon with a new Energy
proposition, Telefonica with Wayra and their Digital business,
and
Visa and Barclays in payments. We
have also been involved with Just Giving's move into the Corporates market, the establishment of Zopa,
the world's first peer
-
to
-
peer lender, and a bit further back with Egg's ascendancy and Daewoo's
challenge to the autom
otive model. We are currently wrestling with live issues in media, banking,
insurance, retail, the third sector, energy and more, and we can see a pattern emerging.


What we have written below

describes
this learning as it takes shape. We
would love to dis
cuss the
se

ideas with others
,

and to apply them with people
that they

resonate

with
.


Avoidin
g the Toaster


M
eeting the challenge of disruptive innovation


What's the challenge?


Although the vast majority of innovations are incremental


small improvements or extensions
to existing products or processes


recent times have seen a wave of

disruptive innovations,
sometimes coming from completely
unexpected quarters, with effects so
profound
that they change the basis of competition and
upend the existing order in the process. It’s
easy to list them: iTunes and the iTunes store
vs CDs, Amazon vs Borders and HMV,
smartphones and tablets vs PCs and
cameras, Zopa and crowdfunding vs the
retail
banks, social media and Google vs
newspapers.


The c
onventional wisdom is that successful disruptive innovation is about supplanting bricks
and mortar with bytes, about being first to spot an opportunity, and that small companies are
better at thes
e things than large ones. There’s some truth in these ideas. But in our
experience, the picture is a bit more complicated than that.


It’s true that many of the new developments are disintermediations enabled by digitisation and
the internet. But there ar
e equally important lessons to be learned from earlier physical
disruptions


as
,

for example
,

when personal computers wiped out mini
-

and mainframe

R
ecent times have seen a wave
of

disruptive innovations,
sometimes
coming from completely
unexpected quarters, with effects
so profound that they change the
basis of competition and upend the
existing order in the process






2


computers, minimills dumped large integrated steel companies on the scrapheap, and when in
the 1970s and 19
80s small Japanese motorbikes did the same to the motorcycle industry.


With hindsight, it is possible to see that although start
-
ups have certainly played their part
(social media, PayPal, Amazon), in many cases
the
big incumbent companies did see change
coming, and were sometimes well prepared for it too. Thus Kodak not only foresaw the decline
of film, but

it had also made significant investments in digital cameras and printers. Xerox
invented the Graphical User Int
erface (GUI) and computer mouse, but it was Steve Jobs and
Apple that surfed on the disruption that they
brought about, to spectacular effect. IBM
could see the end of the mainframe computer
as a hardware business like an oncoming
train rushing down the tu
nnel, Woolworths
and HMV in retail likewise. But none of these
companies could break out of the groove set
by their past, or at least not fast enough to
prevent
some,
if not

all
, of

their market being
snaffled by others. What’s more, some of the
most notew
orthy examples of disruptive innovation are not the result of smaller players taking
a bite out of their bigger brothers’ lunch
, but big,

established players making bold sideways
moves into new markets. Apple in music, smartphones and tablets, Google with
Android and
other technologies, and Amazon with web services are recent examples. Asda into clothing,
News International into satellite TV,
and
Whitbread into coffee shops
are all

others.


Why do some big companies end up as toast while others remain comfo
rtable on the
other side of the grill?


One powerful reason incumbent companies are often outflanked by new entrants is that they
have a 'wood for trees' issue
-

they can’t see their
markets

for their own
products
. In the model
developed by Harvard’s influential Clayton Christensen, disruptive i
nnovations start small with
cheap, accessible products or services that
either open up a new market segment or
address a disregarded one. Typically the
reaction of incumbents is to ignore the upstart,
continuing to do what they’ve always done:
keep improvi
ng good, profitable products


until
they are well beyond the needs and finances of
already satisfied customers. The music industry
thought that digital downloads would never
catch on because the sound quality was so obviously poor compared to CDs or vinyl
, but for
consumers the utility of being able to manage their music more easily, and the value of buying
the four tracks they wanted not the whole album, comprehensively trumped audiophilia. In the

One powerful reason incumbent
companies are often outflanked
by new entrants is that they have
a 'wood for trees' issue
-

they
can’t see their
markets

for their
own
products



Some of the most noteworthy
examples of disruptive innovation
are not the result of smaller players
taking a bite out of their bigger
brothers’ lunch
,

but big, established
players making bold sideways
moves into new markets”





3


1970s and 1980s, manufacturers of big bikes sniggered at J
apan’s funny little putt
-
putt
motorbikes (initially
used in the US

by workers scooting around
within

factories) but rapidly
changed their tune when faced by sophisticated 250cc and 500cc models. The first personal
computers were aimed at hobbyists; no one
dreamed they would become a consumer
product. And so
the list goes
on.


It’s too simple to blame their unsuccessful brethren’s failure to follow suit on vested interests
and resistance to change. As the n
ovelist Upton Sinclair put it: “
Never expect someone

to
understand change when their livelihood
depends on not understanding it”
. This is precisely
Christensen’s
‘innovator’s dilemma’
: which manager in their right mind
wouldn’t

choose to
pursue better margins from sophisticated consumers in predictable, well
-
established markets
over producing a p
roduct or service for a
consumer

that possibly exists

in a new market where
initial profits will be tiny if they exist at all?


It is important to start from the
recognition that these barriers are non
-
trivial. Shareholder
expectations, company reward systems, unwillingness to stand out from the crowd,
psychological bias towards the ‘bird in the hand’, fear of cannibalising existing revenue
streams, a skills and re
source base built around current products and services


in other
words, justified apprehension at
self
-
disruption


all these things can militate powerfully
against launching into the unknown. The losses appear concrete, the benefits theoretical.


How
can these obstacles be overcome? Or,
to put it another way, how do serial
disrupters such as Apple develop the
confidence and capabilities to make
devastating sideways moves into entirely
new sectors?


Our answer comes in the shape of six key lessons.


1.
Create the conditions for long term success even if the issues are immediate


Attracting aligned investors.


There’s some evidence that as the world has become more financially driven
,

and shareholder
value maximisation
has been
honed to a sharp point, the virtuous circle of enabling and
sustaining innovations that has powered western economic growth for the last half
-
century has
broken, with managers focusing single
-
mindedly on efficiency gains, and on liberating capital
for divi
dends and share buybacks, at the expense of what created the value in the first place.


The result is a kind of corporate tragedy of the commons: corporate treasuries on both sides
of the Atlantic are stuffed with unspent cash while the overall rate of in
novation falls,

How do serial disrupters such as
Apple develop the confidence and
capabilities to make devastating
sideways moves into entirely new
sectors?”





4


impoverishing the economy as a whole (Christensen calls this the
‘capitalist’s dilemma’
). But
consider also the effect on the firm. The truth is that whatever they do most, large companies
simply chug along at the pace of the economy. The only consistent exceptions are serial
innovators such as Apple, Amazon and Google. Steve Jobs always arg
ued that shareholder
value was a by
-
product, not a goal, and
that
shareholders should keep their nose out of the
business; and notwithstanding the bursting
of Apple’s share
-
price bubble, medium
-

and long
-
term investors have done
extremely well out of Apple stock. While
perhaps putting it a bit more diplomatically
than Jobs, th
ere is a
strong case for
leadership here,

as
,

for example
,

with Paul
Polman at Unilever or Jeff Bezos at
Amazon, in clearly spelling out to shareholders the need to invest for the long term even at the
cost of a short
-
term hit on the share price. In so doi
ng, they increase their chances of
attracting the shareholders they deserve, re
-
establishing the virtuous circle.


Ma
intaining internal consistency
.


The same consistency is needed inside the firm. It’s all too easy for companies to flip
-
flop
between do
-
nothing caution
and

bouts of frenetic innovation activity which peters out when
instant results aren’t forthcoming. Thus when the dotcom boom burst, man
y large companies
got cold feet and pulled promising internet ventures just as the initial lessons had been
absorbed and more realistic expectations had set in. To avoid such violent swings, it is
important to recognise that
,

while the exact timing of the
‘next big thing’ is impossible to
predict, being prepared for it is both possible and essential. A form of ‘horizon planning’, as
practised by Shell,
whereby resources are

allocated to the short, medium and long term, is a
helpful antidote.


2.
Put the cus
tomer first


It’s not shareholders who create shareholder value; it is customers who buy a company’s
products and services and thereby provide its revenues (as Peter Drucker helpfully reminds
us, ‘the purpose of business is to create and
keep a customer’). As we have a
rgued
repeatedly elsewhere (e.g. in
'How to Solve
Growth Problems by looking at them
differently'
)
,

looking through the customer’s
eye
s is part of the ‘outside
-
in’ focus that is
essential to guide innovation strategically.


All companies say they listen to customers, of cou
rse, but the critical point is to understand

“There is a stro
ng case for leadership
here....
in clearly spelling out to
shareholders the need to invest for the
long term even at the cost

of a short
-
term hit on the share price”


It’s not shareholders who create
shareholder value; it is customers
who buy a company’s products
and services and thereby provide
its revenues”





5


what they really value in relation to the problems they want to solve.

These relate to
markets

as well as products, and often explain where a
new market came from. Failure to see value to
customers, as opposed to value to the
business, is one of the chief reasons why so
many companies miss the significance of
potentially disruptive new entrants at the
bo
ttom end of the market. Conversely,
understanding that significance
,

gives a far
-
sighted company at least a chance in turning a
disruptive challenge to its own benefit.


One of the rare incumbents to have successfully fought off a disruptive innovation
from
outside is the Swiss watch industry. Faced with a classic disruptive challenge from Japanese
companies such a
s Casio and Seiko in the 1980s
, a couple of ailing Swiss manufacturers
under Nicholas Hayek turned the tables by
,
instead of adopting the usua
l margin retreat
,

boldly launching

the Swatch, a technological and marketing breakthrough of their own that
retook much of the Swiss industry’s lost market share and has provided a defensive umbrella
under which the rejuvenated luxury industry has prospere
d ever since. Swatch saw that
customers appreciated accuracy and functionality, but also valued style. As a result they found
a new combination of ingredients that complemented the industry's core.


Real customer preferences aren’t always what companies th
ink they are or wish they might
be. No
-
frills airlines, city car clubs, online betting sites, online search, peer
-
to
-
peer banking,
not to mention digital music, have all taken off by initially flying in the face of long
-
held
assumptions about what consumer
s value, and therefore what they will pay for and wha
t they
will happily do without.

Mike Harris, a great causer of disruption, tells of the insights that led to
First Direct


everyone said that customers wouldn't bank on the phone or online as they
wante
d to visit a branch...


3.
Back many horses and be prepared to fail


Venture capital funds operate on the principle that out of say 10 investments, five will show
zero return, three will wash their face
,

and two
,

at best
,

will be runaway successes that
compensate for the much greater number of disappointments.



Failure to see value to customers,
as opposed to value to the
business, is one of the chief
reasons why so many companies
miss the significance of potentially
disruptive new
entrants at the
bottom end of the market”





6


There’s no reason to think that companies will
do better than seasoned venture capitalists, so
they need to spread their bets. One method is
to

set up hotspots of
innovation
in separate
incubators or accelerators, such as Google
Labs, Unilever’s incubator for media start
-
ups
and Telefonica’s Wayra, an accelerator that has
fast
-
forwarded the launch of dozens of new
technology ventures in record time. 3M, like
Google, allows employees to us
e a proportion of their time on their own projects


Post
-
It
notes famously emerged from one such individual initiative. As with
lesson 1

above,
consistency is all important: many media companies negated the point of having a portfolio of
dotcom ventures b
y closing them all down at the same time when fashion turned against
them.


Visa has adopted a different tack, aiming to ensure it has a stake in whatever the winning
platform(s) turn out to be in mobile payments by simultaneously licensing electronic paym
ents
technology to Google, taking a strategic stake in Monetise and launching its own mobile wallet
service.


4.
Create a corporate culture that encourages curiosity, innovation and learning


Steve Jobs’ greatest achievement wasn’t the Macintosh, iPod or iPhone. It was an
organisation capable of creating such captivating objects of desire one after the other. One
part of this was structure: as a

company with a single P&L and balance sheet, Apple was able
to take a whole
-
company view of opportunities such as music downloads, whereas Sony,
which had all the elements in place to do an
iTunes, was paralysed by divisional infighting.
Silos, convention
al inside
-
out thinking and short
-
term financial targets spell death for disruptive
thinking. Another clue lies in Job’s description of
why the original Mac was successful: the
people
working on it, he said, “
were musicians and
poets and artists and
zoologists and historians who also happened to be the best c
omputer
scientists in the world”
. Such people might be ‘a pain in the butt to manage’, but the reward for
harnessing that passion to ambitious goals is a creative zeal that no other company in the

field
has been able to replicate.


In
a recent article
, Dyso
n’s chief executive noted that “
the best you can do is hire a lot of smart
young people, gi
ve them a lot of responsibility and

they’re going to grow on it...
If you work at
Dyson, you have t
o have fun with vacuum cleaners”
. Google, which at start
-
up resembled a
university department rather than a conventional company, operates on similar principl
es.


There’s no reason to think that
companies will do better than
seasoned venture capitalists, so
they need to spread their bets.
One method is to set up hotspots
of innovation in separate
incubators or accelerators



Silos, conventional inside
-
out
thinking and short
-
term finan
cial
targets spell death for disruptive
thinking”





7



For established, well
-
grooved incumbents, loosening up is easier said than done, since
encouraging creativity inevitably involves giving up a measure of control. Expecting ‘culture
change’ to inspire a hotbed of innovation is the wrong way round: as Marks
& Spencer
showed with its Plan A for long
-
term
sustainability (see
'What we can learn
about innovation from Marks and
Spencer's Plan

A'
), it’s easier to act your
way to a new way of thinking than think
your way to a new way of acting. Plan A
is indeed causing a culture change, but
that is the result of setting out clear
goals for innovation, making them public, showing they are taken e
xtremely seriously from top
to bottom of the business and liberating people to carry it out: it is a result, not an abstract
end. Tolerance for failure (provided it is learned from) has to become more than an empty
phrase, and reward systems have to be mod
ified accordingly.


5.
Develop the ability to master entirely new capabilities or recognise when you can’t


It is essential that a company is honest about what it is good at and what it is not. For
example, Unilever recognises that while it has a chequered

record of invention on its own
account, it is second
-
to
-
none in scaling ideas from one market to many. So it reasons that it
makes more sense to acquire and commercialise innovations from others than pursue them
itself.


In its high
-
growth phase, Cisco turned acquisition into a potent innovation weapon, acquiring
literally hundreds of small technology start
-
ups and integrating their products in a very sho
rt
space of time. In other words, the tool
needs to be fitted to the task. Underlining
the message, a recent article in Harvard
Business Review warn
ed

companies
against launching large
-
scale
transformation efforts to head off disruptive
challenge before
th
ey had

carefully mapped
their

resources, processes and values against
what
they were

trying to achieve. Without such a systematic review, ‘in trying to transform an
enterprise, managers can destroy the very capabilities that sustain it.’


It is a delicate balance, since seasoned innovators understand that to do something new, they
generally have to give up doing something old. Nokia had started out making wellington boots
among many other things, all of which it ditched to focus on masterin
g market segmentation
and design, at least for a period, in mobile phones. Jobs prided himself on being able to say
‘no’ to projects that failed to meet Apple’s exacting standards, but conversely had no qualms
"In trying to transform an ent
erprise,
managers can destroy the very
capabilities that sustain it"


A
s Marks & Spencer showed with its
Plan A for long
-
term sustainability....it’s
easier to act your way to a new way of
thinking than think your way to a new
way of acting”






8


about developing entirely new platforms even a
t the price of cannibalising existing ones (e
.
g
.

tablets vs standard computers). The cost of not developing the ability to adopt new processes
and technologies in a timely fashion is high: like many incumbents
,

Kodak correctly foresaw
what was coming in di
gital imaging and printing but not its speed. In the face of unexpectedly
rapid change, its foresight was of little practical use.


6.
Play at being the outsider in new markets not just the insider in your own


Acquisition isn’t always the right answer. S
ometimes being an outsider enables an innovator
to reframe customer needs without the preconceptions that invisibly constrain thinking in
industry incumbents. Such was the case with Apple, which revolutionised two, possibly three
,
sectors

(music, phones an
d retail) by bringing its distinctive outsider’s values to bear on
sectors that it could see were ripe for reinvention;
likewise for

Amazon in retail. As already
noted, given Sony’s history (it invented the successful Walkman), technological skills and
dis
tribution knowhow, it should have developed the iPod and iTunes store. But it couldn’t bring
itself to make the final step and was rapidly leapfrogged by the quicker
-

and freer
-
thinking
-

Silicon Valley upstart.


Conclusion


Disruptive innovation doesn’t happen every day, and its timing, especially whether and when it
takes hold at scale, is
unpredictable. But it rarely
strikes as a bolt from the blue


in most cases c
ompanies have
ample warning of the coming
shift, and indeed the impending
changing of the guard soon
comes to seem inevitable. Yet
the cases where firms have
failed to react, or react
sufficiently or fast enough, are
legion. It is a matter of record that m
uch disruptive innovation is carried out by new entrants to
the industry; despite the apparent odds in their favour


established market share and
distribution networks, dedicated resources and experience


even large industry incumbents
rarely emerge unsc
athed.


Despite this apparently unpromising history, however, our work with companies coping with or
conducting disruptive innovation has convinced us that the challenges, although difficult,
can
be

managed.


The most importa
nt step in solving a problem is
understanding it. That means managers

Disruptive innovation
doesn’t happen every
day...but it rarely strikes as a bolt from the blue


in most cases companies have ample
warning of the coming shift, and indeed the
impending changing of the guard soon comes
to seem inevitable. Yet the cases where firms
have failed t
o react, or react sufficiently or fast
enough, are legion”





9


taking account of their company’s resources and ambitions and the needs of the market. We
can’t guarantee a success like the iPod.


But if, at the same time, you work systematically to
set long
-
term ambitions to complement
short
-
term urgency; really put measures and mind
-
set in place to understand what customers
value; build a portfolio of experiments in the knowledge that some will fail but all will generate
learning; infuse the company

with a culture of curiosity, optimism and learning; develop the art
of mastering or acquiring new capabilities to complement those that remain valuable
(recognising realistically when you can’t); and practise studying your market like a visitor from
Mars,

looking from the outside in


then you’ll have done a great deal more than most to
prevent yourselves becoming someone else’s breakfast
.


About The Foundation

The Foundation, established in 1999, is a Growth and Innovation Consultancy. We help
businesses
grow more quickly, into new areas, or fend off threats to their top line. Our
approach is built on the insight that clients find this hard. Why? Because to succeed, they
need to see the world differently, from the ‘outside in.’ That means getting very
clear about
what customers value, as opposed to what the business produces, and thinking laterally about
new ways to deliver that value by looking outside the sector for inspiration. We help our
clients see their world differently, from this outside in pe
rspective, and act on what they find
through our border
-
crossing team.

The borders they cross divide customer and business
understanding, strategy and implementation, creativity and analysis, and these contrasts need
to be combined in devising a strong res
ponse. Our work is across a broad range of clients
including HSBC, Jaguar Land Rover, Visa, Tesco, M&S, O2, Intercontinental Hotels Group,
Eurostar, National Air Traffic Control Services, JustGiving and Volkswagen/Audi. This link will
take you to more inf
ormation about our Forum events:
http://www.the
-
foundation.com/our
-
events/foundation
-
forum/