What are Disruptive Innovations?

I recently viewed on the Harvard Business Press a bit old but not less interesting interview of Scott Anthony, former president of Innosight and writer of the Harvard Business review Innovation blog, on disruptive innovation, here is a transcript of the interview:

What is Disruptive innovation?

“Disruptive innovation is a particular type of innovation that occurs when an innovator brings to a market an innovation that is simple, convenient, accessible, and affordable; changing the game. Contrast this to sustaining innovation that takes what exists and makes it better.

A disruptive innovator transforms an existing market and creates a new one by playing the innovation game in a fundamentally different way”

Does Disruptive innovation have to be big? What is it about? Is it a new technology?
“Disruptive innovation will result in major changes but they don't often rely on technical innovation, in fact many times the technology is quite trivial, it's the business model, the way a company organizes and acts that
drives disruption; Take Wal-Mart for example, when it opened its first shop, it didn’t have better products than the established competition, it just changed the way it acts to deliver the products to the customers at a lower price points. It’s often times not the technology, it’s the business model. Another interesting case of  disruptive innovation example is Nintendo Wii.” See Nintendo case study in detail in my blog here 

How can firms generate disruptive innovations? Do they need to have a disruptive innovation department?

“Everyone within organizations has the ability to come up with disruptive ideas. Senior management must have to lead and create appropriate organization space for disruptive innovations to flourish. It is imperative to create a separate organization with own processes to support disruptive innovation. Otherwise any disruptive innovation will not survive the internal organization processes.

How to spot disruptive innovation opportunities?

“Look for markets where there is some kind of constraints that inhibits consumptions, where is there something that makes it difficult for people to solve problems in their life. Sometimes they don't have skills, money, access the solution and sometimes it just takes too long. Find one of those barriers to consumption and see how you can obliterate it”

“Try to identify where people have important unsatisfied jobs to be done, where there is a problem that the customer can’t adequately solve today. If you can find that frustrated customer and ease their pain, you often times have the ticket to disruptive innovation.”

“After you have looked for constraints consumptions and you have targeted that job to be done, think about how you can play the innovation game differently. Remember is not about doing it better, it’s about making it simpler, cheaper, more accessible, and more affordable, that's what disruption is all about”

Do you always to create or satisfy a need? How to you proceed?

“The customer can very rarely articulate the specific things they want or need”
"Think about the markets that you are going to analyze, looking not necessarily at the most demanding customer today, but thinking about people who are relatively undemanding, or people who are not consuming anything at all"

“Focus groups can be a simple way to begin a conversation with customers. Customer observation can be really powerful, because sometimes the customer simple can't tell you what you want. Sometimes you got to
give customers something, a very early prototype and let them co-develop the product or service with you.Sometimes you got to do more detailed quantitative research to really pinpoint what are the points of frustration in the market and where are opportunities to do things differently”

Do organizations need to invest a lot?
“Take a simple first step. Invest a little, learn a lot. Don't spend huge money upfront because the only thing you can be sure of is that your first strategy is wrong, so if you invest too much too soon, you are looking into a path that is fatally flawed”

Harvard Business Press Interview with Scott Anthony

Case study Hindustan Unilever: Reach untapped markets with a Corporate Social Responsibility Business Model

Hindustan Unilever Limited, Unilever's $3.9 billion subsidiary in India. Unilever is the corporation that produces Axe deodorant, Vaseline, Surf detergent, and Lipton tea, among many other everyday products.

India is the second largest country in the world in terms of population. India has also a large number of villages; more than 600.000 villages with poor transport infrastructure making shipments of goods extremely difficult. Most of these villagers don’t have access to the very basic hygiene products like soap, toothpaste, shampoo, etc. Many of them have even never used a tooth brush or washed their hairs with shampoo. Instead of investing in costly infrastructure, the Indian government decided to promote entrepreneurship in these villages, targeting women particularly. Hindustan Unilever saw an opportunity in this program and decided to develop a business model accordingly. Within their established organization Hindustan Unilever has created a leadership organization with total freedom for developing the business model. Hindustan Unilever launched the so-called Shakti Entrepreneurship Program. The value proposition was to create in each village and surrounding a chain of entrepreneurs for Hindustan Unilever products. These entrepreneurs (who are selected women) will not only distribute but also educate these villagers on the use of the different corporal hygiene products provided by Hindustan Unilever.

NGO’s have supported Hindustan Unilever with selecting these underprivileged women, to become the new Hindustan unilever distributers and the new promoted entrepreneurs. According to H.Unilever, at the beginning, there was a lot of hesitation, since these women were often illiterate or had no math skills. It turns out they were very quick to learn and smart-within 48 hours they would get it. Their motivation was so high that it compensated for any lack of ability.

Today H. Unilever employs between 60,000 and 70,000 women entrepreneurs in villages to sell Unilever products at affordable prices to the Base of the Pyramid (BoP). For the first time, villagers had access to soap, detergent, and toothpaste. The women entrepreneurs were also educating their communities on hygiene issues while selling their products - for example, by explaining how to brush children's teeth - and through community wide health awareness days.

Shakti is a good example of CSR. it created a whole new way of life for 60.000 to 70.000 women, with the opportunity to gain a good living. It had a direct effect on their social stature. And millions of people had access to personal care and home products. In terms of distribution and marketing, the business model is using the BoP to distribute products; so the BoP is definitely part of the solution. And it's self-sustaining from the business it generates.
Hindustan Unilever has managed to create a sustainable business for itself and for the women distributers, to reach untapped market and to reinforce its brand and its company internal and external culture. All this by using the BoP in a CSR business model.

Definitions
CSR means Corporate Social Responsibility
BoP means Base or Bottom of the Pyramid, the largetst and poorest population

Cloud $10b market by FY13, Merril Lynch Report Jan, 10th 2011

Merril Lynch has released a very detailed report on January 10th, 2011 on Cloud Computing, "Cloud" next big opportunity for IT service vendors, here is a summary of the most important findings:

Cloud: Key growth opportunity, potential game changer

• over the next 5 years, Cloud presents a great opportunity for IT services vendors.
• Shrinkage in certain revenue streams will be more than offset by new ones.
• Cloud is a game changer where winners will grow IP-based services.

Significant revenue opportunity near term
Cloud consulting, migration and management is forecast to be a new US$10bn market by FY13,
growing at a 5yr CAGR of over 40%. It could form 6-10% of revenue in five years from less than 2% today and could account for 15-30% of incremental revenue.

The IT services competitive landscape will be transformed. Increased competition could result in consolidation process.

Putting the Environmental Dimension into the Business Model Canvas

The Business Model Canvas, as described in Business Model Generation by Osterwalder and Pigneur (2010), presents an easy and general usable business model framework. I have been working on expanding the Business Model Canvas to describe and include the Environmental impact factor of a Business Model implementation.

This canvas does not change the core concepts or the language of Business Model Generation, but extends the canvas and introduces the concept of “Design for Environment” or DFE to be included in the Business Model. See figure below:

This ensures that the Business Model to be implemented will make sure to take into consideration the three concepts of DFE, which are summarized below:

• Design for environmental processing and manufacturing: This ensures that raw material [Resource extraction] (mining, drilling, etc.), processing (processing reusable materials, metal melting, etc.), manufacturing are done using materials and processes which are not dangerous to the environment or the employees working on said processes. This includes the minimization of waste and hazardous by-products, air pollution, and energy expenditure, among others.

• Design for environmental packaging: This ensures that the materials used in packaging are environmentally friendly, which can be achieved through the reuse of shipping products, elimination of unnecessary paper and packaging products, efficient use of materials and space, use of [Recycling|recycled] and/or recyclable materials.

• Design for disposal or reuse: The [End-of-life (product)|end-of-life] of a product is very important, because some products emit dangerous chemicals into the air, ground and water after they are disposed of in a landfill. Planning for the reuse or refurbishing of a product will change the types of materials that would be used, how they could later be disassembled and reused, and the environmental impacts such materials have.

I have of course included the environmental impact in the cost building block, measured nowadays with CO2e.

We see nowadays many companies focusing on sustainability and Environmental issues. Some of them have already started aligning/manufacturing their portfolio according to the Environmental requirements defined by Global initiatives like the UN Global Compact, The Climate Group, the Global e-Sustainability Initiative (GeSI).

 http://www.smart2020.org/ report

The Information Communications Technology (ICT) sector has an important role to play

in reducing environmental impact from these and other sectors. The wider deployment of communication networks and the addition of an underlying intelligence to existing infrastructure can reduce CO2e by 15% or more. ICT has been estimated to account for 2% of energy consumption and as a consequence 2% of CO2e emissions. While this figure is expected to increase over the coming years it is important not to underestimate the net benefit ICT can contribute by increasing efficiency.

Blue Ocean Strategy combined with the Business Model Canvas

I intend to publish series of article/study related to Blue Ocean Strategy in combination with the Business Model Canvas described in the book Business Model Generation by Osterwalder and Pigneur (2010). I will also try to provide examples from different industries and explain them using this interesting combination of Blue Ocean and Business Model Canvas. Before that, we need to have a good understandanding of the concepts around Blue Ocean Strategy and the Business Model Generation Canvas.

“Strategy is the determination of the basic long-term goals and objectives of an Enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler, 1962) or it is defined as “the direction and scope of an organization over a long term: which achieves advantage for the organization through its configuration of resources within a changing environment, to meet the needs of markets and to fulfill stakeholder’s expectations” (Johnson & Scholes, 1999).

This is in congruence with Michael Porter (1985) words on defining strategy as:
“How a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals”.

Blue Ocean Strategy, (Chan Kim & Mauborgne, 2005)

Different companies adopt different strategies depending upon the industry and the environment they operate in. Creating a unique value proposition and attaining a competitive advantage is the heart of any strategy.

The metaphor of Red and Blue oceans describes the market space.

Red oceans strategy is where the industry boundaries are defined and accepted, and the competitive rules of the game are known. The companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the ocean bloody.
There is a “value-cost” trade off of creating greater value to customer at a higher cost or creating reasonable value at a lower cost. This red ocean strategy involves the aligning of whole system of a firm’s activities with its strategic choice of differentiation or low cost.

Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. Many rapid and profitable opportunities for growth are available, away from the “value-cost” tradeoff. Instead of dividing up existing and often shrinking demand and benchmarking competitor, blue ocean strategy is about growing demand and breaking away from the competition.

The Strategy Canvas

The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on and invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition.



Strategy Canvas, (Chan Kim & Mauborgne, 2005)



The Four Actions Framework

The quest for “differentiation” and “low cost” at the same time is possible and can be understand through the four actions framework with 4 key “factored questions” as shown in the below diagram. In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean.

The four actions framework offers a technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered.
This diagram sheds insights to challenge industry’s strategic business model and to break the trade-off between differentiation and low cost to create a new value curve (Chan Kim & Mauborgne, 2005). 

 In today’s rapid changes in environment and customer mindsets, the firms have to revisit their strategic options and move to blue ocean strategy by creating new & uncontested market space with less competition, and innovation is one of the ways to adapt to this blue ocean strategy.



The Four Actions Framework, (Chan Kim & Mauborgne, 2005)



The Eliminate-Reduce-Raise-Create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.
 



The Four Actions Grid, (Chan Kim & Mauborgne, 2005)



Value Innovation

The corner-stone of Blue Ocean Strategy is Value Innovation. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.

Value Innovation,(Chan Kim & Mauborgne, 2005)

Check the coming posts with concrete cases from different industries.