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. 

Books Review - Seizing the white space

Book Title: Seizing the White Space, Business Model Innovation for Growth and renewal
ISBN: 1422124819 - Harvard Business Press

Author: Mark W. Johnson

Review:
The book introduces the concept of  "white space", described as the area where there is a job-to-be-done and fundamental business model change is required; in opposition to adjacent market space.

The book introduces also a "Four-Box Business Model Framework"; the Customer Value Proposition box defined as the offer of  products and services that addresses the job-to-be-done, and solves the customer problem; the Profit Formula describes how company creates value for itself and for its customer, comprising price model, cost structure, revenue streams etc; and the third and fourth boxes Key Resources and Processes that comprise the technology, the people, the skills that are needed to deliver the Customer Value Proposition.

The elements of the Four-Box Business Model Framework are:

1. Customer Value Proposition (CVP): an offering that helps customers more effectively, reliably, conveniently, or affordably solve an important problem (or satisfy a job-to-be-done) at a given price.
2. Profit Formula: the economic blueprint that defines how the company will create value for itself and its shareholders. It specifies the assets and fixed cost structure, as well as the margins and velocity required to cover them.
3. Key Resources: the unique people, technology, products, facilities, equipment, funding, and brand required to deliver the value proposition to the customer.
4. Key Processes: the means by which a company delivers the customer value proposition in a sustainable, repeatable, scalable, and manageable way.

The book presents also a number of interesting cases like HilTi, Tata, Dow Corning and Xiameter.





2009 Innosight LLC

 


2009 Innosight LLC


Mark discusses in his book how to design a new Business Model, and presents a methodology, ideas on where to start; he recommends to identify the job-to-be-done first - only this way you can be certain to sell you offer - and take it from that elaborate, iteratively, the Customer Value Proposition, the Profit Formula, the resources and processes.

Conclusion & remarks:

• It's a good book that adds up to the flourishing business literature. I liked it!
• the book is missing references to body of knowledge, for e.g. "Blue Ocean Strategy" of W. Chan Kim & Renée Mauborgne, Business Model generation of Alex Osterwalder & Pigneur

Book Review - Business Model Generation

Book Title: Business Model Generation
ISBN: 0470876417
Author: Alexander Osterwalder & Yves Pigneur

Review
The book, written by Alexander Osterwalder and Yves Pigneur, co-created by 470 practitioners, is an innovating book in its content and its design that totally contrasts with the business litterature books.
The book presents a business model framework called the Canvas, based on nine building blocks that describe the business model as a complete model with its interfaces and inteconnections with each others:

1. Customer Value Proposition
2. Sales Channels
3. Sales Relationships
4. Customer Segments
5. Revenue Streams
6. Key Resources
7. Key Activities
8. Key Partners
9. Cost Structure

The business model canvas describes the rationale of how an organization creates, delivers, and captures value. It has created a shared language for describing, visualizing, and assessing business models.

The book contains a list of popular business model patterns including concepts from popular management litterature such as Unbundling Business Models, The Long Tail, Multi-Sided Platforms, FREE as a Business Model and Open Business Models.

The book contains also an exhaustive and interesting chapter on Business model design, using concepts such as customer insights, ideation, visual thinking, prototyping, storytelling and scenarios.
An attempt is done to corellate business model design using the canvas and blue ocean strategy, taking as an example the famous blue ocean strategy example of le cirque du soleil.

Design process
A long chapter is dedicated to Business model design process, which includes a 5 step process:
(see my detailed post)

1. Mobilize
2. Understand
3. Design
4. Implement
5. Manage

Visual thinking
The book focuses also a lot on the visual thinking, the analogies to architecture (Guggenheim museum) and design, using concepts such as ideation, prototyping and storytelling. Designing a business model should be a team work and the best way to do it, is to print out the canvas on a large surface, plot it on a wall and let people jointly sketch out or use post-it notes to discuss and analyze business models.

Interesting cases
The book contains many interesting cases from companies such as Lulu.com Lego, Google, Nintendo Wii, Apple, Skype, Rega, Gillette, Procter & Gamble, and Innocentive. It uses the business model canvas to explain the rationale of each company's business model.

Conclusion
It's a very good boek. Easy to read. Visual. Useful for practitioners and novices in business model development.
The Canvas and the methodology explained are powerful, visual tools for success.

Case study: Blue Ocean Strategy - Nintendo Wii

Nintendo’s successful Wii game console is an example of a multi-sided platform business model pattern.

Let's look at how Nintendo differentiated itself from competitors Sony and Microsoft XBOX from the standpoint of Blue Ocean Strategy.

Compared to SONY Playstation and Microsoft XBOX, Nintendo pursued a fundamentally different strategy and business model with Wii. The heart of Nintendo strategy was the assumption that consoles do not necessarily require leading-edge power and performance. This was a radical stance in an industry that traditionally competed on technological performance, graphic quality, and game realism: factors valued primarily by die-hard gaming fans. Nintendo shifted its focus to providing a new form of player interaction targeted at a wider demographic than the traditional avid game audience.

With the Wii Nintendo brought to market a console that technologically underperformed rival console, but boosted the fun factor with new motion technology.Players could control the game through a controller simply through physical movement.

The Wii was an immediate success with casual gamers and outsold its rivals focused on traditional market of “hardcore”.

Nintendo new business model has the following characteristics: A shift from “hardcore” to casual gamers, which allowed the company to reduce console performance and add a new element of motion control that created more fun; elimination of state-of-the-art chip development and increased of use of off-the-shelf components; reducing cost and allowing lower console prices; elimination of console subsidies resulting in profit on each console sold.

Recently, Microsoft XBOX has released a motion controlled device, the Kinetic. The device added to the XBOX, and the game will be controlled by the gamers body...

references: businessmodelalchemist, Alex Osterwalder

What Enterprises need to know about Cloud Computing?

What is Cloud Computing?  “Cloud computing is on-demand access to virtualized IT resources that are housed outside of your own data center, shared by others, simple to use, paid for via subscription, and accessed over the Web.”

Benefits

Enterprises are turning to cloud computing for the following reasons:

• Convenience: for fast procurement of on-demand IT services available on a self service basis from a variety of networked devices. Faster time to market.
• Adaptation/Elasticity: through the ability to mix and match IT services and increase or decrease their use as required.
• Innovation: cloud computing makes it easier to try new things while taking fewer risks via a PAYG business model (utility computing).
• Simplicity: cloud computing short-circuits IT complexity by reducing significant elements of the IT stack to standardized commodity services.
• Lower costs: from economies of scale based on IT resource pooling coupled with the PAYG business model to using these resources.
• Cost transparency/awareness: the ability to understand, measure, and manage who is using which IT resources at what cost for billing, planning, and optimization purposes.
• QoS: enterprises expect public and private cloud IT resources to be more reliable, available, scalable, and secure than traditional ones.

Definitions

Private Cloud

Due to the limitations in terms of security and bandwidth, and the constraints in terms of application design and functionality of the various types of public cloud, some enterprise choose to keep their data center in their own premises and use similar cloud best practices. This means that enterprise take the capex burdon.

Public Cloud

Open Internet capabilities with data centers & services available over the internet.

Hybrid Cloud

A mix configuration of the other cloud flavors.

IaaS

Raw infrastructure, such as servers and storage, is provided from the vendor premises directly as an on-demand service: Amazon Web Services,…

PaaS

Development platforms hosted by the vendor, allowing developers to simply code and deploy without directly interacting with underlying infrastructure: Google AppEngine, Microsoft Azure, Force.com…

SaaS

Complete application systems delivered over the Internet on some form of "on-demand" billing system: Salesforce.com, Google Apps…

Strategy, how?

When Is Cloud Computing A Fit For The Enterprise?

A couple of conditions need to be met before an enterprise decides to implement cloud strategy:

• Applications & processes have highly variable demand
• Internal data center limits are being reached
• Existing hardware has reached end of service life
• Speed of provisioning is constraining business execution
• Enterprise Datacenter no longer provides competitive advantage

How to proceed? How to make a decision? There is no clear cut answer or methodology, so you have to go back to the fundamentals of Business strategy; I recommend two methods:

Mix-Marketing 7C's Compass Model of Shimizu:

and the Enterprise Analysis 7S's from McKinsey:

Case study: How to Increase Market Share with Innovative Customer Value Proposition?

How to increase my market share and create new revenue streams? This is a question that keeps many CxO awake! And I believe the answer is not simple.

Telco Market– In the very competitive Telecom Market, The operators are facing price erosion and revenue decline in their traditional voice business, due to, the emerging over-the-top players offering free of charge voice service over the Internet on one hand, and the change in consumer behavior adopting  new communications means on the other hand. This challenging market situation has pushed many operators to think about innovative solutions to address and fight this new threat.

I highlight below the successful case of Optimus, a Mobile operator in Portugal. I also include their Business Model in Alex’s Canvas format.

Company- Optimus Portugal is an operator in Portugal’s mobile marketplace. As an innovative challenger, it is compelled to think outside the box in attempting to capture new customers as it competes with incumbent market leader TMN and Vodafone.

Objective- Optimus wanted to increase both its brand attractiveness and its market share within the youth segment. The goal was to address the unique requirements of the market with an innovative offering in terms of pricing, devices and social community.

Customer Value Proposition- The solution, which the company calls TAG, bundles a consumer’s mobile and fixed Internet services on the same mobile number for a single monthly fee. The TAG concept was launched – a holistic value proposition with dedicated pricing and services, targeting the teenagers segment, see Optimus TAG.

The Value Proposition comprises Voice calls among TAG members are free of charge, and TAG users receive truly converged communications. Everything the TAG subscriber can do on the mobile is accessible via the PC: voice calls, SMS, MMS, video calls, instant messenger, voice mail with the same look and feel and the same user experience. At the same time Optimus builds up a new TAG community, in fact a new Social Network, within the offering. This allows Optimus to move in the value chain and compete with the emerging Over-The-Top players (see Figure 1).

Figure 1

Customer Segment- Teen, Youth and early adopters market segment.

Sales Channels- Optimus has been using a “guerilla marketing” campaign to attract this customer segments. The service was sold on the Internet, in Kiosks, in Disco’s, Cafes, and close to schools and university sites.

The Business Model Canvas looks as follows:

Optimus TAG - Business Model Canvas

Result- A year and a half after launch, Optimus was able to completely change the game in the Portuguese market. It developed converged fixed-mobile voice/messaging/social experience targeted directly at the teen market. The innovative combination of services and rate plan made the difference.

The TAG results have exceeded all Optimus’ internal expectations:

• 60 percent of all registered users access the service daily.
• Increased Network Utilization
• Increased number of subscriptions and customers
• Creation of a new community owned by Optimus
• And a new way of communicating on the mobile network: PC-based Communication.

Optimus success in the teen market has led to a decision to roll out similar services for its entire user community, including enterprise customers.

References:

Optimus TAG website

http://www.ericsson.com/