“It is rare that a technology or product is inherently sustaining or disruptive. And when new technology is developed, disruption theory does not dictate what managers should do. Instead it helps them make a strategic choice between taking a sustaining path and taking a disruptive one”.
Clayton, Christensen, HBR December 2015
As Christensen points out having great innovative technology is not enough. We need to think through how we go to market. If we go to market with a “sustaining” approach the research shows that the chances of us being successful are only 6%. Therefore, we have to make sure we have a business model, commercial model and go to market plan which is disruptive.
There it is, the “D” word.
There is currently a lot of discussion about disruption. It is the trending buzz word used by consultants, journalists and even politicians. Christensen’s article in HBR December 2015, was an attempt at arresting back the theory of disruptive innovation which he first wrote about in his book The Innovator’s Dilemma.
But as Christensen writes it isn't that easy to implement a disruptive strategy;
‘Disruption theory does not, and never will, explain everything about innovation specifically or business success generally. Far too many other forces are in play, each of which will reward further study. Integrating them all into a comprehensive theory of business success is an ambitious goal, one we are unlikely to attain anytime soon.”
Clayton, Christensen, HBR December 2015
It is therefore with a little trepidation that we admit at signalroad, the consulting practice behind FAQs for Orgs, our BHAG is to do what Christensen says we are “unlikely to attain anytime soon”. That is, to integrate all the forces at play into a comprehensive theory of business success! We call this comprehensive theory the Integral Organization Model.
In the FAQ, What is a Perfect Organization?, we describe the internal workings of an organization and why it is necessary to use the right hand side approach within the four internal sections. In reality we find that the majority of organizations use the left hand side approach and we know it is very, very hard to change without all the pieces in place.
This creates the opportunity for a disruptive strategy.
Below is the systems diagram of the Integral Organization Model and assuming we are closing in on our BHAG let’s use it to explain how a Start Up can create a disruptive strategy instead of a sustaining one.
Customer Outcomes; Value Propositions and Commercial Models
The first requirement is to understand what outcome we are delivering that creates customer value, represented by the horizontal lines of the The Alignment Diagram, in the Nested Mission Statement’s section.
If a Start Up is technology based too often we talk about the technology and not what the technology enables. That is, the value we are enabling in our value proposition. It is not how fast, flexible or low cost our technology is, it is what outcome does it deliver for the customer.
We have seen technologies flounder only to explode once someone works out what to do with them. For example, take a low tack, pressure sensitive glue, riveting right? Well put it on yellow square paper and sell it as a reminder note and you get Post-It notes. Or Steve Jobs at P.A.R.C. Research Labs looking at a strange interface device which we now know as a computer mouse.
Cordis is a great example of focusing on outcomes. Using customer surveys, they ranked customer outcomes and gaps in the market.
“Cordis identified several new product opportunity areas. The outcomes that customers deemed most important and were least satisfied with—such as “minimize the recurrence of a blockage”—represented the greatest opportunity areas.”
Turn Customer Input into Innovation, Anthony Ulwick, HBR Jan 2002
The end result was, “The company went on to develop the stent, which became the fastest-growing product in medical device history, producing nearly $1 billion in revenue in its first year”.
Just as we align our offering to the customer outcomes, our value proposition, we also must align our commercial model. That is our pricing metric needs to be based on $/Outcome. Apple did this with iTunes, instead of buying the whole physical album, we could now just buy the individual songs we wanted, 99 cents per Song. Building on this was Rhapsody and Spotify and allowed us to listen to ALL songs, $12 per month for all songs. Apple have since responded with Apple Music.
How did the physical record stores adapt to this new commercial model? The short answer, not very well. They were disrupted.
The rise of Software as a Service (SaaS) is another great example of aligning the commercial model to customer value. Most SaaS provider licenses are, per user, per month. Customers can increase or decrease the number of users as their business demands. This is disruptive to the traditional software licensing models and hardware sales who want us to pay upfront for all the software, for all the users.
SaaS started out as Application Service Provider (ASP). The ASP model was not disruptive. Its commercial model was effectively a payment stream, over a fixed term, of the same costs as if we were running it yourself.
Along comes SalesForce, with a slogan of “no software”, and uses the SaaS commercial model to disrupt the established CRM competitors like Siebel.
Organizational Structure, Business Models
The majority of organizations are structured based on vertical functional silos. This makes them brittle, fragile, unable to change without breaking. This creates fertile ground for disruption but potentially can be a big black hole for go-to-market partnering models if we get it wrong.
The silver bullet to causing disruption to the established players is to make our offering and go-to-market approach cut across the vertical functional silos of the incumbents. This paralyzes the organization because they just can’t operate aligned to Horizontal Flow. To do so means that departments would have to work together and make compromises. There would be short-term winners and losers which leads to turf wars and budget battles.
Starting in the 90’s and continuing today, a growth area for the telecom providers is the mobile phone market. As we know Nokia and Motorola each had large market share of mobile phones. But it was the telecom companies that decided which devices were put into the market, they controlled the go-to-market model. The telecom company’s vertical product structure, and therefore their commercial model, was based on voice call minutes, wireless data megabytes and SMS messages.
Nokia and Motorola listened to their major partners, the telecoms, and designed mobile phones based on their needs and not the customers. We saw standards created like Wireless Application Protocol, WAP, which quickly became known as “Waiting And Paying”. Which was great for the telecoms, but not for the customer. Nokia and Motorola were being sucked into the telecommunication company’s big black hole.
Apple flipped the go-to-market strategy, designed a phone for the customer and then let the telecoms bid for the right to sell this new smart device, on Apple’s terms.
Customers bought the device that was designed for them and not the telecom companies. Nokia and Motorola were disrupted. But now it has become the telecom’s turn.
Today’s smart devices, should no longer be called phones. They are a Mobile App Platforms where it just so happens that one of the apps on the device is a “person-to-person” communication app, what we used to call a “phone”. But that isn’t the only “person-to-person” app available, there is Skype, WhatsApp, SnapChat, Messenger, FaceTime and more.
We call these app providers the Over-The-Top players and they are disrupting the telecom companies whose commercial models are still based on, voice call minutes, wireless data megabytes and SMS messages.
To compete the telecoms are creating more and more complicated pricing plans which no one, not even their contact center agents, can understand. Their internal organization structure, billing systems, accounting and reporting systems cannot be changed to meet the new reality and this is their Achilles heel.
Chris Anderson in his book, The Long Tail, found the same fragility existed in the music industry. The go-to-market model of music retailers was physical stores with a fixed amount of shelf space. Therefore, there was a fixed number of CDs they could stock and each CD had to earn its place in the store. This meant that they would carry the CDs that were the most popular, that everyone wanted to buy.
What Anderson found when he talked with the online music retailers was that 98% of the thousands, or millions of songs available were bought or listened to at least once a year. This represented a huge market, as long as you didn’t have fixed shelf space. Digital storage “un-fixed” the shelf space problem, with further disruption coming from the negligible cost of delivery, the Internet, which the telecoms help provide.
But what if the incumbent players are our best way to go-to-market? How can we play with them and disrupt them at the same time?
We don’t all have the market clout of Apple, therefore we need to use the leverage points the fragile organization structures offer.
First of all, don't expect the established organizations to change their processes, measurements or how they go to market. We need to tailor our offering to line up with how they operate, this includes how their sales people sell and their product people are measured. Remember we have to do this without turning our offering into sustaining innovation by cutting across the incumbent's departments.
An example of this in when we see over-the-top apps, like Facebook, being bundled into telecom wireless data plans with un-metered usage. Telecoms like this because it adds value to their mobile data plans even though Facebook’s messenger app cannibalizes revenue from SMS messages. (Pssss, don’t tell that department, they haven’t found out yet.)
The other opportunity is that established firms struggle to make decisions, especially if it requires spending money not already assigned in a budget or part of a project. This is true even when everyone agrees that they should do it. In this case we build a white labelled solution for our partners to brand and sell. By doing this we are breaking the decision making constraints of the established organizations.
Care needs to be taken to not let the larger partner contort the offering away from customer outcomes and pricing by value. They will try to do this to align to their internal world, forgetting that this is why they couldn’t do it in the first place. Because we are taking the risk on making the investment we also need to keep control on how it is offered. The good news is that established organizations often give up control willingly without realizing it. They will hand over the running of the offering to us because their systems and/or other departments prevent them from being able to do it.
By the way the change here is that we are taking on operational risk, instead of financial risk. If we manage the operational risk correctly, there is no financial risk. It is the difference between an ASP offering and a SaaS offering. For our SaaS pricing metric to be profitable we need to make sure we can operate effectively and efficiently. This is a big topic in its own right which we will cover in the future.
Operation Models and Processes
As Christensen points out when he studied the disk drive business, if the Start Up’s offerings manifested themselves as sustaining innovation they only succeeded 6% of the time. These are not good odds to present to a potential investor.
What Christensen means by sustaining innovation is that it improves the current approach of the incumbents and fits in with their operating model, processes and organizational structures. In other words, we are playing to the strengths of the organizations we want to disrupt.
In the previous section we discussed how organizations are brittle, fragile and cannot adapt. Adding to this are their processes, which are hierarchically rules based, aligning to the vertical functional silos and ensures that their organization remains fossilized. Trying to get approval outside of the standard rules is a nightmare.
This is why our commercial and go-to-market models need to be aligned to the customer outcomes with our processes supporting these models. This alignment is based on Horizontal Flow which disrupts the workings of the vertical functional silos. The incumbents respond by bundling their existing products into complicated offerings. This bundling requires trade offs between different departments. If you ever want to witness turf wars and internal politics in action just attend an inter-department “revenue sharing” meeting.
Sometimes sustaining innovation is hard to change into disruptive innovation. This is where we may need the help of patents. When Cordis invented the stent it disrupted the angioplasty industry because it dramatically reduced the rate of restenosis, the repeated narrowing of the artery. But this was sustaining to the industry as it was exactly what they were trying to achieve. Therefore, by patenting their invention they were able to protect their value. Cordis was later acquired for five times their pre-stent valuation.
Instead of hierarchical rules based processes we need to use systems thinking and heuristics (goals with feedback loops) to remain flexible with the market changes. That great idea we had to deliver a better customer outcome may miss the mark at first, we need the flexibility to adapt.
Netflix as we know started out mailing CDs to homes. While this provided lower cost CD rentals their real disruption came when they went online, globally. If they were fixated on the process of “mailing”, instead of delivering entertainment the way the customers want to receive it, they may have missed this change. Netflix may have started sending out memory sticks as they are smaller, who knows.
Instead they followed their mission statement, changed how they delivered content, thanks to the Internet Service Providers, (including our friends the telecoms) and created a commercial model to suit;
Netflix: “Members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.”
No adverts, no commitments, watch when you want and where you want, is disruptive to cable operators and television companies, which Netflix describe as providing linear TV.
Start Up Leadership and ongoing success
As described in What is a Perfect Organization?, using Simon Sinek’s terms of WHAT and WHY, a start up’s WHAT (what it produces) aligns to its WHY (purpose, reason to exist, mission). It is filling a gap in the market which addresses an outcome customers value. As Sinek points out this alignment is often missing in the incumbents, where their WHY gets confused with making money, shareholder returns, etc.
Given the WHAT and WHY alignment (customer outcomes), and the fact that Start Ups are usually small organizations the leadership we find in successful start ups can be “Power”, “One True Way” or “My Way” based. We have our heads down, working 24 by 7 to become successful. As long as we are following the disruptive principles outlined here then chances are we will be successful.
The problems occur when we try to scale. Now we need go-to-market partners, a larger number of people, outside investors whose WHY is about money, and some large demanding customers who want continuous “tweaks” taking us away from our main offering. (By the way, this is why Geoffrey Moore says in his book “Inside the Tornado” that when our offering is exploding the best strategy is to ignore specific customer demands.)
Often the advice is we need to “grow-up”. To start putting in the very systems and structures that we are disrupting. The outside investors want to bring in a seasoned executive. Before we know it we are copying the organizational world we escaped from.
In summary
To be a successful Start Up we need to go to market in a disruptive way and not sustaining to the incumbents. To be disruptive we need to have the following;
- A good idea or technology that delivers an outcome customers value.
- Messaging that is about the outcome and not the technology, this is our value proposition.
- An offering that is impossible to replicate by the incumbent’s current organization structure, business models and internal processes. They will have to change to compete and that is very hard for them to do.
- A commercial model that is aligned to customer’s value and the pricing metric is based on the value it delivers, $/outcome.
- A partnering model that removes the incumbent’s constraints but keeps us in control of the delivery and structure (value proposition, commercial model, pricing metric) of the offering
- Patents if possible, especially if the technology is sustaining.
- Not to repeat the sins of the incumbents as we grow. Scale through following the findings in the Integral Organization Model.
Good luck!