This is one of the biggest challenges for any established organization. Clayton Christensen studied this in-depth in his book, “The Innovator’s Dilemma”. What he found was that if new technology improved an existing offering the established firms would win. They would see it and it would fit into their existing way of doing business, they didn’t need to change. But if the new technology created a disruptive offering the established firms almost never won. The main reason the established firms failed to make the change was; “…in the case of well-managed firms… good management was the most powerful reason they failed to stay atop their industries". What Christensen means by “good management” is the management process we have in place today. The same ones that create vertical functional silos, avoiding risks and slow decision making. This is explained further by the Alignment Diagram.
Organizations start of life providing a product that meets customer’s functional requirement. For example, a telephone company provides the ability for us to call people from our home directly into their home. Pricing models are developed based on this function, cents per minute or per call. Phones change and become mobile and the pricing model follows, cents per minute. Along comes a new disruptive functional solution which uses “Over The Top” apps such as Skype and suddenly the pricing model doesn’t work, it has been disrupted. The telephone company now has a problem because its organization is built around the existing pricing model. This includes its financial systems; General Ledgers, Billing Platforms, Product Management, Sales Channel as well as large capital investments. The “good management” decision now is to potentially write down their assets, reduce their revenues (as least in the short term) and restructure their go to market channels. These are big decisions and because the revenue from the existing products is still coming in these big decisions are typically put off until it is too late.
Think about Kodak and the digital camera. Kodak had to give up its photographic film revenues, including writing down plant and equipment to embrace the digital camera age. This was even before we had heard of smart phones or Instagram, Facebook and YouTube. It had to find new product offerings to replace its existing revenue. As history tells us it couldn’t make this change.
The way to avoid being disrupted starts with knowing what business you are in and being able to make decisions based on that mission. Telephone companies are in the “Making Connections” business; people to people, machines to machines, etc. The new functions that have been missed by the telephone companies include, Skype, Whatsapp, Linkedin, FaceTime, Twitter and more. Kodak’s marketing statement was to “share moments, share life” but missed iCloud Photo streaming, Instagram, Digital Picture Frames, Holiday Book / Personalized Calendar printing, you might even put Facebook in here as that’s where we “share moments, share life”.
Christensen explains that the lifecycle of product offerings is: Function, Reliability, Convenience, Price. The successful disruptive startups find the new function that meets the needs of the customers, usually not being serviced by the current suppliers, and executes at right angles to the established firms’ structures, process and pricing models. It is disruptive because established firms cannot make these changes the way they are setup today.
A great test to determine if a startup is disruptive or not is to look at the competing business model, i.e. cents per minute or call. If it is the same as the established firms, then history tells us the startup will fail.