Disruptive Innovation, Innovative Culture, Job-To-Be-Done, Profit Formula, Emergent Strategy, Good/Bad money, Innovation Tournament
How to build a disruptive and innovative mentality in your daily job?
My takeaways from Clayton M. Christensen’s Disruptive innovation course and some other related constructs and models.
Introduction
As both practitioner and a marketplace enthusiastic, I always question what “Disruption” means and how and why some small entrants and newcomers outperform and outlive other established and incumbent companies with more extensive financial resources and market share. Though this is not an easy and question to answer, and there are many different theories and constructs out there to explain this, to get more insights, I took late Clayton M. Christensen’s HBS Disruptive Innovative course in the Winter of 2020. Christensen is regarded as one of the world’s top experts on innovation and growth who coined the popular term “Disruptive Innovation” in 1995. He is also the author of The Innovator’s Dilemma, considered one of the most influential business books of the last 20 years.
That being said, I believe the learnings and theories introduced in this course could help young entrepreneurs to understand disruptive innovation better and think of new initiatives and ideas from a disruptive lens. This perspective can empower some of us as daily problem solvers to better discover the customer needs and build more innovative organizations where ideas and innovation can continue to travel in all directions rather than top-down.
Thus, my objective for this essay is to introduce a few disruptive-related frameworks and mental models from Clayton M. Christensen and connect them to other related theories from some like-minded innovation leaders. I hope this essay will provide a good framework and lens to evaluate new ideas from the disruption perspective and help motivated and curious people to build the next generation of disruptive and impactful business models.
Section 1: How/when do disruptive innovation and business model disruption happen?
Clayton Christensen believes innovation can happen everywhere, but to have disruptive innovation, we should offer new products/services which are less sophisticated and lower-priced while more accessible and affordable to a larger population. This could disrupt the current and well-known incumbents as they might decide to flee the low-margin market to pursue higher-margin opportunities and protect their profitability. As a result, this oversight can create motivation and space for new companies to gradually move up in the market and eventually target the most profitable market segment, thereby threatening the existing leaders.
There are three main types of innovation: Sustaining innovation, low-end disruptive innovation, and new market disruptive innovation, among which only the last two are considered to be disruptive from Christensen’s definition. In all three types of inventions, the causal mechanism in driving innovations is pursuing a higher profit margin between incumbents and entrants.
- Sustaining innovation mostly improves (e.g., increasing quality and functionality) to existing offerings to increase profit margins. In other words, the incumbents and established companies would constantly innovate incrementally. Their focus is primarily on the high-end and most profitable market segment rather than the low-end market where the profit margin is not appealing. Since the incumbents usually have better resources and processes to support their core businesses, it would be challenging for entrants to win against incumbents by improving the quality of existing products; hence incumbents are typically the winner of the sustaining innovation battlefield.
- In the case of Low-End Disruptive Innovation, on the other hand, an entrant with fewer resources begins at the low-end market by offering a good enough product at a lower price to attract the market segment that is over-served with the existing solutions. As the incumbents now face competition in the lower end of the market, the incumbents’ natural reaction is to leave the lower end of the market and focus on more premium markets to protect their profit formula. As mainstream/high-end customers eventually begin to buy new products (which gradually improves performance) in volume, the disruption will be fulfilled.
The most important factor to drive low-end disruptive innovation is the ability of the entrant to offer a good-enough product by utilizing the lower-cost business model. [Clayton Christensen]
- Finally, the third type of innovation is the New Market Disruptive Innovation. This type of disruption creates a new market out of the non-consumption segment. This type of disruptive innovation occurs by targeting the non-consumption who did not historically have the ability/access or desire to use the existing higher-price solutions. The key to fit the definition of new market disruptive innovation is that the new company should make profits by offering low-priced new products or services. The new offering usually at first underperforms the existing solutions via traditional attributes, however by redefining the performance and introducing new attributes (e.g., more convenience or simplicity), the new solution will become now more appealing to a new customer segment ( who are not attractive enough for the incumbents to pursue).
The final note here is that the theory of Disruptive Innovation emphasizes that technological advancement does not necessarily lead to disruptive innovation. Instead, disruptive innovation depends on how new firms and business models enter the market relative to the existing dominant and standard business models. The other interesting learning from the theory is that companies cannot disrupt themselves, and historically the incumbents who succeeded in not being disrupted but maintaining/growing their market share are the ones that managed to create a separate business unit with different profit formulas than their core business to explore emerging opportunities and innovate freely.
Section 2: Theory of Job-To-Be-Done (JTBD)
According to the Job-to-be-done theory or JTBD (another theory and framework coined by Clayton Christensen), a “job” is the problem a person is trying to solve. Hence, customers don’t buy products. They, in fact, “hire” them to get the job done. One of the most important takeaways of the theory and understanding why a customer hires a product is to unlock a causality link between customer and product rather than the correlation.
One good example to differentiate between causality and correlation is “theme park Market.” Through the Correlation, families with small children are the main target segment for this market. However, from the job-to-be-done perspective, customers hire theme parks to “escape from reality into a story-telling experience with their family.” If the theme parks can then market themselves as a product to get this job done, they could differentiate themselves from the competition and avoid being disrupted.
Companies and products come and go, but jobs can persist over time. [Clayton Christensen]
A Job-to-be-Done is stable over time. A Job-to-be-Done is solution agnostic. Success comes from making the job the unit of analysis, rather than the product or the customer. [Anthony W. Ulwick]
Many companies fail to discover the job of their products and integrate them. Instead, they spend a lot of market research money to find the buyer personas (e.g., age, gender, income), which are only correlated with shopping behavior but not causing them. There are some steps for discovering the jobs. The pyramid in Chart 2 summarizes that.
Though job-to-be-done theory seems straightforward and intuitive, it’s often not considered when positioning a product or service in the market. Taking Christensen’s JTBD mental model for market development and the recipe for successful innovation, Anthony W. Ulwick, and Perrin Hamilton developed the Job-do-be-Done Growth Strategy Matrix, which fills in the holes in disruptive innovation theory by examining them through a Jobs-to-be-done lens.
The Job-do-be-Done Growth Strategy Matrix suggests that companies can create products and services that are (1)better and more expensive, (2)better and less expensive, (3)worse and less expensive, (4)worse and more expensive. Chart 3 recaps five strategies Jobs-To-Be-Done Growth Strategy Matrix identified to capture all the above four situations (four quadrants in Chart 3) a company can face in the market to fulfill unmet customer needs or jobs.
Job-do-be-Done Growth Strategy Matrix also confirms that Clayton Christensen’s Disruptive innovation would happen where companies can win in overserved or non-consumption segments with the product that can get the job done more cheaply, but not as good as the competing solutions.
In the case of overserved customer segments, as Christensen’s theories explain, the customers are willing to make some sacrifices to get the jobs done more cheaply to address their unmet needs. For non-consumption segments, on the other hand, the customers who could not previously afford any solutions in the market can now hire cheap and good-enough alternatives, which are better than no solution.
Chart 4 demonstrates the process of disruptive innovation graphically by introducing a series of products at different times. At first, a product or service taps into the market from the bottom by employing the disruptive strategy that gets the job done worse but more cheaply. Then, newly introduced products or services (e.g., product V1-V3 in Chart 4) can gradually move up the market until the new offerings with more/better features dominate the market and eventually get the jobs done better and cheaper.
Section 3: How to set up organizations for innovation
To embrace innovation and business model disruption, every organization should have the capability to support that. Three primary constructs that determine what an organization can do or not are 1) Resources, 2) Processes 3) Profit formula.
Many established companies with all resources and complex processes fail to capture the disruption because the wrong resources, processes, and profit formulas have been used. For instance, to successfully launch a new market/low-end disruptive innovation initiative within a big organization, a separate business unit should be set up with different resource allocation and profit formulas. Otherwise, the opportunities look very small compared to the core business of the organization. As a result, the innovation won’t get enough dedicated processes and resources to succeed, and it is destined to fail from the very beginning. This is something which Clayton Christensen referred to as “Asymmetric Motivation.”
Asymmetry of motivation happens when one company is motivated to do something that another company specifically does not want to do or when the strength of one company is another company’s weakness. [Clayton Christensen]
Often when a large company gets disrupted, this is not because they are in the dark or not aware of the emerging innovation sprouting around them. Large companies are busy focusing on improving existing and core products and allocating resources to support sustaining innovation or improving efficiencies. The established companies are often motivated to make more money off their core competencies by continuously offering higher-end and premium products to the most profitable segment of the market. As a result, small opportunities in the low-end market are not considered attractive enough and not prioritized by the existing resource allocation and profit formulas.
On the other hand, small and unattractive opportunities for established companies will appeal to new entrants that are more flexible and in more exploration mode to find profitable business models that fit the new product and disruptive opportunities.
The biggest takeaway here is that to make organizations ready for innovation and pave up the ground to become disruptors rather than being disrupted, managers of established companies should anticipate the resources, processes, and profit formula needed to go after the market and products which might be inherently different than core products. In other words, there might be a need to create separate business units with different processes, resource allocation, and business models, at least in short to mid-term. Last but not least, the innovation flow and idea generation should travel both bottom-up and top-down to make medium-level managers motivated to bring up new ideas to the leadership and not afraid of getting shut down right off the bat.
Section 4: Managing the strategy development process and how to embrace an innovation culture
There are two types of strategy development processes in any organization: Deliberate and Emergent strategies.
- A deliberate strategy is often used by established and matured companies that have already figured out the winning business models and profit formula through market expansion, customer needs, competitive strengths, and technology dominance. Deliberate strategy (also known as a five- or ten-year strategic plan) is determined by leadership and implemented top-down across the organization and only works effectively when everybody understands what the organization is trying to accomplish.
- An emergent strategy, on the other hand, is unplanned actions when the future is not certain. This could arise from day-to-day innovation decisions, opportunity sizing, and prioritizing them from individual contributors such as middle managers, engineers, financial staff, or salespeople at the early phase of the product life cycle and market creation.
Timings are different for using emergent strategy over deliberate strategy and vice versa. There are three main phases of business growth, and each phase requires a different kind of strategy development process.
- Market-creating Phase: When a profitable strategy is unknown, an emergent strategy needs to be utilized to allow the right ideas to be explored and discovered. Many startups searching for a profitable business model and product-market fit would embrace emergent strategies to rapidly test and pivot during uncertain times in their earliest stages.
Companies must ensure that all employees are empowered to surface and elevate new ideas from the bottom-up to the table for emergent strategies to succeed as they seek new opportunities to grow.
When you’re managing the process of emergent strategy, you’re not telling everybody that they have this piece or that piece. [Clayton Christensen]
- Sustaining Phase: Once a profitable strategy is clear, it must turn into a deliberate strategy. The key to success here is executing and following the already successful playbook to grow and scale.
- Efficiency Phase: The core business must be allowed to thrive through a deliberate strategy while new waves of future business models and disruptive growth should be continuously explored through an emergent strategy. This is the phase that many big companies fail at and lose their sights due to not having enough expertise and skills among the leadership the take on exploration and reinventing the future. As a result, they fall behind the competition by not pursuing new disruptive innovation ideas or breakthrough business models- which is often not supported by the existing profit formula (see Section 3).
In a similar vein, Alexander Osterwalder (the creator of Business Model Canvas) in “the Invicinble Company discussed that every company of any size would fall somewhere at a different point in time in the explore-exploit business model continuum. When a company is in the exploration mode, it searches for many ideas and business models to find breakthrough innovation in a non-linear fashion. This necessitates iterative experimentation speed, failure, learning, and quick adaptation until they have enough evidence that a newly found business model works.
The risk of exploration is that a new business model might fail. The innovation risk decreases when companies find more evidence of product/service’s desirability, feasibility, and viability. All startups begin with exploration mode. They can now transfer to the exploitation phase after finding the product/market fit and lowering the innovation risk. Exploitation is all about execution, managing the processes, scale, growth, and expansion.
Exploration and exploitation are two radically different professions that require a different skill set and different experience. [Invincible Company book]
When operating in the exploitation model, most companies would stick to the core business model and improve efficiency by creating new processes and making linear changes. The biggest risk here is that most companies that stay too long in the exploitation phase can get disrupted by new business models/technology that enters into the market from different or adjacent markets (similar to the situations explained by Christensen’s Disruptive Innovation theory).
Section 5: “bad money” vs. “good money”
Another interesting and insightful mental model introduced by Clayton Christensen is the “bad money ”and ”good money” notion. The idea is that the venture capital and different types of investors' funding a new initiative can greatly influence its success and failure. In order words, every company at the beginning and before finding a winning and deliberate strategy battles between allocating the resources between “growth” and “business viability” (or improving the unit economics).
The “good money” demands entrepreneurs to first search for a viable and feasible business model rather than scaling and stealing market share without a proper path to profitability. The good money in the early stage of the company is patient to allow the company to find a profitable strategy, and once the winning strategy is discovered would push for growth and scaling.
The “bad money,” on the other hand, goes in the opposite direction and focuses primarily on the growth and market expansion without prioritizing to find a feasible and sustainable unit Economics first. Often, the new ventures which become the victim of bad money fall into the trap of “winner-takes-all” or network effect narrative, which might not necessarily apply to that space or provide enough defensibility and competitive edge.
Prioritizing the growth over unit economics makes sense if and only if a company operates in a space with a very strong network effect, strong economics of salce, or very clear first-mover advantage. [Adora Cheung, co-founder of Homejoy]
Silicon Valley is full of many examples of companies that took “bad money” early on and turned it into failure. One of the many prominent examples is the company called HomeJoy. Homejoy was an online home-cleaning startup with an explosive expansion and market penetration in the early years. Homejoy was one of the first movers of cleaner’s “gig economy,” which used logistics algorithms to connect homeowners with cleaners and raised some $40 million from Google Ventures and PayPal co-founder. The company was eventually out of cash and shut down after 2 years. One of the biggest reasons for failure was that company focusing primarily on market expansion so early and acquiring customers so fast without figuring out the problem with churn and marketplace leakage. As a result, to retain customers and rather than understand the user repeat behavior, Homejoy offered many promotions and free services at the cost of losing money and making unit economics so far away from profitability and viability.
The third-party food delivery landscape could be another anecdote of bad money. Over the years, billions of dollars of venture capital have been injected into this space in the past few years (only $19.8 Billion in 2019, according to Pymnts) from some well-known global private equity firms (e.g., SoftBank, Andreessen Horowitz). Bad money wanted Food delivery companies to grow so fast even at the lost Unit Economics to gain the market share because the common belief is that in the network affect businesses the winner would eventually take all market.
With the support of bad money at their core, companies like Doordash and UberEat secured the big market share over the years (as of June 2021, Doordash 56%, Ubereats 23%, Grubhub 16% of total US food delivery, according to Secondmeasure) while at the same time accumulating huge losses. However, since they were able to show significant growth to investors, they could quickly raise another round of money or become even eventually public company to fuel the expansion further and still postpone the profitability.
It was not until very recently and with the start of the Covid-19 pandemic that these companies began exploring some other sources of revenue and emergent business models from adjacent markets to improve their profitability path. Initiatives such as Ghost kitchen and delivery-only food manufacturing line as well as penetration into other delivery verticals such as grocery, alcohol, or medicine with the better unit economics have received a lot of attention from these big third-party food delivery apps either via acquisition, partnership with national brands or internal big investment.
Final note
To support innovation and get ahead of some low-end or new-market disruptive innovation in any industry, we need to build the capability and processes to generate new ideas and emergent strategies from the bottom-up. In other words, we need to develop the culture and program to fuel an idea generation factory effectively in such a rewarding fashion every employee is motivated and feels the ownership to participate.
One initiative and program that can nurture the innovation seed across a company is “innovation tournaments,” Employees and teams can contribute by submitting their ideas and discoveries into an idea pool. The middle management team plays a very instrumental role (see Chart 6) since they are the primary gatekeepers to pick and nominate the eligible ideas based on transparent criteria and pass them to the senior managers. An innovation tournament can be beneficial in two ways: 1) find the winning emergent strategies at scale, which might become the next big deliberate strategies for any company operating in a competitive landscape 2) give motivated and innovative employees a platform to connect with senior management and get more visibility across the organization.