Disrupt This

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Disruption Report Card: Flip Video Scores High

A lively discussion about the Flip Video camera is happening at The Anti-Marketer. My friend, Sean Howard, began it by guest authoring a post where he described qualitatively why he believes the Flip is probably a disruptive innovation. Although Sean and I aren't in complete agreement about the subjective criteria he uses, we do agree that the Flip is a cool device and I thought it worth running a Disruption Report Card™ to get an objective grade to add to the convo.

read more . . .

Disruption: Needed Now More Than Ever

It may seem odd in a period when the stock markets are gyrating wildly and people are running scared, panicking about their 401(k)s, possibility of losing their job, companies failing, the banking system apparently on the brink, to want to talk about innovation and disruption of a different kind. However, I think this is exactly when disruptive innovation is most important.

Yes, a lot of people are going to be hurt by the current financial crisis. Yes, we're all going to be paying for the misdeeds of government bureaucrats, corrupt executives, negligent overseers, and tens of thousands of individuals who bought homes they couldn't afford and leveraged them beyond their value (even before the calamitous drop began), all on the belief that what goes up always goes up. The pain is going to last a long time as we rebuild confidence and fundamental value in institutions and systems that once seemed unshakeable and now seems unsalvageable.

The True Engine of Value and Growth

Credit and equity markets need to start functioning again, but make no mistake, they are not the engine of growth, and they will never pull us out of a crisis. The best they can do is stabilize, and restart the smooth flow of capital -- important and necessary, but not wealth building.

The only way out of this mess in the long term is through innovation, because innovation creates growth, creates new jobs, and builds competitive advantage and wealth where it didn't exist before. So, now more than ever, it's important to examine innovators, the nature of their innovations, the sustainability of their businesses and who is most likely to help us rebuild the foundations of our shattered economy.

To Disrupt, or Not to Disrupt, That is the Question

But the nature of the innovation is itself important. Disruptive Innovation matters because it is more about inherent value than about roller coaster rides, because disruption creates real growth, and that is the truest source of value for investing. Disruption doesn't depend on demographic trends, artificial supply shortages, arbitrage, political interventions and subsidies, technical trends, unemployment figures or even weather patterns. With the exception of demographics, which are fairly consistent and predictable, investing based on any of these other things is really just gambling by another name, and after the nonsense in the mortgage markets which has caused the crash we are now experiencing, you'd think most rational investors would have had enough of that.

So, I'm going to continue on with my plan for this blog to keep focused on disruptive innovation, the value it creates, and the business strategies that enable it. The next series of articles was always intended to examine, evaluate and score disruptors using my Disruption Report Card.

Since this financial crisis has us mostly concerned with American innovation and fixing our own economy first (hard to worry about anyone else's when yours is badly broken), I will skip over those companies that are only sold on foreign exchanges -- i.e. I'll only be discussing companies on either the NYSE or NASDAQ.

I will also note that, for the record, and at the risk of overstating the obvious, these are extraordinary times. We don't know if the worst is yet to come, or if it has already passed. In ordinary times, we wouldn't worry about disruptive innovators like Google (OK, I spoiled at least one surprise) losing 40% of their value in a few weeks or months. That the most important company of the internet age has dropped to a P/E ratio that would qualify it as merely a little above ordinary in ordinary times is an indicator that no matter what the future performance and innovation strengths of these companies, virtually all are vulnerable to dropping further, and virtually all will eventually rebound after reaching bottom and show above average growth in valuation for a while.

Disruptive Confusion

A pet peeve of mine is how many people misuse the term Disruptive Innovation. Many of those who do seem not to have read Christensen's books or if they did, had no idea about the significance of the theory and its application to business (i.e. why the definition matters). Or maybe they skimmed and didn't get what the idea was about because of preconceived notions about innovation. Maybe they heard a friend who is usually in the know describe something as disruptive, or they were in a meeting where a product manager proclaimed their product disruptive. Or they read some bad review of the Innovator's Dilemma.

Whatever the issue, they don't get it, and dilute the meaning with their misapplication of the term. Some think all innovation is disruptive by definition (a truly simplistic and moronic viewpoint). Some believe it has to be breakthrough to be disruptive. Some think it only applies to technology. Some use it as a marketing adjective to imply that their product is "better" or "more advanced". Others believe that "disruptive innovation" is a buzz phrase without meaning. Others just think all innovation is over-rated.

All are wrong.

First Principles

When I encounter confusion like this, I find it useful to return to first principles. Without regard to Christensen's theories (we'll consider that in a minute), what do the words mean?

Innovation:  something novel; an invention; any improvement to an existing process, good, or service; the act of introducing something new

The thesaurus lists several alternatives including: change, departure, invention, introduction, or novelty (no, they aren't precise definitions, but the sum of synonyms usually captures the general meaning). There is nothing in any of this that implies an invention will disrupt markets or other products. In fact, there is nothing in the definition of innovation that implies any market success, or that the innovation is even useful. Innovation doesn't have to be breakthrough or significant -- it can be very minor. It could just be a different means of manufacture or distribution, and nothing to do with the product at all. Many innovations never even make it to market, so how could they disrupt anything?

Disruptive: characterized by unrest or disorder or insubordination; causing disruption or unrest

and Disruption means: the act of breaking regular flow or continuity of something; disturbance; a disorderly outburst or tumult; dislocation, especially an event resulting in dislocation or discontinuity

Clearly to be disruptive, something has to disrupt. So, let's combine the words and discern what they mean together.  Certainly a disruptive innovation should minimally cause a market disturbance. Or market disorder or discontinuity in the success and growth of market incumbents. One would expect a disruptive innovation to be something new that shakes up a market, that is threatening to the existing order of things, that changes the status quo.

Another way to think about this is that to be disruptive, a change has to have more than the potential to disrupt, it needs to succeed at disrupting the market or the incumbent products, or obsoleting a product category altogether.

A disruptive innovation then could be a breakthrough, but it doesn't need to be. It could be an invention like none that has come before, or it could be a small change that makes an existing product good enough to compete in a new product space that it wasn't previously targeted at, and forever change the basis of competition. It does not need to be better than existing products or services, and in fact, often enters a market as an inferior substitute to the dominant market players (at least on the criteria that the category was previously measured on). It could be a change in business model which alters the economic attractiveness of alternative ways of doing business.

How Christensen Intended the Term "Disruptive Innovation" to be Applied

Not surprisingly, just by parsing the definitions of "disruptive" and "innovation" accurately, we come up with something very close to what Clayton Christensen meant when he identified a type of product, service, business model, or other process which over time, completely displaces the incumbent market leaders. It does so because it enjoys an order-of-magnitude cost advantage, or because it changes the ease-of-use or convenience attributes so significantly that it enables a lower level of expertise to successfully use a product, or enables the product to be used away from a centralized inconvenient location and be distributed out to the consumer's location.

Significantly, disruption results from business strategy, even if the innovation's disruptiveness wasn't planned but happened by accident. In other words, it isn't enough to have a product with disruptive potential -- the majority of those fail in the market.

It must also be properly positioned, targeted at appropriate segments, launched properly, priced accordingly, distributed effectively, and even marketing communications programs have to hit the right note and use appropriate tactics for a product to disrupt a market. If a company has a direct sales force, it helps that sales policies and tactics are targeted for disruption.

This fact is missed by many would-be entrepreneurs who believe that if they build a better mousetrap, the world will beat a path to their door. But, disruption doesn't happen that way, except in very rare incidences. And, we aren't interested in accidents when we talk about disruptive innovation, because the idea is to plan for it, and have a reliable, repeatable set of processes based on solid theory that we can use to create disruption.

Why Do We Care?

Disruption is about economic growth. About creation of shareholder value. In fact, almost all real growth comes from disruption -- a fact that I will illustrate in an upcoming post. For now, I will simply refer to a graph that resulted from scoring companies as disruptive or not based on sorting through and analyzing the key attributes that predict market disruption. We used a simple technique of assessing a disruption score based on the current product and market attributes (current at the time of scoring), and then comparing market cap one year later with the valuation on the date of the original scoring.

Significantly, all the disruptors had a minimum gain in shareholder value of over 100% in the course of that year, and all the non-disruptors had a minimum loss in value of over 40%. No exceptions.  Black and white results. (I'll be scoring and reporting on many innovators and their "potentially" disruptive innovations in this blog).

It Matters

So clearly, disruption matters. Without it, everything eventually slides into "commodity" status, with minimal to no differentiation. It's what drives the stock market and the reason investors place bets on startups. It creates jobs. It builds wealth. It is the holy grail of business.

So please, get the definition right, and understand what it means if you're going to use the term. It matters.

More Disruption

This is the beginning of a new business and investment-focused blog on disruptive innovation. My aim is to deliver insights about market disruption, the study of disruptive innovation, disruptive business strategy, and to show how disruption delivers shareholder value. It is designed to complement my long established Anti-Marketer blog and to be an additional source of information for understanding the mechanics of disruption for visitors to my company's website.

Why I Needed Another Blog

I've been struggling to stay focused at The Anti-Marketer blog. My goal for it was to talk about market disruption and the importance of marketing strategy in creating the necessary environment for a potentially disruption innovation to succeed. My objectives included looking at successful disruptors and marketers who completely missed the boat, dissecting their marketing strategy to hi-lite what works and what doesn't, and showing how disruptive marketing is the secret sauce that makes disruptive innovation work.

But there is another story that I needed to tell. While marketing strategy is a key component in delivering on the promise of disruption, it became increasingly apparent that I needed to discuss the connection to the business strategy and how disruption creates value. Without this, marketing disruptively is a concept without a raison d'etre. As a result, I felt it necessary to either write extraordinarily lengthy posts covering all aspects of the story, or not add content at all because of the time investment.

As I thought about it, it became obvious that I needed a place where I could look just at the businesses and technologies, score their strategy and whether or not they have disruptive potential, and analyze the business value that disruptors create, and in so doing, it would be easier to keep The Anti-Marketer focused on marketing, and create equally valuable material that didn't really have a place on a marketing-focused blog.

So, that's what I aim to do here. As well, I will occasionally write different parts of the same story on each blog as appropriate with pointers back and forth. I hope my readers find this new material useful and appreciate the increased focus this should bring to each of my blogs.