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Saturday, April 6, 2013

Big-Bang Disruption Why ClassiC Business Rules Don’t apply 04-06


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Big-Bang Disruption


Why ClassiC Business Rules Don’t apply

Traditional business theory recognizes three types of disruptive innovation, but there is a fourth: big-bang disruption. It is different not just in degree but in kind. For market incumbents, the implications can be harsh: Something unidentifiable now could very well destroy their businesses. 

It will come out of the blue with little warning; there are few barriers to stop 
it; and the competitive impact will be swift and powerful. Moreover, no industry is immune. There is hope for market incumbents, but it is not found in traditional business strategy.

Big-bang disruption upends conventional wisdom, requiring a rewriting of commonly accepted rules. Understanding the threat and what it implies for company strategy is the best way to be prepared.

CONTEXT

The co-authors of the March 2013 Harvard Business Review article “Big-Bang Disruption” explained the ramifications for business strategy of their research into this under-recognized form of innovation.

Key Learnings

Big-bang disruption is a newly identified type of innovation that is remarkably lethal for incumbent market players.

In 1992, the pinball industry was enjoying a renaissance with its highest sales ever. The following year sales plummeted and never recovered, as Sony introduced PlayStation. Sony had never intended to wipe out pinball, but kids with PlayStations stopped going to arcades. 

Google isn’t out to corner the navigation device market; its revenue comes from advertising.

But compared with GPS devices, Google’s navigation app is better (reflecting real-time traffic conditions), cheaper (i.e., free), and user-customized in ways that GPS devices are not (integrated seamlessly with email and other platforms wherever/whenever addresses are mentioned). As a result, GPS makers are under serious siege.

In both examples, an innovation appeared out of left field, consumer uptake was rapid and widespread, and established market incumbents didn’t know what hit them. 

Moreover, the disruptive innovator was not even targeting the felled industry; the destruction was an unintended consequence of the innovation’s success. Similar phenomena have crippled the newspaper industry, travel agencies, and certain consumer electronics devices. 

These examples suggest a type of innovation that business theory has overlooked, which Larry Downes and Paul Nunes have termed “big-bang disruption.” 

Consider: Traditional theory recognizes three types of innovation: 1) the better products that emerge when market leaders invest in R&D; 2) the cheaper products introduced by new entrants disrupting established market order (described by Harvard’s Clay Christensen in The Innovator’s Dilemma); and 3) the new kinds of offerings that emerge when nontraditional customers are targeted, such as hotels catering to business travelers (Blue Ocean Strategy). 


Big-bang innovations, however, are improved over incumbent offerings on not just one dimension but all three: they are better, cheaper, and different. 

Big-bang disruptions are not simply faster versions of disruptive innovations.

There are important differences in what occurs. 

Business theory holds that innovations go through several phases of market adoption, with customer uptake tracing a bell curve. First, a few innovation enthusiasts (2.5%) buy the product, followed a larger group of early adopters (13.5%), then the early majority (34.0%), late majority (24.0%), and laggards (14.0%). 

But this isn’t the case in the market adoption of big-bang innovations. After a few trial users spread the word, others follow en masse.

People don’t need to be sold on the product; awareness is enough to create torrents of demand. The iPad’s launch generated immediate demand among both millionaires and people who couldn’t afford computers. 

Better, cheaper innovations are bound to disrupt every industry, since every industry is dependent on IT. 

Big-bang disruptions aren’t limited to consumer electronics, although that field provides great examples. 

Every industry faces the threat of big-bang disruption, because every industry uses IT extensively and technology is a key factor in big-bang disruptions. The continual advance of technology makes big-bang disruptions increasingly possible and indeed likely. 


Why is that?

Two forces are at work:

• Technology deflation. Moore’s law continually deflates the cost of technology. This affects not just processing costs but also data transfer and storage costs. Technology costs are declining not linearly but logarithmically. 

• Innovation deflation. Web 2.0 has deflated the cost of innovation via crowd sourcing, open innovation, open source communities, etc. As the cost of technology drops, innovations that are both better and cheaper are bound to emerge.

Consider this example:

 A market incumbent’s car is offered at $30,000. After 18 months, technology deflation allows a competitor to make a comparable car for 10% less, suggesting an offering price of $27,000. However, if the cost of innovation to add better features is less than $3,000, the competitor can improve features and still sell the car for under $30,000. The new car is both cheaper and better.

Consider: Traditional theory recognizes three types of innovation: 1) the better products that emerge when market leaders invest in R&D; 2) the cheaper products introduced by new entrants disrupting established market order (described by Harvard’s Clay Christensen in The Innovator’s Dilemma); and 3) the new kinds of offerings that emerge when nontraditional customers are targeted, such as hotels catering to business travelers (Blue Ocean Strategy). 

Big-bang innovations, however, are improved over incumbent offerings on not just one dimension but all three: they are better, cheaper, and different. 


Big-bang disruptions are not simply faster versions of disruptive innovations.


There are important differences in what occurs. 





Business theory holds that innovations go through several phases of market adoption, with customer uptake tracing a bell curve. First, a few innovation enthusiasts (2.5%) buy the product, followed a larger group of early adopters (13.5%), then the early majority (34.0%), late majority (24.0%), and laggards (14.0%). 

But this isn’t the case in the market adoption of big-bang innovations. After a few trial users spread the word, others follow en masse. People don’t need to be sold on the product; awareness is enough to create torrents of demand. The iPad’s launch generated immediate demand among both millionaires and people who couldn’t afford computers. 

Better, cheaper innovations are bound to disrupt every industry, since every industry is dependent on IT. 






Big-bang disruptions aren’t limited to consumer electronics, although that field provides great examples.

Every industry faces the threat of big-bang disruption, because every industry uses 
IT extensively and technology is a key factor in big-bang disruptions. The continual advance of technology makes big-bang disruptions increasingly possible and indeed likely. 

Why is that?

Two forces are at work:

• Technology deflation. Moore’s law continually deflates the cost of technology. This affects not just processing costs but also data transfer and storage costs. 

Technology costs are declining not linearly but logarithmically. 

• Innovation deflation. Web 2.0 has deflated the cost of innovation via crowd sourcing, open innovation, open source communities, etc. As the cost of technology drops, innovations that are both better and cheaper are bound to emerge (See Figure 1, next page).


Consider this example: A market incumbent’s car is offered at $30,000. After 18 months, technology deflation allows a competitor to make a comparable car for 10% less, suggesting an offering price of $27,000. However, if the cost of innovation to add better features is less than $3,000, the competitor can improve features and still sell the car for under $30,000. The new car is both cheaper and better.

Deflationary pressures on technology and innovation mean better and cheaper 

innovations are increasingly likely.



Another factor makes cheaper, better big-bang innovations likely: the “democratization of 

innovation.” With most information freely accessible, the tools of innovation have never been 
more available and the barriers to market entry have never been so low.

Big-bang disruption upends conventional business wisdom.Recognizing big-bang disruptions as a phenomenon in their own right, distinct from other kinds of disruptive innovation, changes some aspects of established business theory. 

For instance, the old model of innovation adoption and industry change suggested that companies ought to try to “jump the S-curve,” or plan for next-generation offerings while at the same time nurturing current businesses that will eventually be usurped. 


But a spontaneous big-bang 

disruption that sets consumers on a new course altogether could render both current products 

and future plans irrelevant 

S-curve jumping is useless when the “sudden death line” appears.


Big-bang disruption upends conventional business wisdom in other ways as well: 

• Strategic discipline. Conventional wisdom says to focus on one generic strategy: low cost or product innovation or customer intimacy. In contrast, big-bang wisdom suggests competing on all three at once for improved chances of success. 


• New product marketing. Conventional wisdom advises targeting a small group of early adopters before attempting to enter the mainstream market.Conversely, big-bang wisdom suggests marketing to all user segments immediately. That means big-bang innovators should be ready to scale up quickly, prepared to fulfill demand that is suddenly massive, and should likewise have an exit strategy for scaling down quickly and cheaply when consumers move on.


• Innovation method. Conventional wisdom recommends seeking innovation in lowercost, feature-poor products that meet underserved customers’ needs—i.e., cheaper but not better. But big-bang wisdom says to seek innovation through rapid-fire, lower-cost experimentation on popular platforms—for cheaper and better products.


There is hope for incumbent market players that understand what they are dealing with and know how best to respond.

By understanding what innovations that provoke big bang disruptions look like, incumbents have hope of countering them strategically. 

Three characteristics of big-bang disruption are important to recognize:


1. Unencumbered development: You can’t see it. The development phase of the innovation involves lots of experimentation and recombination of widely available elements in new ways, leveraging the democratization of innovation. This activity often is not on incumbents’ radar, or if it is, initial failures may give incumbents a false sense of security. 


2. Undisciplined strategy: You can’t beat it. Without a targeted focus on being better or cheaper or more differentiated, the undisciplined approach allows the innovation to be all three at once. That is hard for incumbents to beat.


3. Unconstrained growth: You can’t stop it. With the near-perfect market information consumers have these days, the world quickly recognizes the innovation as the best and demand explodes. Market incumbents can’t stop this train.


What then can incumbents do to hope to survive big-bang disruptions? The strategic imperatives are:


• See it coming. There are two ways: 1) Keep an eye out for failed innovations, which often pave the way for future big-bang disruptions, as e-books preceded the Kindle and Napster preceded iTunes; and 2) Find “truth tellers,” who intuitively understand your market and can tell you where it is headed. They are often found among a company’s own employees. 

There are signs of potential big-bang disruptions evident today in multiple industries, including the end of cash in consumer retailing, market pricing for government services, biometric sensors that demystify medicine, and the “virtual ivory tower” revolutionizing learning. 

• Slow innovation long enough to better it. Use IP laws, regulations, and patents to 

your advantage, both offensively and defensively.

• Get closer to the exits. Prepare for a fast escape from an affected business; plan how to redeploy resources and assets in optimal ways.

• Try for a new kind of diversification. Achieve a higher level of clarity regarding what business you are actually in; with an altered perspective, advantageous new directions often become apparent.

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