The Theory of Disruption
Disruption 2020: An Interview with Clayton M. Christensen
Disruptive innovation describes a process by which a product or service powered by a technology enable initially takes root in simple applications at the low end of market – typically by being less expensive and more accessible – and then relentlessly moves upmarket, eventually displacing established competitors.
Big data tends to ignore anomalies. It’s only by exploring anomalies that we can develop a deeper understanding of causation.
- Sustaining innovation, which most understand, is the process of making good product better.
- Efficient innovation, which is when a company tries to do more with less. They generate free cash flow for companies.
- Market-creating innovations. A third type of innovation consists of developing simple products for unserved populations who historically couldn’t afford or didn’t have access to something. They are the source of growth in any economy.
The theory of disruption predicts what will happen without being clouded by personal opinion.
The theory of Jobs to Be Done – what the customer is trying to accomplish in making the purchase.
Far too many people assume that disruption is an event. Rather, disruption is a process. It’s intertwined with the resource allocation process in the firm, in the changing needs of customers and potential customers, and in the constant evolution of technology.
When someone tells me they are disruptive, the first question I always ask is, “To what?” This is an important question, because disruption is a relative concept.
The Human Element
How Leaders Delude Themselves about Disruption – Scott D. Anthony and Michael Putz
Why are companies still so vulnerable to disruptive threat. Our view is that it isn’t about not having the right playbook. The problem is that well-intentioned leaders often deluded themselves by downplaying disruptive threats of overestimating the difficulty of response.
New habit formation is often an early sign of disruptive change.
Powerful deceptions hinder a leader’s ability to respond to disruptive threats and seize disruptive opportunities. Lies that leaders tell themselves play a critical role in determining a company’s long-term fate. Let’s explore four of them.
- Lie No.1: “We’re safe.” It is easy to be in the middle of a disruptive storm and take comfort in data suggesting everything is fine. This is because data lags disruptive change. Today’s data reflects yesterday’s ability. Leaders must have the “courage to choose” before they face the proverbial burning platform. Once the platform is on fire, choices substantially narrow.
- Lie No.2: “It’s too risky.” “Big moves look like they are really risky. By and large, they are not,” declared a Fortune 500 CEO. “Because what you lose when you invest a ton of money, is the money you invested. It is capped. When you win, your usually create not only an annuity but a new ecosystem that gives you the opportunity to win the new areas.”
- Lie No.3: “My shareholders won’t let me.” Maximizing value means focusing on cash flow, not earnings. Executives who manage for value allocate corporate resources with the aim of maximizing the present value of risk-adjusted, long-term cash flows.
- Lie No.4: “My people aren’t up to the task.” It is a convenient lie that puts the burden of inaction on others. New behaviors should focus on agile development, customer obsession, and experimentation.
Leaders first need to transform themselves. They have to find new ways to solve customer problems while at the same time scoping out new growth opportunities.
Research by longtime Harvard professor Robert Kegan found that most leaders lack the cognitive flexibility required to “toggle” between being disciplined and entrepreneurial. The best starting point is to embrace what broadly goes under the term mindfulness. A mindful leader is better at toggling between different mindsets: a disciplined focus on transforming today’s business and more entrepreneurial thinking to create tomorrow’s business.
Too often you see a single-shot transformational leader. Single-shot leaders might have the personal ability to toggle between different mindsets, but they seem to struggle to codify core elements of their unique approach and institutionalize them.
Review people “accurately, not kindly”. Pain + reflection = progress.
If you want to defeat the dilemma of disruption, you must start by defeating delusions about disruption. That challenge starts at the top.
Overcoming the Innovator’s Paradox – Jeff Dyer, Nathan Furr, and Mike Hendron
Having a great idea is essential to innovation, but that’s only half of what’s needed. Securing the resources to implement the idea is just as important – and potentially more difficult.
Every innovator faces what we call the innovator’s paradox. The more novel, radical, or risky the idea, the bigger the challenge in acquiring the necessary resources.
Innovation capital consists of four factors:
- Who you are (innovation-specific human capital: your capacity for forward thinking, creative problem-solving, and persuasion).
- Who you know (innovation-specific social capital: your social connections with people who have valuable resources for innovation).
- What you have done (innovation-specific reputation capital: your track record and reputation for innovation).
- The things you do to generate attention and credibility for yourself and your ideas (what we call impression amplifiers).
The first three are built over time through sustained effort.
How amplifiers work:
- Comparing: finding the right analogy to convince supporters your idea will succeed.
- Materializing: making an abstract concept tangible, visible and real.
- Signaling: connecting to other credible groups that confer legitimacy to your idea.
- Applying social pressure: creating a sense of scarcity.
- Committing: convincing others through a visible, personal, or irreversible action.
Effective comparisons follow several key principles:
- The best comparisons capture both the opportunity and the solution.
- For any given idea, there are often multiple potential benefits. So, when looking for the right comparison, see what resonates with your audience.
- Comparisons are especially valuable for complex ideas.
In some cases, the critical question will be “Can it work?” and in others it will be “Will customers want it?” Materializing can be particularly important for radical ideas.
In most organizations, stories are chronologies, mission statements, or thinly veiled manipulations. Effective stories are personal, create a narrative arc, vividly paint the opportunity or threat, and create an emotional connection.
Signaling works because of the human tendency to follow others we admire or see as experts. The goal of signaling is to prove to supporters that what you’re doing is legitimate – and that others believe in you. Institutional endorsements can be more valuable and enduring than endorsement from individuals.
Fear of missing out works best in competitive situations.
Create credible commitments, ideally with your abundance rather than your scarcity.
A Crisis of Ethics in Technology Innovation – Max Wessel and Nicole Helmer
Predicting where your industry will stumble within this new world can make the difference in ensuring your business flourishes with its reputation intact.
In the HBR article in 2001, Christensen and Raynor wrote about how new technologies enter the market. Article title was “Skate to Where the Money Will Be. “
It explained what they called the Theory of Interdependence and Modularity. The theory holds that when new technologies emerge, they tend to be tightly integrated in their design because dependence among components exists across the entire system. To combat this fragility, one entity must take tight control of the system’s overall design to ensure performance.
Christensen and coauthors argued that, over time, the connections among different parts of complex systems become well understood. Each element’s role is defined. Standards are developed. To use Christensen’s term, the industry becomes modular, and an array of companies can optimize and commercialize small, specific components with no meaningful impact on overall system performance.
For any new technology industry, modularization is the end state; it benefits consumers and grows the pie. In our increasingly modular world, companies can quickly tailor products to user demands; innovation and opportunity flourish, but so do the potential risks – not just to a company’s bottom line and reputation but also society at large.
The danger of trusting the pull of user demand to shape an industry is that user’s short-term desires don’t always account for long-term societal needs.
Ownership and accountability are messy in the age of modularity.
Christensen et al.’s Theory of Interdependence and Modularity is a powerful explanation of how value chains evolve – and of the influence of consumer demand.
Every executive should imagine the future that is bound to arrive and consider both the path toward consumer delight and the systemic protections that will be required.
Four Skills Tomorrow’s Innovation Workforce Will Need – Tucker J. Marion, Sebastian K. Fixson and Greg Brown
All industrial revolution, including The Fourth one, currently being driven by the convergence of new digital, biological, and physical technologies, were changing the nature of work as we know it.
The competences that companies will need most are business-oriented rather than technical.
Companies would do well to cultivate four broad business-oriented competencies in tomorrow’s innovators.
- Omniscience. Tomorrow’s talent must aspire to understand everything, or at least much more than today, about their business. Employees must grasp key connections: links between physical machines and digital systems, between each step of the value chain, between the company’s current and future business models. And they must know their customers’ business.
- Entrepreneurial Mindset. Innovation teams will need to become more enterprising to succeed. This can be a shock for incumbents. They are used to work on proprietary systems and tools. But the new world is world of open systems, beta versions, and constant iterations. Not to mention collaboration.
- Bottom-line focus. In data-driven world, employees need to be just as skilled in thinking about business models as they are at designing and implementing systems. Technical people should be able to ask themselves questions like, can the data be used to monetize our services or products. The need to be business-focused throughout the organization can lead to dramatically different customer-facing roles.
- Ethical Intelligence. Machines, overseen by smart humans, will make many design decisions. Given AI’s potential, every company needs to consciously decide what good judgment looks like.
Traditional companies will have to experiment with new organizational structures to get the best out of their people.
Education, Disrupted – Michael B. Horn
In the face of rapid technological changes like automation and AI, helping employees keep pace is challenging. We must change how we educate both traditional college-age student and adult learner.
In July 2019, Amazon announced that it would “spend 700 million USD over six years on postsecondary training for 100.000 of its soon-to-be 300.000 workers.
Online learning emerged over two decades ago as a technology category that enables a range of potentially disruptive business models.
We are now entering a similar moment in workforce education as we seen in Christensen Theory of Interdependence and Modularity. In the case of Amazon, the step in the value chain that’s not good enough is the education that colleges and universities provide.
Allison Salisbury observed that companies can take at least five different angles when investing in human capital: providing on-ramp programs, upskilling, re-skilling, outskilling and education as a benefit.
The biggest challenge for companies that want to invest sustainably and heavily in human capital may lie in figuring out what kind of people they need.
The experts literally don’t recall how they do what they do. They are good at their jobs because much of their knowledge has been automated.
Betting Big on Employee Development – Ardine Williams
Ardine Williams is Amazon HQ2’s vice president for workforce development.
Good jobs have three elements: good wage, robust benefits from the day you join and the opportunity to create a career by gaining experience and building skills that give them more options to progress over time.
The challenge today is different in two ways: the pace of technological change has accelerated, and the impact of technology on jobs is being felt at the task and skill levels.
It is hard to identify the jobs that are trending and will be needed in the future, so that you can educate enough resources. The data is always lagging, and there isn’t a single source of truth for labor shortages or for the knowledge, skills, and capabilities that companies need.
CoLAB recently launched a data analytics certification program that identifies students who have completed an industry-approved curriculum in this high-demands area. Employers and educators agreed on the required knowledge, skills, and abilities. Then, educators chose the best pathways for their institutions.
We realized that we needed to work across the entire ecosystem – educators, employers, and catalytic agencies – to link education to employment.
Successful employees will have to be technically literate.
The Competitive Element
From Disruption to Collision: The New Competitive Dynamics in the Age of AI – Marco Iansiti and Karim R. Lakhani
A new kind of digital company, with data and AI at the core and human labor pushed to the edge.
The collision between innovators and established players are forcing leaders of existing companies to examine how they do business in environments where new players follow radically different rules.
The collision between digital and traditional companies shows what happens when user needs are met by a new kind of operating model that digitizes some of the most critical tasks to deliver value.
Digital operating modes scale differently. Companies with traditional operating models encounter diminishing returns as they scale and grow the numbers of customers they serve, but those with digital operating models can achieve increasing returns to scale.
Those self-reinforcing loops in network and learning effects make a big difference to the nature of competition.
While hotels companies will never disappear, their profits will continue to migrate to the “software layer”.
Traditional retailers were able to compete with the first generation of online retailers fairly well; the big changes didn’t occur instantly. Amazon found a way to take on traditional retailers using a data-centric, operating platform to transform the retail experience.
Melvin Conway. Conway’s law explains why the physical architecture of products or service developed by companies reflects their organizational architectures. Architectural inertia due to company’s links with existing customers prevented the company from responding effectively to “disruptive” change.
Collision, unlike disruption, involves more than introducing a technological innovation or revamping the business model or customer value proposition – it’s about the emergence of an entirely different kind of company.
The way things are unfolding, the first dramatic effects of artificial intelligence will have less of an impact on human nature than on the nature of organizations, how they create and capture value, and how they shape the world around us.
The Future of Platforms – Michael A. Cusumano, David B. Yoffie, and Annabelle Gawer
The world’s most valuable public companies and its first trillion-dollar businesses are built on digital platforms that bring together two or more market actors and grow through network effects.
All platform businesses use digital technology to create self-sustaining positive-feedback loops that potentially increase the value of their platforms with each new participant.
All platform businesses face the same four business challenges. They must choose the key “sides” of the platform – which user to serve. They must solve a chicken-or-egg problem to jump-start the network effect. They must design a business model capable of generating revenue that exceed their costs. They must establish rules for using the platform.
Two types of platforms are innovation and transaction platform.
Most platforms lose money, but the ones that dominate the market are really successful. Platform companies achieved their sales with half the number of employees.
Trends in platform development:
- More hybrid business models.
- More turbocharged innovation.
- More industry concentration.
- More curation and regulation.
Massive infusion of capital is a third form of disruption that could be just as powerful as new technology and business models, such as turning transportation into a subscription service.
The Experience Disrupters – Brian Halligan
Experience disrupters offer better experience. How they sell is why they win. This is a central insight of Jobs to Be Done Theory. An idea that customers don’t buy products, they hire them to do a job for them.
I’ve come up with five things I call modern adaptations that allow these experience disrupters to run over the incumbents in their industries.
- The first adaptation is that while incumbent companies focus on product-market fit, experience disrupters work on experience-market fit.
- The second adaptation is that experience disrupters pull the friction out of each customer interaction.
- The third adaptation is that experience disrupters are awfully good at creating a personalized experience.
- The fourth adaptation is that while the incumbents know how to sell to their customers, the experience disrupters are very good at selling though their customers.
- The fifth adaptation is that experience disrupters enable customer-facing employees to fix things when they need to.
The experience disrupters spend hardly any of their energy extracting value from their customers. Instead, they spend all their energy thinking, “How do I add value for my customers?”
The New Disrupters – Rita Gunther McGrath
In the last decade the profile of disrupters has changed dramatically. The critical difference is that they now enter the market with products and services that are every bit as good as those offered by legacy companies.
Christensen’s theory also highlighted the powerful way that management metrics and incentive structures reinforce this pattern. In his view, many of these combines to discourage executives from investing in innovation.
Today’s direct-to-consumer (DTC) disrupters illustrate a next evolution in the theory of disruption.
In a short period of time, new competitors have radically changed customer behavior in three significant ways:
- Consumers are now happy to purchase hard goods like mattresses, furniture, and even cars online.
- Almost everything can be sold as service.
- Excess capacity is a consumer asset.
Just as digital technologies allow companies to build businesses almost overnight, social media, digital channels, and online influencers can help new brands build meaningful identities and reputations at warp speed.
These new D2C businesses have several similarities, each driven by digital technologies, algorithms, data analytics, and new forms of connectivity.
- Access to assets, not ownership of assets.
- Cocreation with customers.
- Always-on and mobile.
- Capital-light ecosystem business models.
As Christensen also predicted, the “jobs” customers seek to get done in their lives remain remarkably stable – even though digital technologies have created entirely new ways to get those jobs done. Christensen’s theory also holds for the fact that creating new customers by lowering prices enough to compete with nonconsumption is still a viable opportunity for crafty newcomers.
Christensen’s perspective on what he called the capitalist’s dilemma is still with us. In many large organizations, incentives are not aligned with the market-creating innovation.
The most significant change since he first laid out his theory is that digital competitors can now move with unprecedented speed.
All too often, business leaders of incumbent companies spend way too much money on digital transformation efforts that fail to take the new economics and business models of digital disrupters into account. Incumbents need to stop spending money trying to be a better version of their analog selves.
The Futurist Element
The 11 Sources of Disruption Every Company Must Monitor – Amy Webb
Some clever entrepreneurs had already deployed new systems to share the computer processing power sitting dormant in our connected devices. Using a simple app.
Looking at the future of telecommunications through the lens of distributed computing. How should existing bandwidth models and projections be revised to account for all of these devices.
When faced with deep uncertainty, teams often developed a habit of controlling for internal, known variables and fail to track external factors as potential disrupters. Failing to account for change outside those known variables is how even the biggest and most respected companies get disrupted out of the market.
Futurist call these external factors weak signals, and they are important indicators of change.
The 11 Macro Sources of Disruption:
- Wealth distribution.
- Public health.
- Media and telecommunications.
Seeking out weak signals by intentionally looking through the lenses of macro change is the best possible way to make sure your organization stays ahead of the next wave of disruption.
The Uncertainty Factor – Rahul Kapoor and Thomas Klueter
For the past two decades, companies have assumed that they know the disruption playbook.
Uncertainty and disruption are two sides of the same coin; they can’t be separated.
There is always significant uncertainty regarding the rate of progress within the new disruptive value proposition.
We have found three key sources of uncertainty that are pivotal to understanding the process of disruption. Around technology, ecosystem, and business models.
The potential for collaboration in the face of uncertainty. Established companies and startups can pool resources and share risk during a period of significant uncertainty. Startups can help established companies experiment and validate new business models. Established companies can leverage their ecosystems and resources to holly startups scale up their disruptive innovations.
With nearly all disruptive startups are motivated by the possibility of replacing the industry’s status quo, many of them confront resource constraints in their efforts to develop a disruptive value proposition.
Established market leaders face other challenges. Although they typically have significant resources available to explore disruptive innovations, they cannot focus solely on this quest.
Resolving technological uncertainty requires significant resources over time to achieve performance-cost threshold necessary for product-market fit.
Resolving ecosystem uncertainty represents a coordination dilemma, given that business leaders need to manage significant investments across multiple actors, including business partners, suppliers, customers, and regulations.
Resolving business model uncertainty requires continuous experimentation and the ability to reconfigure one’s approach to unlock the potential of the disruptive innovation for the innovation’s users and the innovating companies.
The following five questions can help innovators – incumbent companies and startups – manage uncertainty.
- What are the opportunities for a disruptive value proposition?
- Where are the key sources of uncertainty – technology ecosystem, and business model – in different markets?
- How can the different sources of uncertainty be addressed?
- Can I pursue this disruption on my own, or do I need strategic partners in the ecosystem to help resolve uncertainty?
- How can I align partners to cocreate value?
Why Innovation’s Future Isn’t (Just) Open – Neil C. Thompson, Didier Bonnet, and Yun Ye
New digital technologies have upended conventional business models, organizational structures, and operating processes in most industries.
Most companies should rethink their innovation system and developed portfolios with a balance of innovation sources.
A digital transformation is a deeper change. It entails using second-wave technologies to create new sources of value through product and process innovation.
Becoming more open to external innovation is a marked departure from the “not invented here” syndrome from which companies suffered for decades.
Open innovation helps guard against one of internal innovation’s biggest risks: incrementalism.
Internal innovation is critical for digital transformation. It delivers competitive advantage and helps maintain trade secrets and protect IP. Internal innovations are easier to develop, produce, and sell than externally sourced. Developing innovation capabilities inhouse improves them durably.
How do we achieve right balance between internal and external innovations:
- Step 1 – Identify critical competencies.
- Step 2 – Create and architecture.
- Step 3 – Develop transfer processes.
To Disrupt or Not to Disrupt – Joshua Gans
The term disrupt has become synonymous with being an ambitious startup of any type.
Industry leaders are vulnerable to disruption when they are stuck in their profitable business model.
Choosing to be a disrupter should not be a startup’s first choice. It’s a hard road – much harder, longer, and resource-intensive than many new entrants realize. That doesn’t mean there’s not a viable path to disruption, but disruption should be a considered choice, and there are alternatives.
For categories of disrupter choices: technology, customer, organization, and competition.
Technology can be disruptive or sustainable.
With customer, you either offer discount, or you find customers that are ok with lack of performance.
With competition, incumbents eventually became targets.
Entrepreneur can choose alternative paths. One option is to become a value chain entrepreneur, partnering with existing market leaders.
Most entrepreneurs would be better off laying out their choices before making them.
Disruption in an industry is a complex phenomenon. Market leaders might be vulnerable, but it takes others to make disruption happen. It is not a foregone conclusion. There is a viable alternative – a value chain approach.