I usually don't suggest to people they should be disruptive.
But if you're starting a growth startup a disruptive innovation
strategy is your most likely path to success.
By the end of this video you'll understand what is a disruptive innovation
and how that's different from a sustaining innovation.
And we'll go through an example to try to make it that much clearer as to what exactly
does disruptive innovation mean.
And then we'll talk about the proof the research that strongly suggests
that a disruptive innovation strategy is your path
to a higher likelihood of success.
And then we'll try to pull it all together by talking about how you can apply
all of what you've learned to create your own disruptive innovation
strategy so you can increase your chance of startup success.
So what is a disruptive innovation?
A disruptive innovation is a process.
It's a process that begins when there are customers that get left
behind. Customers tend to get left behind when you have sustaining
innovation. That's when you have multiple companies in a market that are
competing head to head
and they each introduce new products
with more features more capability more performance.
The products get better and better so that they can get a little more
market share and get more revenue.
Perfectly natural thing to happen.
But as that happens the other thing that tends to come along
with it is an increase in price
and because of that more
and more customers get left behind.
Which means there are customers that would love to have the capability they'd probably
even be okay with a little less capability
but they don't have access to it because it's just not in their
price range. A disruptive innovation begins when
another company realizes that there's that gap.
There are customers that have been left behind
and they create a product that's actually less capable.
Usually less capable usually smaller usually not
as attractive but at a lower price
and a product that although it's less capable is good enough
for at least a lot of the customers that got left behind - the customers
who can't afford the other products that are on the market if they could
they'd certainly prefer those
but they can't afford it.
And if you offer a product that's good enough even
though it's not as fancy as the products that are available elsewhere t hat
creates a disruptive innovation.
Once a company takes advantage of a disruptive innovation - they they
provide this lower capability product - they get a
toehold in a market selling to these sort of low end of the
market customers and then over time they slowly
improve their product: sustaining innovation.
And as the product gets better
and better eventually it becomes acceptable to
the mainstream customers.
And if the company can do that while maintaining their cost advantage
that then is a key for taking over a market
and that's what happens in your classic disruptive innovation.
So let's talk about an example the U.S. auto market back in the 60s.
Now in the 60s Ford Chrysler
and GM owned the car market in the United States
and they kept competing head to head offering more feature s
better performance more horsepower
and so forth each trying to eke out a little more revenue
and gain market share over the others.
But in doing that they left a lot of customers behind.
There were customers who couldn't afford a Ford Chrysler
or GM. And yet they wanted a car.
They were forced to buy an unreliable used car
or walk or take the bus. They didn't want that.
They wanted a new reliable car
but they simply couldn't afford it.
Well, some companies in Japan Toyota Honda
and Nissan recognized that opportunity
and started providing cars that were fit for those
customers that got left behind.
Now they were smaller
and cramped definitely not as nice as the cars that were
being made by the Big Three.
They were less safe - they were smaller they were less safe if
you got into an accident
and they were definitely not cool.
I mean these were looked out way back then as a sort of toy cars
they were real cars - real cars were Ford Chrysler
and GM. It was almost a little embarrassing to be seen in
one of these cheap Japanese imports.
But if that's what you could afford to get a reliable new car well
it became a good enough solution.
It was lower price better mileage which made it even
lower price really to operate
and it was more reliable so it even had lower repair costs.
So all of those factors made it good enough for the people who
couldn't afford a real car from Ford Chrysler
and GM. What ended up happening?
Well of course Toyota Honda and Nissan kept then introducing
new cars with more features more capabilities more performance
and eventually their cars became acceptable to the mainstream
market. And eventually as you know Toyota
became the number one car company in the world.
So that's a simple example of how a disruptive innovation can
be an effective way for a new entrant to enter a market where there are
very well established dominant competitors already in the market by
going after those customers that have been left behind
and then eventually take over that market.
That's the potential of a disruptive innovation.
So let's talk about the research that's behind a disruptive innovation
and that research was done by Thomas Thurston.
Thomas used to work for Intel Capital which is one of the biggest venture
capital companies in the world.
So they had a pretty large portfolio to take a look at.
What Thomas noticed though was that the vast majority of companies
that Intel invested in were not successful.
And he had to wonder isn't there a better way to pick
your investments to increase your odds of success.
What he did was he took a look at a portfolio of 48 companies
and he decided to test four hypotheses.
Hypothesis One was that if the company was
applying a sustaining innovation to get into
an existing market a market it was already in it was already competing
in, and that meant by sustaining that they
were doing a better product a product that was better that had better features
performance - some edge on the existing competition
in that market segment.
If they did that then his hypothesis was that their odds
of success were pretty good. Because that's a classic sustaining
innovation kind of opportunity.
On the other hand if he looked at doing a sustaining
innovation offering a better product
and more features more capabilities more performance
and going into a market that was a new market for
that company
his prediction was that's likely to not work.
Now why would that be.
Well you can think of a couple of reasons.
You're offering a better product in a market that's
a new market for you that has entrenched competitors
those competitors look at you
and say This company is going after our best customers
and they'll do everything they can to try to make sure that you don't succeed.
So you immediately get a response from the entrenched
competition when you're going after their best customers.
So it kind of makes intuitive sense.
On the other hand looking at a disruptive innovation where you're going after
the underserved the customers that have been left behind.
If it's an existing market opportunity where a company again
is let's say entering a market they're already in.
But now they're saying oh hey we're not getting to everybody in this market.
Let's go after those customers that have been passed
up. Well his prediction was that that was a recipe
for a disaster.
One reason. Well think about it if you have a product line in an existing
market that's higher margin that is going after the mainstream
customers who'll pay more - if you invest in a lower end product
for customers who can pay less it's going to be less revenue
and lower margin. That's not very attractive.
It's very easy to get into that discussion that says hey why are we spending money
on this low end product. Look at how much money we're making on our mainstream products.
If we took the money we're wasting on these low end cheap low margin
products and invested them in our high margin businesses
we'd make a lot more money.
And that's what tends to happen in a situation where
you try to do a disruptive innovation.
So again his prediction was no success.
The final hypothesis was if you do a disruptive innovation
when you're tackling a new market
or a market you're not addressing already then the odds
of success there are much higher.
Again intuitively kind of makes sense.
You're doing a disruptive innovation much like the Japanese car companies did in
the U.S. auto market by going after those customers that were
left behind. They can't pay as much as mainstream
customers and the entrenched competition tends to ignore you
because after all you're going after customers that they're really not that motivated
to go after. Those were his hypotheses.
And the question was based on those hypotheses
could he predict the winners
and the losers in the Intel portfolio.
We went through that portfolio of 48 companies
and he categorized each one into
one these four categories.
Were they sustaining existing, sustaining new,
disruptive existing, or disruptive new.
And based on what category they were in
and based on no other data he predicted whether
or not they'd be successful.
Let's take a look at the results.
The results actually were pretty impressive.
There were 48 companies. Now what happened in reality was
out of 48 companies there were just five successes.
In this situation he defined success as a company that survived
pretty basic success measure.
So out of those forty eight companies five of them survived
which meant there were 43 that failed.
Now that does say something about the odds of success in startup businesses
at least in the business is that Intel Capital was investing in.
What did he predict.
Well he predicted that there would be six successes
and forty two failures.
So he wasn't 100 percent spot on
but out of those six successes he predicted he correctly
identified four of the five winners.
Now that means he identified a couple of companies he
thought would be winners that weren't winners
and one of the companies that he identified as a loser
ended up being a winner. So its prediction wasn't perfect
but it was pretty darn good.
In fact statistically the odds of him getting something that was that
close to being correct one in 2,500.
So those are pretty impressive odds.
Based solely on knowing whether
or not they were disruptive
or sustaining and whether they were entering a new market opportunity
or an existing market he was able to predict
success with that kind of accuracy
and that's pretty compelling evidence that if you are a startup
entering a new market opportunity which by definition
is what you're doing if you're an early stage startup a disruptive innovation
is a pretty good strategy to follow.
So how can you take these lessons to heart
and figure out how you can disrupt a market.
Well it all starts with identifying a segment of customers
that have been left behind - customers who want some
capability other people mainstream customers are getting
that capability, but there's a segment of customers that aren't getting
that capability because they simply can't afford it.
If you can figure out how to provide a solution that's
acceptable to those customers that have been left behind something
that's good enough for them.
That probably doesn't have all of the features right
but even though it's less capable it's also at a price
at a cost that they can afford.
That is the opportunity for a disruptive innovation even though
you're offering something that's not acceptable to the mainstream market.
That's OK. That means the entrenched competition is probably
going to leave you alone because you're not going after their best customers.
And that in a nutshell is how to put together a disruptive
innovation strategy. It's not that complicated.
Start with customers that have been left behind identify a solution
that's acceptable to them that you can deliver actually at a lower cost.
And even though it's not acceptable to the mainstream
as long as those left behind customers will accept your solution
you're well on your way to a disruptive innovation.
And that's a wrap for this video and why you should build a disruptive startup.
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