This podcast addresses one of the most powerful forms of innovation – disruptive innovation. As the name suggests, those companies on the receiving end of a competitive disruptive innovation can feel very disrupted. Their world changes. To survive they can’t just respond with a new flavor or 20% more or a better package on their existing products.
Consistent with the best practices in this podcast, information you will hear today is drawn from a very helpful Harvard Business Review article titled Meeting the Challenge of Disruptive Change where one of the authors is Clayton Christiansen, the author of the seminal innovation book, The Innovator’s Dilemma.
In my business career, I had a front row seat to disruptive innovation in the coffee category. I had some experience with Folgers while at Procter & Gamble (the brand is now owned by Smuckers). I’ve also had innovation clients in and around the coffee business.
For decades, there was a consolidation process and the coffee category ultimately ended up with two brands dominating the category. Maxwell House was first developed by a company called General Foods and then bought by Kraft. Procter & Gamble purchased Folgers at a time when it was primarily in the Western United States and expanded it into the balance of the United States where at first it became a solid number two brand. Then through some remarkable and insightful advertising, Folgers moved from number two to a clear number one brand. For years Maxwell House positioned themselves as a great tasting coffee with their slogan “good to the last drop.” Folgers was also on a taste strategy until it discovered the power of aroma. Waking up in the morning to the aroma of coffee advertising, helped propel Folgers into the number one market share position.
So these two brands, owned the retail coffee category. There was not much successful product or packaging innovation going on for a long time. Folgers experimented with several flavored, iced coffee drinks that I tasted in the lab and thought were great tasting products. Unfortunately for them, the products never got out of the lab.
All of this preceded the introduction of Starbucks. Starbucks became a disruptive innovation. It’s amazing that Folgers and Maxwell House had millions of dollars of research and advertising and yet they did not know what the founder of Starbucks knew.
The next major disruptive innovation was the Keurig coffee machine and K cups from Green Mountain Coffee, a small company in Vermont.
The vast majority of the growth in the coffee category, both home and away from home, has come from these two disruptive innovations while the previous kings of the category have had to deal with flat or declining trends. They never successfully responded to these two disruptive innovations despite the fact that both companies are highly respected for their business acumen and innovation.
The situation where the big brands lose out on major innovation is not unique to coffee. Prior to personal computers that were mini computers and not one mini computer company succeeded in the personal computer business. With the advent of discount retailing with Kmart and Walmart, only one department store succeeded in discount retailing – Dayton Hudson.
The article’s authors zero in on the challenge existing companies have in responding to disruptive innovation. “It’s because organizations, independent of the people in it, have capabilities. And those capabilities also define disabilities. As a company grows, what it can and cannot do becomes more sharply defined in certain predictable ways.” Their research identified three factors that define what an organization can and cannot do.
First, they look at the company’s resources and what it can do. Resources include things like people, technologies, balance sheet, market insights, brands, and various kinds of relationships, like with suppliers, distributors, and customers.
Second, they look at a company’s processes. They define this as “patterns of interaction, coordination, communication, and decision-making employees use to transform resources into products and services of greater worth. Such examples as the processes that govern product development, manufacturing, and budgeting……”
Third, they look at a company’s values. The authors say, “we define an organization’s values as the standards by which employees set priorities that enable them to judge whether an order is attractive or unattractive, whether a customer is more important or less important, whether an idea for a new product is attractive or marginal, and so on.”
The authors note that most companies are pretty good at using their capabilities to respond to evolutionary changes. Evolutionary changes usually are relatively modest improvements to existing products. For example, a new flavor of a beverage or a new variation of a detergent, like cold water Tide.
Companies typically have a very difficult time responding to disruptive innovations. For example, Merrill Lynch had great difficulty responding to Charles Schwab’s entry into the bare-bones discount broker business. When personal computers were first introduced, they were very disruptive to both mainframe and mini computers.
One of the things that makes responding to disruptive innovation so challenging for most companies is that these types of innovations tend to be both rare, unpredictable, and intermittent. This usually means that they are not organized to develop disruptive innovations of their own or to respond to competitors’ disruptive innovations.
Companies successful in responding to disruptive innovations often use new teams, new organizational units specifically deployed to develop or respond to a disruptive innovation. This is not an additional assignment for people in an operating unit. As the authors state, “managers need to pull the relevant people out of the existing organization and draw a new boundary around a new group.” They go on to say, “new team boundaries facilitate new patterns of working together that ultimately can coalesce as a new process.”
Companies that have used this approach include Medtronic, IBM and Eli Lilly.
This approach is necessary because disruptive innovations can fundamentally change the rules of doing business in a particular category. For a company to respond, it often requires new processes and new values. Responding to a disruptive innovation can fundamentally impact the business model of an existing company, forcing it to develop a way of doing business with much lower margins. This is difficult for existing companies that have pre-existing overheads. Many companies initiating a disruptive innovation are smaller and leaner so that lower margins are nowhere near the issue that they are for existing companies.
HP faced this issue with their laser printer division when inkjet printing emerged as a very popular option. They were forced to face lower margins, new manufacturing processes and systems, and all this for a lower quality printing option. They struggled with their inkjet business until they created a separate division from their laser printer operation in Boise, Idaho and created a separate inkjet division in Vancouver, British Columbia.
Sometimes a company can respond to a competitive disruptive innovation with an acquisition that gives it new capabilities. Having said this, this is a tricky and challenging option. The acquiring company needs to never lose sight of what it is acquiring, especially the capabilities, processes and values of the acquired company. To make this work, the acquired company most often needs to be kept as an independent operation. If it is merged into an existing business unit, there’s a very high chance that the different capabilities, processes and values of the acquired company will virtually disappear when they are forced to conform to the acquiring companies capabilities, processes and values.
The bottom line is that companies facing a competitive disruptive innovation face a serious challenge. In many cases, the degree of severity of the challenge can range from a significant negative financial impact to a dramatic financial impact that threatens the very existence of the company.
How can you use these lessons in your business?
First, the best defense is an offense. You want to have as a regular part of your innovation program the goal of developing your own disruptive innovations. Disruptive innovations are always out of the box ideas. Developing them requires the full power of quantum idea generation, especially including high-level external expertise and diversity in the creative process. You will have difficulty getting a disruptive innovation without doing this.
Second, if you face a competitive disruptive innovation, your initial inclination might be to ask existing product groups to develop a response. As much as they might like to do so, they probably lack the capabilities, processes, and values to get the job done. Your highest probability of success options are developing a separate internal business unit or making an acquisition that you keep independent.
This podcast is giving you an overview of this very important and often challenging topic. The principles are good, but the unique details required for your business to succeed will make the difference between success and failure.