Wednesday, June 14, 2006

Disruptive innovation-III

31. Disruptive innovations enable a larger population of less-skilled, less wealthy people to do things in a more convenient, lower-cost setting, which historically could only be done by specialists in less convenient settings.

32. A new disruption brings in a new population which are mainly non-consumers.

33. The low cost advantage of India is temporary but the number of non-customers is huge.

34. The transistor disrupted the vacuum tube. The vacuum tube manufacturers concentrated on Table top radios and floor standing TVs and kept on trying to improve their vacuum tubes for these products. While this was happening Sony created the transistor radio which was a pocket radio which was not of a good quality but was targeted to non-users who were teenagers. Sony didn’t sell to Parents. Sony then came out with the portable TV with the transistor. Again it was competing with non-consumption. Soon the vacuum tubes just got sucked out by the transistor using devices. The vacuum tube improvements were being crammed into the space where one would certainly fail.

35. Similarly voice-recognition software was being developed by IBM and was being crammed into the space of the Word processor. In the meanwhile this software was launched in toy robots with simple standard phrases being used and in chat rooms. Not very sophisticated but gradually improving over time. The disruption of new technology is accepted more by non-customers.

36. IBM needed to make the voice-recognition software more cost-effective and increase its performance. This is not so achievable in the upper segment as it is in the low end segment. Among non-customers one doesn’t have to spend so much money to be successful.

37. Billions of dollars are being spent to make the use of solar energy more widespread among current users of electricity in the urban area. No matter how much improvement one makes in solar panels its adoption in the urban areas will not be much. The expectations are too high. Whereas in Mongolia 40% of the population lives in tents. They have no access to electricity. The adoption of solar panels is a tremendous success here. They are non-consumers.

38. Linux is a modular architecture. It cannot compete head-on with Microsoft which is an interdependent architecture. So Linux creates a web-centric use which is a new space. It will disrupt by fuelling web-centric computing. There are problems in the software today but gradually it will improve.

39. Not only products and companies get disrupted but whole channels get disrupted. Vacuum tubes were being sold through appliance stores. When Sony started developing its transistors the same appliance stores were refusing to keep them. At the very same time K-Mart and Wal Mart were coming up and they decided to sell Sony’s transistors and thus disrupted the whole channel of appliance stores.

40. In new markets rules don’t apply. Rules like IRR, ROI etc. Patterns need to be seen and which customers one is serving. One needs to go after non-customers.

41.The rule of shareholder value is no longer valid. In the 60s it was valid because the average time a share was held was 6 years. Now it is 60 days. Shareholders have become speculators. Therefore the long-term value of the firm is the goal and not increasing shareholder value.

42. If existing managers are taught how the world works they can use disruption effectively.

43. The way we segment markets makes new products fail. We usually segment markets according to product categories or customer categories. It’s usually an inside-out approach. We need to look outside-in. From a customer’s point of view he/she needs to get ‘jobs’ done or important problems solved. We need to find out what are the ‘jobs’ which are arising in the customer’s life and for which jobs will the product be hired.

44. In the example of Milk Shakes purchased from a Mcdonald’s outlet the question one needs to ask is ‘What job arises that gets a milk shake hired?’ It was found that 40% bought milk shakes in the morning from the Mcdonald’s outlet. They did not consume it in the outlet and bought the milk shake alone. It was found that they used it as a nourishment and pastime while driving to work in the morning. So they had one hand on the wheel while the other hand held the milk shake. Competition for this ‘job’ therefore gets restated to include bananas, snickers, bagels etc. In the evening the same milk shake was being hired by parents who were saying ‘no’ to their children throughout the day and needed to alleviate their guilt by giving in to their children by buying them a milk shake in the evening. Once one understands the ‘jobs’ for which the product is hired one can now go on improving vis-à-vis the ‘job’ for which it is hired. For instance the morning milk shake could become more viscuous and fruity while the evening milk shake could be packaged differently. The size of the market now gets defined from the customer’s perspective.

45.From this perspective one sees that the market is larger, one’s share smaller, the real competition is not in the product category, the growth potential is greater, and one understands the constraints under which non-customers operate.


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