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Occasionally we come across an innovation that looks like a disruptive innovation on first glance, but upon further consideration turns out to be a sustaining innovation. In situations like these, asking the right questions is critical. Take for example the new Firefly mobile phone. A pretty neat concept, the phone is designed for young children (the target is ages 8 to 12). Without a keypad, children don't have to remember phone numbers and parents don't have to worry about children making outside calls. And none of that time wasting, distracting text messaging which is so bothersome in the class room.

On the surface, this might appear to be a disruptive innovation. A simple (almost toy-like) product that enables usage by a new market. And yet, if we ask the right questions, we discover that the Firefly is more of a sustaining innovation and if it gains any traction in the market, incumbents are likely to take over the market.

The first question to ask should be "is the innovation low-end or sustaining?" In the case of the Firefly, it is a new market disruption. It wouldn't be considered a low-end disruption, because at $99.99, it's much more expensive than your average mobile phone and it's functionality is not even good-enough for the regular mobile phone market.

Now, when evaluating a new market disruption, two sets of questions must be answered. First, "is there a large population of people who historically have not had the money, equipment or skill to do this thing for themselves and as a result have gone without?" Certainly a lot of young children have gone without, either because a regular cell phone was too complicated or because parents felt it inappropriate to give a young child a cell phone. Is the market large? That is up for debate in this case. For Firefly the answer is clearly yes, but it is less clear for a phone manufacturer like Nokia.

Second, "is the innovation disruptive to all the major incumbents? In this case the answer is no. There is nothing unique about the Firefly from the perspective of Nokia. It is simply a stripped down cell phone with limited capabilities. Such a product would be fairly easy for them to develop (setting aside the issue of product design for the moment). Additionally, with a new market disruption, as the product improves it pulls customers from the original value network into a new value network. In the case of the Firefly, the concept was to take a cell phone and strip it down. As the product improves, it ends up competing at the low-end of the existing value network, not creating a new one.

When it comes to innovations, asking the right questions is critical.

A friend sent me a link to an out-of-this-world application of disruptive innovation theory. This article , co-authored by the former head of the Pentagon's Office of Force Transformation, describes how the Department of Defense is employing a disruptive approach to satellite use. The idea is to use a new business model to serve a market underserved by the current "big space" programs: warfighting commanders.

The article explicitly cites Clay Christensen's work and DI theory as the model for the project. By reducing payloads, eliminating many cost drivers, and targeting functionality to support the needs of specific sets of military leaders, the innovation targets current nonconsumers. The result is a new market innovation that disrupts the space shuttle and other means of launching satellites.

The Office of Force Transformation funded the project, called TacSat-1, as an experiment to prove the value of the associated business model innovations. The project is still underway. The the ability of the Defense Department to implement the necessary resource, process, and priority changes remains to be seen. However, this article shows the potential of disruptive innovation theory to inspire and guide needed change in the defense area.

I had dinner with a friend this weekend who has decided to leave the world of investing OPM (Other People's Money) - and will be investing his own account for a living. One of the biggest issues with doing something like this is health insurance. Personal and Single Family Health Insurance have historically been prohibitivly expensive. Occasionally a regional chamber of commerce will allow small businesses to join together and obtain a group health insurance plan, but this practice is not widespread and is subject to a wide range of limitations.

My friend had mentioned Costco was testing a program to offer health insurance to its members... and sure enough - an AP story showed up yesterday. Here is the link to the article:
Costco to Test Health Insurance Offering

Money quote - "Costco's move to sell health plans through its membership stores probably won't have much effect on the nation's estimated 45 million uninsured. But if other big-box discounters jump in, it could do to brokers what Wal-Mart did to small retailers, analysts said Friday."

I would classify this as a low-end disruption. A product that is "good enough" at a lower cost. While the article doesn't make this clear, my hunch is that the Costco offering will be a good basic insurance without any of the more "upscale" offerings such as dental insurance, discounted health club memberships, and reduced premiums for quitting smoking. As the article mentions at the end, "...this could accelerate an emerging trend of offering locally based, low-premium niche plans that reduce costs by limiting care to one or two hospitals."

At a 20% discount to existing premiums, the product is still expensive, and thus unlikely to address the problem of the uninsured. But to the extent that customers previously unable to purchase health insurance are now able to obtain it, one could argue that this could be a new-market disruption. What do others think?

Regardless, if Costco is successful, you can be confident that others will follow. When health insurance brokers repond saying "These customers purchase low-end, low margin products - I'm not interested in serving them," they would do well to keep the example of steel mini-mills described in Chapter 4 of The Innovator's Dilemma in mind.

There have been a couple recent articles (Washington Post story, RR) about the launch of single-use camcorders. The hope behind companies introducing the products is that they mimic the use of single-use still cameras. Believe it or not, there were more than 200 million single-use still cameras sold in the United States last year " about two per household.

The company that has introduced the camcorder, Pure Digital Technologies, has done its part. Wall Street Journal reviewer Walter S. Mossberg (RR) praised its product as simple and convenient, exactly the words you would want associated with a disposable product. He did note that the quality of the product lacks in some circumstances. Thats not a big deal however, since people who purchase these devices are going to compare them to no recorded video at all. Something with spots of mediocrity is almost always better than nothing.

So will the product be a big success? My hunch is that it will not. The basic reason for this assessment is the sense that the save my memories when Im on the go space has a number of established competitors. Sure, video has some advantages over still images, but there still is vastly more consumption of still cameras than video cameras. Additionally, many digital cameras and cellular phones with cameras have rudimentary video capabilities, which could very well be good enough for target users.

Because Pure Digital Technologies has optimized around the right variables for a compete-against-nonconsumption play it has a fighting chance of success. The big question will be whether it truly does compete against nonconsumption, or if consumers compare it to disposable cameras and their cell phones and think, What Ive got is actually good enough.

Any thoughts about this? Am I offbase?

The Wall Street Journal had a very interesting article Monday (registration required) about how health insurance companies are developing new strategies to tap into the 45 million Americans who lack health insurance. Insurers who have looked at the segment have discovered something interesting: many people who are uninsured are so by choice. In other words, they have sufficient income to afford health insurance, but choose not to consume it. Why? Existing products are too confusing and lack compelling value propositions.

To address this problem, some companies are developing niche products targeted at pockets of the uninsured. For example, Blue Cross of California has developed a line of products called Tonik, targeted at the active uninsured, relatively young consumers who chose not to purchase health insurance because existing packages didnt meet their needs. The product line includes specific products called Thrill-Seeker, "Calculated Risk-Taker and Part-time Daredevil.

Companies that successfully crack into this space will follow this kind of approach. Instead of assuming the 45 million uninsured are some kind of monolithic bloc, Blue Cross of California has attempted to understand precisely why a group of consumers is uninsured and design a product to attract pockets of those consumers from the sidelines of nonconsumption. Expect companies to continue to find novel ways to target pieces of this untapped population.

One of the most fascinating sustaining battles is taking place in the airline industry, between Boeing and Airbus. Chalk a point up for Boeing today, as Airbus announced delays of up to 6 months on its A380 super-jumbo jet. The cause? Manufacturing issues.

In battles of sustaining innovations, there are always two things to watch:

1) Has the company picked the right undershot dimension along which to optimize?
2) Can it execute flawlessly?

Boeing and Airbus are placing fundamentally different bets on the dimension of improvement that customers need. Airbus is betting on sheer size with its 550+ seat A380. Boeing is betting on efficiency, with its in-development 787 Dreamliner significantly more efficient than any existing model.

Airbus had a big time-to-market lead over Boeing, but further delays like this one might whittle that away.

Of course, our perspective has always been consistent -- even the "winner" of this battle might end up the loser as disruptive players such as regional jet and microjet manufacturers transform the industry. Regardless, this one will be an interesting one to watch!