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One of the trickiest bits of the disruptive innovation puzzle comes once a company launches or acquires a disruptive business: How to integrate the new venture into the parent company while protecting what made it work in the first place. We refer to it as “avoiding institutional antibodies” — making sure that entrenched rules or nit-picking comments (“…But we don’t do it that way!”) don’t prematurely kill innovation efforts.

An article in the New York Times a couple weeks ago gave a surprising example of successful institutional antibody avoidance. Disney and Pixar: The Power of the Prenup outlined the various ways those two wildly divergent companies have worked to maintain the spirit of Pixar since their 2006 merger.

“When Disney bought its rival, Pixar, in 2006 for $7.4 billion, many people assumed the deal would play out like most big media takeovers: abysmally,” wrote Brooks Barnes in the June 1 article. “The worries were twofold: that either Disney would trample Pixar’s esprit de corps (turning Mr. Lasseter into a drone, chanting “Hi Ho” en route to Mickey’s animation mines) or that Pixar animators would act like spoiled brats and rebuke their new owner.”

In fact, so far the companies seem to be getting on well, and Disney’s stock has made welcome gains in recent months. Some of the successful tactics Barnes described include drafting an explicit statement of what would not change at Pixar, including the retention of superior benefits packages, no contracts and no move from Emeryville to Burbank. Meanwhile, the company has conceded to Disney’s push for sequels to popular movies like Cars, ramping up its production schedule and outsourcing some animation.

It should give others who are facing the institutional antibodies challenge hope: If Disney and Pixar — who spent years before the merger embroiled in personality clashes and combat over partnership deals — can make it work, anyone can.

Typically, business model innovation is understood in the context of the for-profit sector. When looking for new ways of being innovative, companies might find inspiration in the last place they would have expected: the non-profit sector. Those tasked with running a non-profit are forced to think differently in order to maximize the impact on those in need, while minimizing overhead and reducing direct costs related to providing the public service.

In a recent article in New York Times magazine, Stephen Dubner and Steven Levitt discuss a new trend -- charitable organizations run like businesses. One of these new models is an organization called Smile Train, which calls itself a “new breed of non-profit that is run like a for profit.” This non-profit shares the same mission as organizations like Operation Smile: to provide free cleft lip and palate surgery for millions of poor children in developing countries. While traditional treatment missions offered by organizations spend as much as $1,400 on a cleft surgery, Smile Train has managed to reduce the cost of a single surgery to $250.

How have they achieved this 82 percent cost reduction? (Social) business model innovation. Smile Train has managed to innovate along the same dimensions we would consider when analyzing the business model of a for-profit organization. We think of a business model as an organization’s blueprint, a complex system governed by interdependencies between four key components: a consumer value proposition, a profit system (for non-profits would include direct and overhead costs), key resources and processes. Smile Train has managed to take an innovative approach to each of these components.

Profit systems & Processes: Traditional missions provide cleft palate surgeries by transporting philanthropic doctors to developing countries to conduct as many surgeries as possible during the short period of time they are there/where there is a need. Travel expenses, equipment and supplies may account for as much as 75 percent of the total cost per surgery. Due to a small number of doctors and a large number of children in need, nearly 80% of these children are turned away. Smile Train has taken a different approach to solving the same problem by using new technologies, including digital patient charts, virtual surgery software and a digital cleft library in order to train local physicians to perform the surgery. Not only does this dramatically reduce costs, but it enables and entirely new population of physicians to perform multiple surgeries, thereby reducing costs even further.

Key resources at Smile Train –- funds provided by generous donors -– are focused solely on covering equipment and materials necessary for each surgery and improving training programs for local doctors. In the traditional non-profit model, a percentage of these donations covers administrative costs as well as efforts to raise more money. This results in a new value proposition for donors as well. Beyond key resources and processes necessary to dramatically reduce costs, Smile Train’s founders pay out-of-pocket for all non-program expenses. As a result 100% of donations go directly towards paying for cleft surgeries, and 0 percent goes toward administration and overhead, which accounted for only 2 percent of total expenses in FY07.

In order to maximize the number of free cleft palate surgeries performed on millions of children in need, Smile Train looked to traditional businesses to find new ways to approach the non-profit model. Out of all cleft charities, Smile Train claims to have the “highest productivity and lowest overhead.” Wouldn’t any for-profit company love to say the same?

 

The market reacted with surprise today when it emerged that Blockbuster has offered about $1 billion to purchase electronics retailer Circuit City. The potential deal threatens to distract both companies from the unenviable task of wrestling with disruptive forces affecting their respective core business models. Over the past few years, online video rental pioneer Netflix has used its no-late-fees model to pummel Blockbuster. After dragging its heels for a few years, Blockbuster started fighting back in 2004. It now has a reasonable share of the online market but has never figured out how to be as profitable as Netflix. And Netflix is moving on to the next act -- developing a strategy to win in the video on demand market. Circuit City has had to contend with Best Buy, whose larger stores and lower prices have allowed it to dominate the electronics retailing market. Circuit City is also trying to play catch up in the emerging market for services to small businesses and individual consumers, where its Firedog service trails Best Buy's Geek Squad service. Behind Blockbuster's bid is a bold plan to expand its retail footprint and transition its business from video retailing to become in the words of CEO James Keyes a "one-stop shop with solutions for the consumers". Keyes said the combined entity could model itself after Apple's popular stores. Consumers could rent videos from Circuit City locations, or buy hardware from Blockbuster locations. Combining Blockbuster and Circuit City seems like a pretty bad idea to me (Circuit City doesn't seem to be convinced either -- the company is refusing to give Blockbuster access to its books).... Read the rest at Innovation Insights

 

In her previous post, my colleague Kathleen considered the implications of disruptive innovation as it applies to the business of charity. In making her point, she mentioned CK Pralahad's 2004 book, The Fortune at the Bottom of the Pyramid, and one of the success stories cited within, that of the Hindustan Lever Limited (HLL).

HLL's success is a great story of a company creating a business model customized to the local market; it is also a great story of an incumbent reacting to a disruptive startup. However, HLL almost failed to spot the disruption until it was too late, and the story of their success partially obscures the achievements by the true innovator -- a company called Nirma.

Nirma was founded in 1969 by Dr. Karsanbhai Patel, a science graduate and government chemist. Patel had been experimenting with ingredients in his back yard to make a detergent. After discovering a simple recipe, he founded Nirma to sell his product door-to-door in the neighborhood. In interviews, Patel has discussed the company's origins saying, "It all started to earn a side income, and at that stage, I had never imagined this kind of success."

Nirma retailed at only a fraction of the price of competing products, costing only Rs.3 per kg instead of Rs.13 per kg charged by the competing brands. The product was a great success not only because of its low cost and high quality, but also due to the unique door-to-door distribution model pursued by Patel.

Initially, Patel had a great deal of difficulty in persuading the local shop owners to stock his product. It was only when he recruited local housewives to help sell and create demand for the Nirma product that he stumbled upon a compelling and scalable business model.

By the early 1970's Nirma had appeared on the radar screen of executives at Hindustan Lever Limited. HHL was the manufacturer of Surf, one of the best-selling detergents in the country. However, their reaction was dismissive, saying, "That is not our market”,and “We need not be concerned."

Their perspective was that Nirma was an inferior quality product being sold to people who weren't currently purchasing Surf, and that their sales would be unaffected by any growth in Nirma's popularity.

Luckily for HHL, they soon recognized the disruptive threat posed by Nirma, and were able to adapt their own strategy to compete, launching Wheel detergent to try and stem the (ahem...) tide of Nirma into the low end of the market.

In developing their strategy to fend off Nirma, HHL’s wheel product was created specifically for low-end consumers. HHL noted that the primary source of water for washing was river water, and so created Wheel with a high percentage of oil relative to water. HHL also created entirely new production, distribution and marketing capabilities in order to deliver and sell Wheel, investing heavily in creating entrepreneurial door-to-door programs aimed at driving sales at the village level by tapping into the networks of local rural women, just as Nirma had done.

So, what lessons can we draw from this case?

1. Target disruptive products at non-consumers: By targeting non-consumers of existing laundry detergents, Nirma was able to stay 'below the radar' of Hindustan Lever, giving them time to experiment with their sales strategy, refine their business model and then grow rapidly - all while avoiding competition.
    
2. Create a compelling solution by considering Gives and Gets relative to existing solutions: Nirma offered a compelling solution allowing consumers to make a simple trade-off relative to existing products. Get a far cheaper alternative to Surf, but Give up a fraction of the cleaning power, which was already more than sufficient for most laundry occasions.
    
3. Think expansively about how you define your market. Rather than categorizing it along traditional dimensions, consider definitions using a jobs-based segmentation. Had HHL thought of their market in this way, it would have been far clearer that Nirma was a disruptive threat at an earlier point in time.

Alasdair Trotter is a venture leader at Innosight Ventures.

Rebecca Waber

 

Theres a lot of excitement, as well as a lot of skepticism, surrounding e-readers like Amazons Kindle and Sonys Reader. Believers in the technology are thrilled with the ability to carry an entire library around with them, as well as the ease of looking up an unknown word or immediately purchasing the sequel when they finish a novel. On the other hand, skeptics point out several disadvantages: the high price point ($399 for the Kindle), peoples psychologically high standards for replacing the revered book, and an e-books inability to be lent out, written on, or passed on through the generations. On balance, it appears uncertain if the Kindle will spark the reading revolution Jeff Bezos is hoping for.

One thing stands out to me amid the debate, though- why the exclusive focus on books?

The technology that makes these e-readers possible is electronic ink (eInk) and electronic paper, which work by using electrically charged ink particles suspended between two layers. The Kindle uses an electronic paper product made by eInk Corporation. The eInk technology has many novel advantages; not only does it allow you to change text after a document has been produced, it also works in all light levels, including direct sunlight, its flexible, and doesnt need to use power when maintaining an image. This gives it disruptive potential vis--vis both hard-printed media as well as electronic screens.

Many other applications would welcome these advantages and could be accepting of the tradeoffs. Some ideas that come to mind are signage and flexible electronic price tags. In fact, there is already movement down the non-book path; an eInk watch is already for sale, and several cellphones in Europe are being developed to have roll-out flexible displays that significantly increase screen real estate while maintaining the phones small form factor. These markets may well prove to be important stepping-stones for the commercialization of this potentially disruptive technology. Ultimately, given the more recent developments in both color and video-capable epaper, eInk may eventually allow us to rethink the very definition of screens.

 

Rebecca Waber

 

If youve ever wished you could buy your very own Star Trek-type replicator, youre finally in luck. While not quite so instantaneous or hands-off, it is now actually possible to create a vase or spatula right on your desktop. And "3D printing, as it is known, is a technology with incredible disruptive potential.

3D printing actually refers to a number of different processes, but what they all have in common is that they take a 3-dimensional image (like a CAD image, or even a CT scan) and build up that object in a progression of layers. These devices are sold by a number of companies, such as Dimension Printing, Desktop Factory, and Z Corp.

3D printing can not currently compete with traditional manufacturing in terms of mass-produced products; it has lower resolution and durability, not to mention the inability to produce high volumes of goods. However, 3D printers have been constantly improving in terms of their size, speed, cost, and need for human intervention.

So far, based on their current capabilities, 3D printers have found a foothold in rapid prototyping. They tend to be marketed towards professional designers, students, engineers and architects who value the ability to produce custom models and prototypes in-house, and for whom low volumes and the other deficits of the technology are not a problem.

And yet, the potential for this technology outside the rapid prototyping market is vast, and its eventual markets unknown. One exciting application may be in biotechnology, as researchers are already studying the possibility of printing organs and bones. The technology also offers the possibility for extremely personalized consumer goods, since tweaking a digital design is relatively easy. With companies competing to produce machines affordable for even the home, and one group even helping do-it-yourselfers build their own 3D printer, Im already imagining a future where people buy (and probably pirate with illegal file-sharing) digital blueprints instead of physical objects for certain classes of products. Consequently, not only does this process of manufacturing have the potential to dramatically shake up its own industry, but the industries of the products it manufactures. This may not be something well see soon, but this is definitely a technology that Im going to keep my eyes on over the next couple of decades. Breakthroughs in the key performance dimensions mentioned above size and cost of the machine, print speed and quality, ease of use and automation could lead to significant disruption in the markets suited for the new benefits that 3D printing provides.
 

In my last blog post, I referenced recent announcements by Microsoft, Google, and Apple of new or increased online storage offerings. In the post, I took advantage of these announcements to envision a world where personal computing (i.e. applications, storage, content) would migrate to the cloud, signaling an end to local computing as we know it. Rather than requiring a heavy client device such as a traditional desktop or laptop computer, a user would be able to access online applications, storage, and content through any connected device with web browsing capability (i.e. from a wristwatch and mobile phone to a home appliance with a screen or a television to a connected vehicle).

The evolution of inexpensive (moving to free) online storage, ad-supported online applications, inexpensive connected client devices, and inexpensive (one could argue that its costs will shift to zero at some point) connectivity have tremendous implications for the ways in which business gets accomplished in the future. Consider the following

In 1937, economist Ronald Coase published an article, The Nature of the Firm, in the journal Economica. Within the article, Coase argues that firms exist because there are costs inherent to free markets such as costs of communication, of sharing information, of trying to find goods and services. Given these costs, Coase suggests that firms are formed because it is more efficient and less expensive to complete many of these tasks internally within a formal organization rather than outsourcing them to the market and thus incurring these added costs.

In September 1998, MIT Professors Thomas Malone and Robert Laubacher published an article in the Harvard Business Review entitled, The Dawn of the E-Lance Economy. In the article, Malone and Laubacher describe how the evolution of technology and the decreasing cost of communications are making the traditional corporation obsolete. Taking this idea further, the authors envision a world where business is "carried out autonomously by independent contractors connected through personal computers and electronic networks. These electronically connected freelancers--e-lancers--would join together into fluid and temporary networks to produce and sell goods and services. When the job is done--after a day, a month, a year--the network would dissolve and its members would again become independent agents. (Citation)

Consider these two articles jointly. In essence, Malone and Laubacher argue that the evolution of technology reduces to zero, over time, many of the costs that form the basis for Coases argument. If the costs inherent to free markets disappear or at least become negligible, it becomes possible to marketize all sorts of functions and tasks traditionally left to formal organizations. Along these lines, in 2004, Malone published The Future of Work, an excellent book examining how decreasing communication costs will lead to the decentralization of organizations.

These trends and analyses, when viewed through an Innosight lens, fit the patterns of interdependency and modularity. In 2003, Clayton Christensen and Michael Raynor authored The Innovators Solution, a follow-up to Christensens 1997 work, The Innovators Dilemma. Within Solution, Christensen and Raynor introduce a discussion of interdependent and modular systems. Synonymous with optimized or proprietary systems, interdependent systems have unique linkages between elements ranging from product components to the members of a product value chain. Essentially, the pieces are integrated like puzzle pieces and have only specific partners (consider the iPod and iTunes). Modular product architectures, on the other hand, are synonymous with the concept of plug-and-play and resemble building blocks, consisting of standardized interfaces, enabling parts to be easily swapped in and out (consider Linux or Java vs. Microsofts integration of Internet Explorer with the Windows operating system).

By definition, interdependent systems often lead to higher performance than modular systems because the system is closed and optimized. In contrast, modular systems often lead to lower costs because there are a greater number of suppliers, since interfaces are standardized and pieces can be swapped in and out. In industry, interdependency is often required to raise the performance of a new solution. Eventually, however, continued interdependency often drives the performance of that solution beyond that which the target market is willing to pay for. The target market then frequently turns to modular solutions which, at that point, often offer good enough performance along with modularity-driven advantages such as lower cost, convenience, or other ancillary benefits.

Returning to the Coase and Malone and Laubacher articles, it is clear that the potential shift from hierarchical, industrial corporations and multinational megacompanies to one of individual e-lancers can be considered similar to the shift from interdependency to modularity. Indeed, considered in the context of the definitions above, the dominant corporations and value chains of today can be thought of as interdependent architectures, delivering high levels of performance when complex coordination is called for. On the other hand, such corporations and value chains are often fraught with challenges such as high costs due to overhead and of putting specialized systems into place (e.g. the costs of maintaining physical infrastructure, HR systems, training employees, employee benefits etc).

As Christensen and Raynor found, modular architectures are often the solution when interdependent architectures prove too costly. Considered in the context of this research, the e-lance economy may represent a modular stage of organizational evolution - indeed, an architecture of easily swappable or plug-and-play components (e.g. individuals or resources). In an age where closed, proprietary systems are recognized as inhibiting the ability of organizations to respond to or even identify innovation-borne change, modularity seems a promising answer; virtually every element of the value chain could come together on an ad-hoc, objective, modular basis without being hamstrung by the subjectivity and myopias brought on by business process and the long-term commitments to physical infrastructure, a capital investment in which innovation may quickly make irrelevant.

On the premise of a future in which organizations become increasingly loosely organized, a forthcoming blog post will examine how vendors can put themselves in the best position possible to create and capture value when an immense shift (such as this one) occurs - as Christensen, Raynor, and Matthew Verlinden articulated in their 2001 Harvard Business Review Article of the same name, it is important to Skate to Where the Money Will Be. In the meantime, I look forward to any and all thoughts, reactions, comments, and questions.

All companies aspire to reach that critical billion dollar mark " a steep goal for any business. Google, eBay, Yahoo, and Intuit are just a few examples of an elite group of companies that built breakthrough ideas into billion dollar businesses. In the recently released book Blueprint to a Billion: 7 Essentials to Achieve Exponential Growth, David G. Thomson identified the success-patterns of these billion-dollar Blueprint companies.

Innosight found that over 50% of the blueprint companies [that reached a billion] studied by Thomson were disruptive businesses, supporting Thomsons first Essential to building a billion dollar business: develop a breakthrough value proposition that creates, redefines or optimizes a market.

If you have been following Innosight and this blog, you know that disruptive businesses that either create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations have a higher probability of success than those that do not. Properly managed, disruptive strategies have tremendous potential to create growth and transform markets.

The key to creating your own billion dollar baby is to find the next big idea for growth and then properly manage that growth on a trajectory to a billion dollars. Easy, right? If you would like to learn more about how to grow your business to a billion, check out these resources:

To learn more:

Blueprint to a Billion: From Disruption to Dominance by JOE SINFIELD, DAVID G. THOMSON, AND CHRIS CARTER " forthcoming article in Strategy & Innovation

FREE WEBINAR: Join David Thomson and Joe Sinfield for The Path to a Billion, August 24th 11:00am EDT

1-day Workshop: The Path to a Billion: Turning a Big Idea into a Billion Dollar Business, September 21st, Reston, VA

From the Wall Street Journal this morning comes a story about disruption in interstate bus travel. New entrant Megabus.com, hubbed in Chicago, serves eight cities in the Midwest and advertises fares as low as $1.50. Like its airline counterpart Southwest, the companys operating expenses are far below rivals. Passengers reserve tickets online eliminating staffing costs. Megabus routes leave from street corners avoiding the congestion and fees of major bus terminals. The service targets both non-consumers, drivers wary of Chicagos $3+ gas, and low end consumers of other bus services willing to forego flexibility and amenities for bargain basement prices. On a typical route, rival Greyhound advertises fares three times higher than megabus.

Low end bus services have had success in other markets. The famed Fung-Wah bus services linked cities like Boston and New York for as little as $10. Fung-Wah initially served the cities Asian communities traveling Chinatown to Chinatown. Despite few amenities, a spotty safety and on-time record and the occasional live chicken passenger Fung-Wah and its imitators soon became favorites with students and budget travelers up and down the east coast. And Megabuss own parent company Stagecoach started a similar bargain bus network in Scotland.

So how does high(er) end rival Greyhound respond? By emphasizing its upmarket amenities. According to the WSJ: Greyhound says its customers can walk in and buy a ticket on the day they travel, rather than having to reserve it online. Then, they can wait in terminals with wireless Internet and TV sets.

How about it? Is megabus good enough or do you need Wi-Fi to make the wait for your bus ride worthwhile?

Getting the Customers Innovation Job Done
Tuesday, February 28th - 12:30pm - 2:00pm EST

Learn tips and tricks for increasing the odds of creating winning new offerings. Join Harvard Business School Professor Clayton M. Christensen as he discusses his latest research summarized in the recent Harvard Business Review article, "Marketing Malpractice: The Cause and the Cure." He will talk about the jobs-to-be-done framework of understanding customers and expand on these concepts. Professor Christensen will explain how a company can create new markets by innovating to help customers perform a job for which no optimal products exist.

Innosight 1-day Innovation Seminar
Thursday, April 27, 2006 - Chicago O'Hare Hilton

Innosight is holding a one-day, cross-company workshop that will go over the basic disruptive innovation principles and how to put the principles into action. This seminar is a cost-effective way to train you or your team in the principles and can be a vehicle for a team that is struggling with a disruptive problem to learn a new way to problem solve.

The day has been designed to help you develop the capabilities you need to create innovation-driven growth within your organization and to equip you with tangible tools and techniques to do so.

Register by March 15th and save 10%. Register a group and save up to 30%. Seating will be limited in order to enhance the learning experience and enable individualized application of the concepts and tools.

"Best seminar ever (I have taken many in the past 20 years)"
~ Comment from a participant at the December Innovation Seminar