Friday, December 7, 2012

Find the Next Disruptor Before it Finds You

The head line says it all. Aivars Lode

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I'm Sarah Green. I'm talking today with Max Wessel, a Fellow at the Forum for Growth and Innovation, and a Senior Researcher at Harvard Business School. He is the author, with Clay Christensen, of the HBR article Surviving Disruption. He also blogs regularly for So Max, tell us what the problem you're really trying to solve with this piece is?
MAX WESSEL: Sure. Surviving Disruption actually came from a hypothetical. I was walking down the street talking with a friend-- a colleague at Harvard-- about, in fact, the future of retail. And we're both heavy technologists. And we tend to embrace any new buying format, any mobile purchasing, as soon as anything is available in app form on our phones. We were quick to adopt e-commerce in the era of the web browser.
And we were walking down the street and talking about the significance of disruption, when I kind of posed the question, well, what do you think is going to happen when Amazon puts all of these mom and pop stores, or local chains, out of business? Because I can't imagine looking down the side of the road and seeing no storefronts.
And that was really the first time the two of us had taken the perspective of the incumbent's view. There are things that the incumbent companies in the world-- the Barnes Nobles of the world, the Tower Records-- could do to satisfy jobs in our lives that require physical presence. And as much as I tried to imagine the world without a need for physical presence and physical interaction, I couldn't.
I always picture myself walking into a store, whether it be for an impulse purchase, or just to try one thing out or another. So Clay and I set out thinking on what it is that big companies could do-- these sorts of assets, and these legacy businesses that are incredibly valuable, and in fact generate huge customer value-- what they could do to really preserve as much of their core business as possible in the face of technological destruction.
SARAH GREEN: So it's interesting to think about the difficulty with which you were trying to conjure up that vision of a street with no stores on it. Because it seems like part of the challenge for these legacy businesses is trying to imagine what for them is the unimaginable. It seems like by the time it's obvious what the threat is, and you can imagine it, it may already be too late.
So how do you first start to monitor the companies, or the trends, that might spell big trouble for your business? Because sometimes they're not even coming from your same industry. It could be a trend in a different industry that ends up migrating over to your industry and totally disrupting you.
I'm thinking, for instance, of the example you use in the piece of cellphone cameras. And how that ended up totally disrupting the digital camera market. So how do you be on the hunt, have your finger on the pulse, for those kinds of trends where you couldn't really imagine it?
MAX WESSEL: So let me reposition that. And I'm going to talk a little bit about jobs to be done. As you're familiar with, inside the piece and throughout kind of our lexicon, we talk about jobs to be done and their significance. And really what those are, which is what the fundamental job is that a customer is trying to accomplish in their life every time they purchase a product-- a good or service.
And so for the retailers who can't imagine a world without retail, that is a broad generalization that lacks the focus on exactly what a customer's trying to accomplish. For Kodak and Canon and Nikon, the companies who were producing cameras who couldn't foresee this paradigm shift, really if they had understood that the fundamental job of capturing a moment was one in which they were competing for. And then there was another job to be done that required the big SLR camera, that was really about the artistry of image generation, or some such thing. Because they hadn't bifurcated and understood that granular difference in what they did for their customers, they couldn't see this impending threat of cell phone cameras.
But if you started from this foundation of what is it that I do for customers? Well, for customers I actually just help them capture a moment in an instant. The quicker I can get to that moment, the less friction there is, the better. I mean first of all we started with half a megapixel camera in flip phones, the Motorola Razr, the original Motorola Razr. And it's very, very-- well we'll say it's lacking at best, it's sensor technology in its camera.
But the fact of the matter is that phone was out all the time. People had it, people carried it in their pocket no matter where they went. It was fundamentally different than the use of a big point and shoot camera. And that allowed cellphone cameras to be so pervasive that they could capture any moment. They could complete that job to be done. So if Canon had recognized, from the very beginning, that it wasn't about the quality of their sensor necessarily, and the quality of their colors, but completing that job to be done required this universal pervasiveness, this proliferation of lenses. Then maybe they would have seen the impending threat more quickly.
With that in mind if I were an incumbent, the first thing that I would do, is make sure to engage in kind of these deep jobs-based segmentation studies of my customer population. To really, truly understand what people are trying to accomplish. And then this set of competitors that compete in that space.
SARAH GREEN: OK, so once you actually have done that deep dive and are starting to understand the job that your customers are really hiring you to do, or a segment of them, what do you actually start to do about it? How do you start to turn the Titanic around before it hits that iceberg?
MAX WESSEL: Well, you know, it's very funny. You take turn the Titanic, I consider the recommendation in the prescriptions of Surviving Disruption as business judo. There are certain things in the world for which cellphone cameras are better positioned then point and shoots, and better positioned then SLRs. And there are jobs as you go about and you do your job space segmentation, and you are thoughtful and honest with yourself about the benefits, the core strengths of your disruptor's extendable core, if you're honest about that, then you'll say these jobs I can't compete with. But there will also be a set of jobs for which you are uniquely positioned, because your product has still advantaged.
So this is the creating great art. the SLR, the Nikon's kind of reinvention around very, very, very high quality cameras, and in fact making those cameras even better for a knew population of customers. I don't know if you're familiar but now there's a mirror-less SLR camera. So we have Nikon and Cannon investing in making professional quality cameras, and these very high dollar value systems, less expensive so they can appeal to a broader consumer population. And so that creating great art is something that a cell phone camera just is not positioned to do, because it has to be small. It has to fit in my pocket. It should get thinner, and thinner, and thinner. And because of that, it's never going to have a telescopic zoom. It's not going to be something I take on Safari.
So as Canon and Nikon recognize that, and they recognize their inherent advantages, they can move out of the way of their disruptor, and kind of embrace their strength. And if they embrace their strength, they can get out ahead of the game. They can jump out in front of Olympus. And that's part of it, understanding what you're going to lose and recognizing where you can win.
SARAH GREEN: So you used a phrase there that I'd like to go back to a little bit. The extendable core. To the uninitiated, that could sound like something maybe out of Star Trek, or Harry Potter, or something. The Extendable Core, what is that exactly? What do you mean by that?
MAX WESSEL: Yes, good point. Using business jargon without defining business jargon. The extendable core is a concept that we introduce in Surviving Disruption that a colleague of ours, Michael Raynor, hinted at in his latest book The Innovator's Manifesto. But really what it is, what differentiates disruption from price competition. All disruption is built around either a technology change or business model innovation that provides an advantage as a company scales.
For example, let's take the realm of online retail, where we talk about this loosely in the piece, and there's a lot known about it. So hopefully some listeners can identify with. But an online retailer has in extendable core that's built around the absence of physical space to appeal to an incremental customer, Amazon doesn't need to build a new store. It doesn't need to increase its working capital. It's working capital demands don't increase by adding a new distribution outlet, because everything's warehoused kind of centrally in a metropolitan area. It doesn't have to pay for additional shelf space to put an image of a new book online. It doesn't need to pay for additional fixed cost infrastructure when it dives into home furnishings, for example.
And so that digital storefront provides an extendable core. Where Amazon started in books, it could slowly move up market and get better and better and better, without adopting the same infrastructure costs as it's up market competition. This differs from for instance, a hotel chain. A hotel chains like Best Western competes and has a cost advantage with the hotel chain like Four Seasons. But there's no extendable core there. Best Western still has to pay for physical space. It still leases a building, or buys property, develops its hotel, pays for furnishings, et cetera.
And if it wanted to compete with the Four Seasons, it would have to adopt the same cost structure. It would have to hire a well-trained concierge. It would have to bring in a four star chef to run a restaurant. It would have to invest in major infrastructure-- your costs in terms of getting better beds, and better sheets, and all of the things that the Four Seasons does that allows them to position themselves as a high end hotel.
So without an extendable core, we see price competition not disruption. So the Best Western isn't disrupting the Four Seasons. A company like Airbnb on the other hand is. Where their advantage is in aggregating a lot of independent listers of free space. And so as Airbnb goes around and signs up better bed and breakfast, and people with nicer homes, it can breach ever closer to the Four Seasons in terms of quality, without adopting the same cost structure.
SARAH GREEN: So a question about that. Because that to me seems, in the case of the Airbnb and Best Western, that to me seems like a place where it could just be price competition. Because you're giving up something, namely privacy, in the ability to come and go as you please and not have to be polite to other people, for the convenience. And really the cost of staying some place much cheaper. So if you were in this case Best Western trying to use your article to maintain some advantage, to maintain business, what would you do?
MAX WESSEL: So if I were Best Western watching the disruption of Airbnb, I would recognize that there are certain number of things that Airbnb can't provide its customers. So it can reach ever further up market. But the way it does it is with a nonstandard product. Because it's a platform connecting people renting space with potential renters. You have a huge nonstandard amount of inventory. So there's no guarantee to the business traveler that there will be wi-fi. There's no guarantee that there will be clean sheets, or a clean bed, et cetera. There's no office fax. There's no smart technology integration there. So you don't see people aware that your flight was delayed, and you're getting in late.
So if I were Best Western, I would figure out, of the jobs to be done that I complete for my customers, who amongst those customers need something that's a standard experience. I would figure out how to tack on those little incremental things that appeal for the person who's looking for an office away from home-- a home office away from home. There's something there, there's an opportunity there that would allow Best Western to kind of fortify its position from the oncoming disruption.
SARAH GREEN: So this approach of focusing on the job to be done, and looking for ways you can extend your core to maintain advantage, this all seems to make sense. So why then does so many companies get it wrong? Why do so many companies see the train coming, and can't get out of the way?
MAX WESSEL: Well, it's easier said than done to admit that somebody is positioned better for your customer then you are, for two reasons. One, because I think we all suffer from a bias of perspective. We're ingrained to see the world such that our companies are-- the be all, and end all of customer value creation. And that's true. It's just an inherent bias associated with all the jargon that we eat, we submit ourselves to in advertising, et cetera. So we've refocused-- a lot of us refocus around our company instead of the customer. So that's one flaw.
The other flaw is, frankly, we have real fixed cost infrastructure that needs to be maintained. And the threat of losing 20 to 30% of your customers over the course of 10 years, that's a threat that most of us aren't ready to accept, or a proposition that most of us aren't ready to accept. The problem with not accepting that proposition in the face of disruption, is that it doesn't really matter.
It didn't matter for Borders that they weren't willing to admit Amazon's unique value proposition for their own customers. Because Amazon was going to come in and steal those customers whether or not they were ready to admit it. The faster we can kind of come to that realization, and the faster we can change our core business strategy, the better. And frankly the faster we come to that realization, the faster we begin disrupting ourselves as well, which is still a key part of this entire prescription that we come forward with.
SARAH GREEN: Well Max, thanks so much for chatting with us today.
MAX WESSEL: Absolutely. Thanks for having me.

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