Here's an "old-school" rendition of a framework that shows how the customer value of a web-based business (a venture built around one main offering) evolves under the pressure of innovation and commoditization, respectively. Feel free to use the image as wallpaper or poster. (Also available, PDF version here and TIFF version here.)
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Deeper Insight Into Disruptive Innovation
Disruptive innovation. Disruption. Whatever you call it, this concept/phenomenon championed by Professor Clayton M. Christensen of Harvard Business School remains almost as popular as it was more than a decade ago when it was first articulated. Simply put, it explains how upstarts can defeat well-entrenched companies. Some background is available at Wikipedia, but for convenience, I copied here a brief description from Professor Christensen's book "The Innovator's Solution" (chapter 2, page 32):
"Our ongoing study of innovation suggests another way to understand when incumbents will win, and when the entrants are likely to beat them. The Innovator's Dilemma identified two distinct categories--sustaining and disruptive--based on the circumstances of innovation. In sustaining circumstances--when the race entails making better products that can be sold for more money to attractive customers--we found that incumbents almost always prevail. In disruptive circumstances--when the challenge is to commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer set--the entrants are likely to beat the incumbents. This is the phenomenon that so frequently defeats successful companies. It implies, of course, that the best way for upstarts to attack established competitors is to disrupt them.
Few technologies or business ideas are intrinsically sustaining or disruptive in character. Rather, their disruptive impact must be molded into strategy as managers shape the idea into a plan and then implement it. Successful new-growth builders know--either intuitively or explicitly--that disruptive strategies greatly increase the odds of competitive success."
Great! Nonetheless, using the fundamental theory of business that I introduced in the presentation "A Fundamental Theory of Business" (at BizBigPic), and recently detailed in the article "A Business-Relevant View of Human Nature," it is now possible to dig even deeper into this interesting concept/phenomenon.
In short, the new perspective shows that disruption occurs when an entrant introduces a simpler and cheaper offering (O2), relative to the incumbent's existent offering (O1), and then increases its commoditization rate to reach a critical mass of customers before the incumbent can retaliate. Beyond this critical point, the incumbent will not only have difficulties introducing its own new offering (O2) to compete directly (head-to-head) with the entrant, who by now has developed a dominant presence, but it will see its old offering (O1) become increasingly irrelevant to its typical customers, who now begin to adopt the new offering (O2) instead. In other words, the incumbent's business associated with the old offering (O1) will begin to shrink -- it will be disrupted.
Clarifications, conditions, and other details:
a) The new offering (O2) is a downward breakthrough innovation based on the existing offering (O1). Slightly different than Prof. Christensen's categorization, I distinguish between two basic types of offering innovation. The first basic type of innovation is breakthrough innovation, which is a new offering based on (or derived from) an existent offering. If the resulting offering is simpler and cheaper, then I refer to it as a downward breakthrough innovation. If the resulting offering is more complex and more expensive, then we are dealing with an upward breakthrough innovation.
The second basic type of offering innovation is sustaining innovation, which refers to the incremental improvements of an offering over time. In this case, however, the result is perceived as the same offering. Thus, sustaining innovation generates the force/pressure that opposes the force of Commoditization (see slides 3 and 4 in the presentation mentioned above, and page 15 in the article).
b) The combined action of (Sustaining) Innovation and Commoditization generates the commoditization trajectory (see more on the slides and pages mentioned in the previous point). However, an offering's commoditization does not happen in vacuum; it takes place relative to a group of customers. Specifically, it takes place relative to a homogenous group of customers that have the same behavior relative to the offering. That is why the same offering can (and usually does) have multiple commoditization trajectories and velocities, each associated with a group of customers as mentioned above -- each virtual business space defined by the offering and such a group of customers is termed tofmos, and each "slice" of a tofmos associated with a vendor is termed ofmos (see more on slide 5 in the presentation).
This is important, as it reveals an essential condition for disruption: the customers for the old offering (O1) and the customers for the new offering (O2) must, in fact, be part of the same broad, homogenous set of customers that have the same behavior relative to the new offering (O2). Remember, the whole point of disruption is for the entrant to "beat" the incumbent. But if the customers that are supposed to switch from the old offering (O1) to the new offering (O2) have a different relative behavior than the customers that already employ the new offering, then they enter/create a new tofmos that is different from the one in which the entrant vendor has supposedly built a dominant position. In this case, the incumbent could "escape" the effects of disruption by entering the new tofmos relatively early.
In light of this finding, the distinction between low-end disruption and new-market disruption becomes more of a detail. Whether the entrant's initial customers are some of the incumbent's customers that employ the old offering (O1), or a completely new set of customers, in the end, all customers involved should be part of the same homogeneous group characterized by a unique behavior relative to the new offering (O2).
c) According to Prof. Christensen, an offering's "disruptive impact must be molded into strategy." Well, the new perspective shows that this "strategy" is to speed up the offering's commoditization in order to reach a critical point before the incumbent gets to retaliate. Assuming that the entrant has eliminated the "escape" alternative mentioned above, beyond this point, neither of the two options available -- speeding up the commoditization of the old offering (O1), nor introducing its own new offering (O2) -- will be enough to save the incumbent.
Why? Every offering, as the defining component of a tofmos, has a limited life span -- the length of its commoditization path. Also, by nature, more complex offerings not only commoditize slower, but they have shorter life spans. So, even if the incumbent attempts to speed up the commoditization of its old offering (O1) in order to increase its customer base, the inherent complexity and associated costs for the customers will stop this expansion short, while the entrant continues to expand the market for its new offering (O2). In other words, even if the old offering (O1) is offered free, the costs associated with its use will prevent additional customers from adopting it.
The incumbent's second option is to develop its own new offering (O2) and compete head-to-head with the entrant. While the incumbent's action in this direction is typically delayed by the legitimate fear that the new offering (O2) will cannibalize the old offering (O1), the entrant is supposed to speed up the commoditization of its new offering (O2). So, by the time the incumbent has readied its new offering (O2), the entrant's position in the tofmos it created is so dominant that the incumbent will find it difficult to gain much traction.
In closing this post, I would like to emphasize that speed is very important when it comes to disruption -- and the new perspective does a great job at showing it.
Cool Graphic T-shirt: MYTREEOFNEEDS
The graphic is a witty play on the theory of needs (issues) and human behavior presented in the article "A Business-Relevant View of Human Nature."
In essence, the theory states that:
1) At any given time, every individual possesses one, and only one, dominant issue to address;
2) Every individual possesses a dynamic hierarchy of issues that stems
from the dominant issue; and
3) Every individual employs one of three basic problem-solving behaviors
when addressing issues.
My Diesel Wall 2008 Submission (for Zurich)
"Diesel Wall was born out of a need to salvage what precious public space is left. We will take your art, your powers of dissuasion; your ability to disrupt; incite; excite; inspire and intrigue; to make comment; to make beautiful; to make real; to make people think again. And we will give you walls in 4 major cities around the world: New York, Barcelona, Manchester, and Zurich." (Diesel.com)
I submitted an artwork for the Diesel Wall Zurich.
"Diesel Wall Zurich is one of the most prominent walls in the city. From its humble preside on the border of a residential area, this wall rises from the edge of a parking lot, above the busy streets below, to be clearly visible from the 50,000 capacity Zurich Letzigrund football arena. Letzigrund is one of the key stadia to play host to Euro 2008 as well as open air concerts, athletic championships and many other cultural events." (Diesel.com)
The shortlist for the Diesel Wall Zurich has been announced today. Congratulations to the 12 finalists!
(more at www.diesel.com/cult/wall/zurich/shortlist.)
My artwork did not make the shortlist. Nonetheless, I would like to take this opportunity and share my submission with you here:
Title:
Everyone has a tree of needs
Description:
The artwork "Everyone has a tree of needs" is primarily a call for celebration.
I. From the distance, there are two adjacent elements that stand out. One is the caption "everyone," and the other is a human silhouette, which depicts a soccer player in the moment immediately following the scoring of a goal. It is a moment characterized by a unique, utterly-human burst of energy/celebration/happiness/ecstasy that occurs in many, if not all, sports. Nonetheless, this particular image captures the moment as it commonly occurs in soccer -- with the player running toward his/her teammates and/or fans while gesturing "Number 1."
The intended message for this "view from the distance" is: "EVERYONE, CELEBRATE! BE HAPPY!" And it is a message aimed at all viewers, regardless of their activity (i.e., attending a concert), as the image focuses on celebration, not on the game of soccer itself (there is no ball depicted).
II. Upon closer look, the artwork reveals the entire caption, "everyone has a tree of needs," as well as the fact that the human silhouette is actually a tree structure of round objects. Together, the caption and the tree structure are a simplified presentation of an innovative theory of human nature that I recently developed as an independent researcher. It is a new theory that states that at any moment, every individual possesses a tree of needs. This structure of needs begins with a dominant need labeled "successful existence," which has a different meaning from one person to another, and from one time to another (typically it is understood as the long-term goal that would translate in happiness). Resulting from the effort to address the dominant need, the rest of the structure is generated through a process of disaggregation (i.e., Need AB = Need A + Need B). In short, this hierarchical structure of needs is the driver of one's existence.
But why would this theory be important to the general population, you might ask? It is important because it lays the foundation for a new economic and business worldview that better reflects reality. (The current mainstream economic view of the world is largely based on concepts developed at least half-century ago.) And that is further important because there is a causal relationship between a society's economic health and democracy. So, ultimately, this theory can help us all better understand what must be done to achieve and/or preserve PERSONAL FREEDOM. (A complete account of this new theory of human nature is available for free at: www.redefiningstrategy.com/HumanNature.pdf)
The intended message for the artwork's detailed view is: "WE ARE ALL UNIQUE, HAVING UNIQUE NEEDS. NONETHELESS, HERE AND NOW, WE ARE ALL EQUAL -- A SHARED MEANING OF 'CELEBRATE! BE HAPPY!' BRINGS US ALL TOGETHER."
Sure, it is rather impossible to predict how people will interpret the artwork. The aim is not to have everyone read the theory of human nature, but rather to have everyone think. The more interpretations, the better. And hopefully, at the end of the day, some will begin asking the right questions; questions that concern our success as a global society.
Also important to mention is the fact that the artwork pays tribute to a local symbol and a National symbol, respectively:
- the blue used for the background is the same blue used in Zürich's coat of arms (see http://en.wikipedia.org/wiki/Image:Ch_zh_wappen_stadt.gif)
- the font used in the artwork is Helvetica, a popular font developed by Swiss typeface designer Max Miedinger (see http://en.wikipedia.org/wiki/Helvetica)
UPDATE 5/22/2008: And the winning artwork is "Bag Bellows Break" by Andreas Marti. Congratulations!
A New Take on the Business Cycle
The concept of the Business Cycle, or Economic Cycle, is one of the most important topics in economics. It represents the quest to understand why an economy tends to alternate between periods of growth and periods of decline, or recession (a subject all too common these days!). Expectedly, this is a fiercely debated subject, and thus there are several related theories out there -- check Wikipedia's "Business Cycle" for a good introduction to the concept. As I mentioned in the past, the business theory that I developed recently has the potential to provide novel explanations for broader economic phenomena; including the Business Cycle. Since I just published the article "A Business-Relevant View of Human Nature," which details (as opposed to the more abstract explanations from BizBigPic or my book "Spointra") the basis of my fundamental theory of business, it is now possible and timely to elaborate a little on the new perspective on the Business Cycle. Despite my efforts to keep this simple, though, you should read the article.
... Done? ... Let's move on, then.
As you know now, all business transactions can be represented on the continuum of problem-solving behaviors. At any given time, a transaction occupies a particular position on the continuum. Furthermore, over time, that position tends to move lower under the effect of commoditization. Now, if we think of a national economy as the totality of business transactions that take place within that particular country, the economy can be seen as a collection of positions, or dots, that are moving lower on the continuum of problem-solving behavior. In addition, dots are continuously added (i.e., new offerings) or discarded (i.e., irrelevant offerings). (For some help with visualizing these dynamics, you can check the second part of my video "Strategic Vision a la Spointra," with the note that: (1) it is a two-dimensional representation; (2) it refers to a firm; and (3) the continuum is placed horizontally, as opposed to the vertical orientation from the article. So, instead of a top-down movement, you will see a right-left movement.)
We know that each of these dots has an associated stream of revenue that grows larger as the dot moves lower (a.k.a. commoditizes). We also know that during its continuous evolution, the collection of dots tend to form a cluster, where a majority of the revenue is generated. I will refer to this cluster as the Center of the economy. Due to the continuous downward movement of all transactions in an economy, the Center will typically emerge at the lower end of the continuum of problem-solving behaviors. Now, there are three general areas on the continuum, each associated with a particular business environment. At the lower end, the environment is characterized by commoditized offerings, high levels of standardization, high levels of competition, low margins, etc. All this implies that practices like consolidation through mergers & acquisitions, business-process outsourcing, and personnel reduction due to process automation are very common.
I will conclude for now with some thoughts. It is clear that the Center's formation or migration to the bottom of the continuum is natural, being driven by human nature. The way down is characterized by increasing revenues, and thus economic growth. But once there, the conditions tend to worsen for most participants. Moving up or dispersing the Center can be caused by technological revolutions (which would create a multitude of new high-level offerings). However, it can also be caused by widespread divestures of irrelevant offerings, and profound social and political change (which would cause many transactions to be repositioned on the continuum), among others. That is why it is often that we see recession, or economic contraction, being associated with these sort of events.
So, there you have it -- another view of the Business Cycle, or a general pattern for economic fluctuations. I will come back with more thoughts in the future, but in the meantime let me know what you think.
An Innovation Model for the Media Business
Few business areas, if any, have been more affected by the Internet than the media. And by media I mean businesses whose activity consists of processing, managing, and distributing information (i.e., text, photo, video, music). This broader definition includes all of the traditional media and many web-based businesses. So, I thought that it would be appropriate to start my take on the business big picture by introducing an innovation model for the media business.
As you know, most media companies are businesses whose offerings are commoditized, or become commoditized very fast. And here is a way to prove this. Technology plays a major role in these companies' operations, which is a clear indication that a significant part of the operating processes are standardized. This occurs only when most of a company's offerings are delivered through the same, limited number of processes. Further, this means that these businesses thrive through the volume of transactions, as opposed to diversity. In other words, they sell or provide high volumes of only a few types of offerings, which indicates commoditized offerings (I will discuss commoditization in more detail in a future post).
Because, in media, it is rather impossible to innovate at the offering level, companies must innovate at the whole-offering level. And by whole-offering I mean all of a company's offerings plus the mechanism with which they are managed and delivered to the customers. (Although, in many cases, it is the main revenue generator, the advertising side of the media business is fully dependent on the information side of the business. More so, it addresses a different set of customers. Therefore, the whole-offering does not include advertising offerings; just information offerings.) Most media companies have just one whole-offering. In these cases, the whole-offering can be identified with the business. Some examples of whole-offerings include book distribution (Amazon.com), search engine (Google), encyclopedia (Wikipedia), video distribution (YouTube), and photo distribution (Flickr).
The logic behind the innovation model is relatively simple. On one side, there are the customers, who need information to better their existence. Fundamentally, humans follow three steps when employing information: search through the available information, gather relevant information, and then aggregate the relevant information according to a particular knowledge or algorithm in order to address an issue (i.e., entertainment, education). On the other side, there is the media business, which needs to process high quantities of a few types of information offerings, and then deliver them through one or more mechanisms (one type of offering may require a unique mechanism) to the customers. All I had to do was find a way to bring these two sides together. So, here's the result:
Whole-Offering = all of a media company's information offerings (i.e., text, photo, video, music) plus the mechanism (i.e., web-based application) used to process, manage, and distribute them to the customers.
Whole-Offering Functionality = a whole-offering's hierarchical levels of functionality (range >>> range+relevance >>> range+relevance+recipe), determined by the fundamental way in which customers employ information. Note: This hierarchy is a unique characteristic of the media business.
Range = the amount of information offerings that the whole-offering is capable of reaching.
Relevance = the actual relevance (to the customer) of the relevant information generated by the whole-offering.
Recipe = the degree to which the whole-offering's algorithm for aggregating the relevant information comes close to the algorithm that the customer would use in order to generate a solution to one of its issues (i.e., entertainment, education).
Whole-Offering Value = the level of importance of the customer issue that the whole-offering addresses.
Whole-Offering Innovation = an improvement of the whole-offering's value, achieved through the improvement of its functionality along the hierarchy mentioned above. Note: While small, incremental improvements may occur with a higher frequency, more significant improvements tend to move slowly up the functionality hierarchy following the advancement of the major technological era that unfolds at the time (see the Internet era examples below).
Operational Efficiency = a media company's capacity to generate and deliver its whole-offering(s) in the best possible manner with the least waste of resources. Note: While the lack of innovation endangers a business over time, the lack of operational efficiency poses an immediate threat. Therefore, operational efficiency must be a constant effort for any company (I will discuss this subject in more detail in a future post).
So, what is this model telling us?
Well, for primers, it explains the past. Of course, we can go back to various major technological eras like the printing press and the telegraph. However, as I mentioned above, it is useful to focus on one era and see how the innovation cycle gradually advances up the functionality hierarchy. So, if we look at the Internet-dominated recent past, it is clear that since its introduction, the Internet has rapidly increased the range of the (existent and new) whole-offerings to incredible levels. This explains the meteoric rise of companies like Amazon.com and Google.
The model also explains the present. Recent technological developments have allowed media businesses to significantly increase the relevance of their services (in addition to their range). The success of Wikipedia, MySpace, and other "web 2.0" whole-offerings/businesses is a result of these advancements.
And, finally, the model also indicates what will probably happen in the future. In this Internet era, the innovation cycle gradually advances to reach the recipe level. This suggests that the future is bright for the specialized communities, which can reach the recipe level with enough range and relevance that will ensure the critical mass of customers necessary for success. However, that's not to say that the successful whole-offerings of today will disappear. They will most likely find a way to thrive in the new environment. For example, Google will probably continue to excel at the range and relevance level. The acquisition of YouTube and other initiatives, like book-scanning, point in that direction. And, if nothing else, this can make Google a strong platform candidate for other whole-offerings. Amazon.com may run into difficulties because they sell mainly packaged information (i.e., books, CDs, DVDs), and customers most often want to access the pieces of information inside those packages. As a result, Amazon.com must, at a minimum, keep the pace with other companies' "un-packaging" initiatives (i.e., Google’s book scanning, Apple’s iTunes digital music store). Wikipedia too may have troubles advancing their whole-offering/business at the recipe level because of the heavy reliance on unpaid volunteers.
UPDATE 5/22/2007: Also read "How to Innovate Your Online Venture."
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