Can you be crappy? Do you dare?
When we think about innovation, we usually think about what impresses us. Like Steve Jobs standing on a podium showing off his latest triumph: Incredible! Revolutionary! Mind Blowing!
However, the kind of innovation that changes paradigms is usually crappy. The stuff that doesn’t work all that well. The carpetbaggers who come into your industry utterly unprepared to service your existing clients. That’s where the danger often lies.
The Innovation Pyramid
Some years ago, I was subcontracting for a highly regarded consulting firm and was paired with a project manager who had just earned a prestigious MBA at one of the world’s top programs. Being the generous sort, she was happy to share her wisdom with me.
“This is a pyramid,” she explained. “At the base is what you have to do just to stay in business. But if you want to out-perform your competitors, you need to reach the top of the pyramid. That’s where innovation is.”
“Oh,” I thought. “You mean like New Coke?” No wonder it’s so lonely at the top.
As I’ve written about before, there’s a big difference between technology that creates efficiencies and technology that creates value.
A few decades ago, Harvard Professor Clayton Christensen took a break from instructing impressive young scholars about the finer points of pyramid building and asked himself a question: Why do good companies fail?
What he found was not what you’d expect. The companies he studied were data driven, invested heavily into R&D, were responsive to investors and clients, etc. What happened was they were blindsided by crap.
That is, while they were making their products better and better, other companies figured out how to build a business out of crap. The problem was that if these crappy upstarts stayed around long enough, they became less crappy and eventually pretty darn good.
In other words, the companies he studied failed not because they got worse, but that they continued to get better and better at things people cared less and less about. (For more on this point, see Disruptive Innovation).
Once Christensen started looking, he found that there were lots of crappy innovators and many of them became big successes by changing the basis of competition.
Here are some examples:
MP3 Players and Digital Cameras: When these technologies came out, they were expensive and performed poorly. It took a special breed of people to drop $1000 on a camera that took lousy pictures or a player that held 10 songs and needed a software engineer to install.
Charles Schwab: Traditionally, stock brokers were trusted advisors that consulted the well heeled on their investments for a fixed percentage commission. Charles Schwab came along and offered less service for a low flat fee. Today it has a market cap of $20 billion.
Dell Computer: When PC’s first came out, they weren’t good enough. So everybody wanted them to be faster and better. At some point though, the benefits of the latest technology diminished. At some point, processor speed and other performance metrics overtook basic needs.
Then Dell Computer entered the market and offered mediocre computers at low prices with great service. Since Dell’s products were good enough to do the job, these attributes were valued over performance by many customers.
Nucor Steel: Nucor pioneered the minimill, which made low grade, low margin steel. The integrated firms, such as US Steel, were happy to cede that business to the new upstart and concentrate on high margin, high profit lines of business.
Then Nucor started producing medium grade steel, which the big boys were happy to get rid of so they could concentrate on the more profitable stuff. Their margins increased again, until…well they eventually went bankrupt. They had upgraded themselves out of business.
Why Apple is not a Disruptive Innovator
Of course not all innovators are crappy. Some continue to please customers and investors year after year, for decades. Iconic companies like Proctor and Gamble, General Electric, Coca Cola and others have stayed at the top of their industries for generations. Christensen calls these sustaining innovators.
Apple, contrary to popular belief, is not a disruptive innovator, but an incredibly successful sustaining one. They seem to have a knack for finding categories that can be vastly improved. They find an existing customer base who’s ready for more and then they dazzle them.
Apple is a particularly revealing case because they don’t disrupt industries, just the companies in them. They didn’t kill MP3 players, or mobile phones and they won’t kill tablets. Instead, they just get lots of people to buy Apple.
In other words, they don’t change the basis of competition, they outperform the competition.
Signs that the Basis of Competition is Changing in Your Industry
Disruptive competitors emerge from the most unexpected places, which is what makes them so disruptive. Innovation is a messy business which rarely follows a certain trajectory. Here are some things to look out for:
Your Customers Treat You Like a Commodity: You’re constantly improving to keep up with the competition, but all your customers care about is price. Chances are, the basis of competition in your industry has changed. That’s how Dell became a multi-billion dollar company.
The sign to watch for here is what Christensen calls a change from integrated to modular organization. Where before customers demanded the higher performance and hand holding that comes with a custom solution, now they are happy with something off the shelf.
Potential Customers Go to Non-Competitors: The integrated steel makers didn’t see Nucor as a threat. In fact, the scraps Nucor was feeding on let the incumbents focus on higher value-added products. The integrated firms continued to migrate upwards into eventual insolvency.
This is a tough one to spot, because you’re so used to duking it out with your traditional competitors, some funky company (which in some cases is an existing customer or supplier) is taking business that you don’t really care about.
As Andy Grove said, “Only the Paranoid Survive.”
A New Crappy Customer Emerges: Charles Schwab didn’t start out by stealing clients from established brokers, they marketed to people who didn’t invest in stocks. “We offer a superior service that targets a more sophisticated customer,” the full service brokers thought.
Yet as Schwab grew, they added services. It was just a matter of time before the high commissions of the full service brokers were toast. The skills Schwab learned from servicing clients on the low end helped them migrate upwards into the full service firms core market.
The lesson here: Don’t turn down your nose at potential business. Everybody’s money spends the same way.
Stop Listening to Your Customers and Start Focusing on the Jobs They Want Done
Innovation would be easy if it really was at the top of a pyramid. We wouldn’t have any problems figuring out where to do it. This was probably Christensen’s greatest insight.
He found that companies often listen to their customers too much. People often demand more of what they always have had, whether it serves any purpose or not. It doesn’t mean they’ll actually pay for it.
There was a time when we all cared about things like how many megapixels in our cameras or whether our computers would be fast enough to run software, because those were crappy areas. When they got good, the basis of competition changed and we cared less about those things.
And that’s why the really exciting innovation lies in the crap. That’s where the job isn’t getting done well enough, so people will pay more for improvement. After all, it really doesn’t matter what customers ask for, but the crap they will actually pay for.