CS419 Info. Technology Entrepreneurship

CS419Info. Technology Entrepreneurship Fall 2012 – 2013 Emre Oto Building a Lean, Scalable Startup www.CS419online.com Follow on Twitter: @CS419Bilkent

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» New Lanchester Strategy

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» How should we, then, build startups? • New markets • or hybrid strategy New Market / Resegmentation • Disruptive Innovation • Primarily new market disruptions • Value Innovation + Blue Ocean Strategy • Making the competition irrelevant

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation»

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Sustaining Innovation • May involve incremental refinements or radical breakthroughs • Improve the performance of established products and services along the dimensions that mainstream customers in major markets historically have valued. (e.g. Moore’s Law) • Targets demanding, high-end customers with better performance than previously available • Higher margins • Greater motivation to fight • Incumbents always win battles of sustaining innovation

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Up-market movement • Caused by the growth imperative • Companies must exceed the consensus forecast rate of growth to boost share price • Sustaining innovation to capture higher margin customers to sustain growth • Asymmetric motivation: • Incumbents are always motivated to go up-market • They are never motivated to defend the new or low-end markets • Fight vs. flight

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Disruptive Innovation • Doesn’t attempt to bring better products to established customers in existing markets • They redefine the trajectory by introducing products and services that are not as good as currently available products • Offer other benefits: Simpler, more convenient, less expensive etc. • Appeal to new or less-demanding customers

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Let us summarize with a video... • http://www.vimeo.com/5729898

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» You can’t stand still!

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Disruption is relative • An innovation must be disruptive with respect to all players in the target market to be called a true disruption

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Examples of Disruptive Innovation • Digital photography vs chemical photography • High speed CMOS video sensors vs photo. film • Downloadable digital media vsCD/DVD • Tablet vs Notebook • LED vsIncandescent light bulb • LCD vsCRT

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Two Types of Disruption • New market disruptions • Creates a new market by targeting non-consumers • Create a new value network • Low-end disruptions • Attack the least-profitable and most overserved customers at the low-end of an established market

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Two Types of Disruption

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» The Value Network Context within which a firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers New value networks

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Disruptive Channels • Disruptive innovations almost always require disruptive distribution channels • Channels of the sustaining innovation are likely to make the disruptive innovation fail • There needs to be symmetry of motivation across the entire chain of entities that add value to the product • Disruptive products must enable the channel to disrupt its competitors • Channel must view the products as a fuel to move up-market

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» New-Market Disruptions • Compete with non consumption • Much more affordable to own / simpler to use • They enable a whole new population of people to begin owning and using the product • ..and possibly in a more convenient setting • New-market disruptions initially compete against nonconsumption in their unique value network • As their performance improves they become good enough to pull customers out of the original network into the new one, starting with the least demanding tier

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» New Market Disruptions • They don’t invade the mainstream market • They rather pull out customers out of the mainstream value network in to the new one • Incumbent leaders feel no threat or pain until the disruption is in its final stages • New Market Disruptions start stealing customers from the lower end, so the incumbent doesn’t mind due to upmarket movement • Compare with the idea of “making the competition irrelevant” in Blue Ocean Strategy

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Examples of New Market Disruptions Sony pioneered the use of transistors in consumer electronics Its portable radios and portable TVs disrupted firms such as RCA that made large TVs and radios using vaccuum tube technology

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Low-end Disruptions • Disruptions that take root at the low-end of the original or mainstream value network • They do not create new markets • Low-cost business models that grow by picking off the least attractive of the established firm’s customers • New market disruptions induce incumbents to ignore the attackers, low-end disruptions motivate the incumbents to flee

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Most disruptions are hybrids

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for New Market DisruptionsQuestion #1 • 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 it altogether • ..or have needed to pay someone with more expertise to do it for them?

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for New Market DisruptionsQuestion #2 • To use the product or service, do customers need to go to an inconvenient, centralized location?

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for Low-end DisruptionsQuestion #1 • Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price?

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for Low-end DisruptionsQuestion #2 • Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these overserved customers at the low end?

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for Disruptive Innovation • Is the innovation disruptive to all of the significant incumbent firms in the industry?

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» How do we reveal Disruptions? • The answer is “circumstance-based segmentation” vs “attribute-based segmentation” (attributes of products and/or customers) • The critical unit of analysis should be circumstances rather than the customer • Statistics, demographic data, psychographic profiles etc. are people. • Essential for revealing new market disruptions (true competition is nonconsumption)

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Circumstance-based Segmentation • Customers have “jobs” that need to get done • When customers become aware of a job they need to get done, they look around for a product/service they can hire to get the job done • They set out to hire something/someone to do the job as effectively, conveniently, and inexpensively as possible • Functional, emotional, and social dimensions of the jobs that customers are trying to get done constitute the circumstances in which they buy

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Circumstance based segmentation • Position a disruptive product on a job that has been poorly adressed in the past • Develop hypotheses by carefully observing what people seem to be trying to achieve for themselves and ask them about it • Compare with the idea of Customer Discovery • Observation and questioning to determine what customers are trying to do, coupled with strategies of rapid development and fast feedback, greatly improve the probability that a product converges quickly upon a job that people are trying to get done.

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Don’t Ask Customers to Change Jobs!‘cause they won’t.. • “A business plan predicated upon asking customers to adopt new priorities and behave differently from how they have in the past is an uphill death march through knee-deep mud.” A quote from Clayton Christensen’s Innovators Solution

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Don’t Ask Customers to Change Jobs!‘cause they won’t.. • An idea stands little chance of success if it requires customers to prioritize jobs they haven’t cared about in the past • Customers don’t just change jobs because a new product becomes available • The new product will succeed to the extent it helps customers accomplish more effectively and conveniently what they are already trying to do.

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Don’t Ask Customers to Change Jobs!‘cause they won’t.. • The “jobs question” is a critical early test for a viable new-market disruption. • A product that aims to help nonconsumers do something they weren’t already prioritizing in their lives is unlikely to succeed.

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Extracting growth from nonconsumptionStep #1 • Target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Extracting growth from nonconsumptionStep #2 • These customers will compare the disruptive product to having nothing at all. • As a result they are delighted to buy it even though it may not be as good as the other products available at high prices and/or to current users with deeper expertise in the original value network

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Extracting growth from nonconsumptionStep #3 • Disruptors deploy the technology to make the purchase and the use of the product • Simple • Convenient • Foolproof • The “foolproofedness” creates new growth by enabling people with less money and training to begin consuming

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» Extracting growth from nonconsumptionStep #4 • The disruptive innovation creates a whole new value network • The new consumers typically purchase the product through new channels and use the product in new venues

CS419Technology Entrepreneurship Week #2 «DisruptiveInnovation» For more on Disruptive Innovation… • Read the HBR paper by Clayton Christensen.. • Read the Innovator’s Dilemma and the Innovator’s Solution by Clayton Christensen.. • Read the Innovator’s Solution for more on New Market/Low-end Disruptions, Circumstance-based segmentation, and great insights on creating and managing disruptive innovation

CS419 Info. Technology Entrepreneurship