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Published 16 August 2012 05:01, Updated 16 August 2012 07:51
Sick of the old ways of doing things? Companies are raking in big dollars by challenging assumptions about what customers want.
Entrepreneurs and would-be entrepreneurs take note. Your next bad customer experience may be the seed of your next big business opportunity. It might just give you the inspiration to shake up, remake or supersede that industry with a “disruptive innovation”.
Disruptive innovation – a term made famous by Harvard Business School professor Clayton Christensen – in essence is an innovation that makes the knowledge existing companies have obsolete, explains Melbourne Business School associate professor Kwanghui Lim.
“Laymen use it in a variety of ways to mean innovation that leads to the demise of existing firms and the rise of new ones,” Lim says.
Corporate history is littered with examples of big companies that failed to keep up to date. IBM lost its place at the top of the computer industry with the advent of cheaper, simpler and smaller personal computers rather than better mainframes. Eastman Kodak failed to see how the photographic film market would be disrupted by digital technology. Borders and other booksellers have been superseded by Amazon, which turned the way that their products were sold upside down.
The central idea “is that there are incumbent companies in markets that have a technological solution to a problem and they lose control of that market because somebody else innovates and pushes them out of the way”, says University of Melbourne faculty of business and economics senior fellow Peter Cebon.
Think about big companies that you deal with every day, in business or as a consumer. Do some of them seem out of touch? Are there newer businesses that offer you a different way of meeting your needs? If so, they could be on the way to disrupting a big player.
“The world is changing every day and sometimes it changes in a way that’s not perceivable to us . . . you have all this entrenched behaviour and nobody questions,” says Freelancer.com founder Matt Barrie, whose own business has disrupted the way businesses outsource services.
“Then you fast forward through all these years of change and it’s like the emperor has no clothes. Until someone actually calls it out and says, ‘Why are we doing things like this, this is stupid’ . . . on a day-by-day basis we don’t realise, but year by year, decade by decade, it’s quite dramatic.”
Disruptive innovation happens when an incumbent is so focused on what is making money right now, they don’t see how things are changing, or they don’t want to commit resources to an initiative that might cannibalise a product or service they are already offering.
“Disruption doesn’t come from the incumbents because the whole model and the way they work and the way they fund stuff is all invested in the old platform,” the head of Deloitte innovation think tank Centre For The Edge, Peter Williams, says. “As these new platforms come along they just can’t move their model.”
Find an industry that just isn’t connecting with a lot of potential customers and you could be on to an idea for a fast-growing business. Investors will likely take notice.
Pollenizer is a technology incubator that invests in start-ups and then works with the entrepreneurs to help develop their ideas. It has also just begun working with entrepreneurs inside companies. So it is always on the lookout for big new disruptive ideas.
“The two broad options for a new business are to take on a big, ugly, well-funded incumbent and try to beat them at their own game, or to disrupt,” Pollenizer founder Mick Liubinskas says. “So we basically choose disrupt every chance we get.”
Other investors think the same way. “We like to back what we think will be the number one player in what we hope to be a disruptive and large category,” a partner with US venture capitalists Accel Partners, Sonali De Rycker, told British newspaper The Guardian . Also speaking to The Guardian, co-founder of lastminute.com and now investment partner at PROfounders Capital, Brent Hoberman, said, “The thing I get most excited about is disrupting industries that haven’t yet been disrupted.”
So if finding a disruptive innovation is one way to hit the entrepreneurial jackpot, where can would-be disruptors look for inspiration?
To begin with, be prepared to think differently, to take a look at how things work now and how they could be turned upside down. “It’s not so much about thinking out of the box, it’s about creating new boxes,” Williams says.
One place to look for ideas: Bad customer experiences. “Where are those moments in your life when you’ve been putting up with pain and problems and disappointment for so long?” Liubinskas says.
“Maybe you need a complaint registry or . . . follow ‘misery’ on Twitter or ‘I hate’. What are people just hating?”
Perhaps it’s health insurance where people might feel they aren’t getting value. Or telcos, banks or the recruitment business.
A Pollenzier-backed business, Pygg, is setting out to disrupt banking. “We sat down and we said, ‘Well, let’s be the opposite of a bank. Instead of being big, let’s be small; instead of being private, let’s be public; instead of being boring let’s be fun’,” Liubinskas says.
Pygg is the product of those thoughts. A peer-to-peer payments system, it lets people pay each other money using email, Twitter or mobile phones. “The big banks are trying to do their own payments systems now but they are so weighed down by their own legacies that it’s harder for them to be nimble,” Liubinskas says. “That’s the big disruptive opportunity for Pygg, to change the way coins move between people’s pockets.”
Take a look at the companies listed on the Australian Securities Exchange and ask some basic questions, Barrie says. “Just go through them one by one, thinking about how does this business actually operate? What do they really do? Is there a better way of doing things? ”
Don’t stop there, he says. Consider businesses near where you live. What seems wrong about the way they are working now? For instance, here’s how Barrie says a disruptor might think about a local accounting firm: “What does an accountant do? Well for a lot of people, you get all these receipts printed on dead trees in a shoebox and then once a year you take this shoebox full of dead trees and you empty it on the table and the accountant does this sorting algorithm and data-entry routine, entering the information on the dead trees into a computer program and then they punch out a tax return. Maybe there’s a better way of doing things.”
Look for inefficient businesses, Barrie says, which haven’t been fully penetrated by digital technology, or those that might have lots of employees performing tasks that can be done by machines. “Companies that have got lots of employees, they are ripe for disruption,” he says. “Especially where the employees don’t really contribute to the strategy or the critical reasoning. Anywhere that employees’ job description can be described by an algorithm.”
Banking is a classic example, he says, with processes that could be replaced by websites, mobile phones or vending machines.
Taking on the banks might seem impossible, but Barrie says it’s important that your product or service can potentially reach a lot of people. “Make sure that you go for a market that is huge because if you screw up in a huge market . . . there’s a lot of room for error,” he says. “If you are going after a $20 million market, there’s not much room for error. If you go after a $1 billion market you can find a niche, even if you can’t capture the whole market.”
Rather bizarrely, another route to successful disruption is to not think about disrupting at all. Perhaps, like filmmaker Jim Frazier, it’s a case of inventing something new because you can’t do what you want to do. He invented a lens that kept the whole of a picture in focus when there was a small insect in the foreground, rather than the background going fuzzy. The lens has gone on to be used widely and won him a shared Academy Award for technical achievement.
“A lot of disruptions that happen didn’t mean to necessarily disrupt an industry,” Deloitte’s Williams says. “Google didn’t mean to disrupt the classified advertising world. They meant to organise the world’s information and create a great search engine.”
Likewise, when BRW’s entrepreneur of the year, Mark Harbottle, set up 99designs.com, a web-based marketplace for graphic design, he didn’t realise the business would be disruptive. “We started 99designs and it ended up being a disruptive business as far as the design industry goes but it’s not like we sat down and said, ‘This looks like a disruptive opportunity, let’s build a product and launch it and disrupt this market’. It kind of evolved into that.”
If you do hit the entrepreneurial jackpot and create a disruptive innovation, get ready to retire. Or, do it again. And join the ranks of the BRWRich 200. “If you’re successfully disrupting an industry, then by very definition you are going to be richly rewarded,” the head of local technology accelerator Startmate and real estate start-up Homethinking, Niki Scevak, says.