In my previous post, I covered the concept of “Customer jobs to be done”. Your company needs clarity on what jobs your customers do that cause them to “hire” your product/service. Once you do, you can focus your innovation around these “jobs” and seek to improve their experience here. As Clayton Christensen explains, “Products and technology come and go, but jobs persist over time,” and disruption favours those who consistently integrate around the “jobs.” READ MORE
In this post, I will cover my second favourite lesson from the Disruptive Strategy course: Many innovations fail because of the wrong resources, processes, and profit formulas. Here are key takeaways:
- New technology is not intrinsically disruptive.
- Resources, processes and profit formula determine what an organization can or cannot do. The wrong set often cause disruptive innovations to fail.
- When taking on disruptive innovation, managers must set up a separate business unit to allow it to develop the unique resources, processes and profit formula needed to win.
- Start innovating today while your core business is strong. Disruption is typically an opportunity long before it’s a threat.
New technology is not intrinsically disruptive.
When we talk about disruption, we generally associate it with emerging technologies. Today, we hear about GenerativeAI, Metaverse, AR/VR, etc. During the Blockbuster days, it was streaming services and the speed of the internet. However, as Clayton Christensen claims,
New technology is not intrinsically disruptive. It depends on how the technology is deployed into the market relative to the business models for existing products or services.
– Clayton Christensen
When streaming as a technology emerged and the internet speed got good enough, Blockbuster tried to adopt it. While many research and articles blame the late adoption for Blockbuster’s failure to survive as a business, the root cause isn’t the lateness. The root cause lies in a mismatch between their existing resources, processes, and profit formulas and what a business model using streaming services requires. This mismatch prevented them from adopting quickly.
Let’s dive into what this trio means.
Every organization has resources, processes, and profit formulas that determine what an organization can and cannot do.
According to the disruptive innovation theory, three critical areas in the business impact the success of an organization, business unit, or innovation project. I suggest digging into each box for some reflection on why Blockbuster struggled to adopt streaming services later.
Many innovations fail because the wrong resources, processes, and profit formula are used.
Let’s revisit the Blockbuster case study and analyze those three areas against their business model, which was to earn revenue through its physical stores:
- Resources – 9,000 physical stores, store equipment (POS), staff on the ground, DVDs to be rented out, devices that can play the DVDs at home by customers, store signage and banners, etc
- Processes – partnership with content sources/owners, early access to new releases, charge late fees to customers, on-the-ground processes, etc
- Profit formula – revenue from physical stores minus costs to secure/maintain the stores, late fees revenue, etc
Remember the late adoption of Blockbuster’s streaming service?
How invested will Blockbuster be in the streaming service if their profit formula is revenue minus cost from 9,000 stores? If their resources are shop managers, staff on the ground, and 9,000 physical stores, these existing resources will not help build and maintain the streaming service. If their profit formula relies on revenue brought in by stores, the streaming service will not influence that. Neither will it address the cost related to maintaining those physical stores. If their process is to charge late fees, this becomes irrelevant for streaming services. It’s a mismatch.
Christensen argues, “An organisation cannot disrupt itself”. Let’s repeat that.
An organization cannot disrupt itself.
Clayton Christensen, Disruptive Strategy, Harvard Business School Online
So what should Blockbuster have done? And what does the course say about taking on disruptive innovations like this?
When taking on disruptive innovations, set up a separate business unit to develop the resources, processes, and profit formula needed to win.
It sounds simple enough, but this is crucial when taking on disruptive innovation projects. Your team’s current skillsets may not be what is required to succeed in your disruptive innovation project. The profit formulas will be different, and so will the processes needed to succeed. Netflix does not charge late fees. They earn revenue from a subscription model. They don’t need store managers. They need software engineers.
Not all innovations are disruptive. Fold sustaining innovations into the core business unit.
If all you’re doing is improving your products and services, yet the business model remains the same, you do not need to set up a separate business unit. In the course, this type of innovation is called Sustaining innovation, as opposed to Disruptive Innovation. You can fold sustaining innovations into the core business unit.
- Sustaining innovations are improvements made to the product or service that do not fundamentally change the business model. When Apple releases new iPhone models, the business model does not change, but the products are improved. This is typically a strategy that large incumbents use.
- Disruptive innovations include a fundamental change to the business model. When Netflix started, they were doing DVD-by-mail before streaming was introduced that change the business model. If you already have a core business but want to take on disruptive innovation, it’s recommended to set up a separate business unit to develop the right resources, processes, and profit formula needed to win.
Start innovating today while your core business is strong. Disruption is typically an opportunity long before it is a threat.
If you remember in part 1 of this series, disruption favours those organizations that are integrated around the “Customer job to be done”. If there are emerging technologies that help customers accomplish those existing jobs in better ways, start innovating now. As Christensen says, “Disruption is typically an opportunity long before it is a threat”. As we discussed in the previous post, discover why your former customers left. Study customers who stopped using your product or service to spot disruption in your industry early.
Conclusion (A call to action for leaders)
To wrap this up, the second lesson from the Disruptive Strategy course underscores a crucial reality: innovation isn’t merely about adopting new technologies-it requires you to organize for innovation and to find the right resources, processes, and profit formulas needed to win. Blockbuster’s tale serves as a poignant reminder that success in innovation doesn’t stem from technology alone but from a deep, strategic alignment within the organization. For those in leadership, the call to action is clear: reflect on and possibly recalibrate your core business elements to ensure they are in harmony with the innovations you wish to pursue. Start this reflection while your business is strong. Fold sustaining innovations in your core business unit, while set up a separate business unit when taking on disruptive innovations.
The third and final part of this series is about continuity. When you find a winning strategy, you’ve found a good solution temporarily. It doesn’t mean that Netflix will forever succeed. What will allow Netflix and other large incumbents to continue to win? How does a thriving business always stay ahead of the curve? We will find out in the next and final blog post!
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