New Technologies aren’t driving most disruption, Consumers are!
How do companies innovate? Here’s a simple and effective framework to understand how startups and big companies alike innovate. You too can use it to bring in innovative new products and services to the market!
My notes:
The Internet has seen 3 great waves of Business Model Innovation. They are:
- Phase 1 — Unbundling
This was a phase wherein you could purchase a single favorite song track. You need not have to purchase the entire CD inorder to listen to that one favorite song of yours. Companies like Apple made it possible to do so. Same goes with TV channels. You need not have to purchase a package of 100 other channels inorder to get those 2–3 favorite channels of yours.
This is unbundling. The separation of products and services from one giant bundle to a single offering. Customers get to buy only those products and services that they wanted. - Phase 2 — Disintermediation
This phase resulted in the elimination of middle men as as Companies could reach out to their customers directly. Prior to this, middle men who acted as an interface between the Producer and the Consumer. The internet allowed customization of products and services that suited individual Customers. Take the example of Travel. Earlier you’d go to travel agents and based on your criteria, Travel Agents would book your tickets. Now with Kayak.com and other travel booking sites, many users prefer to book their own travel. - Phase 3 — Decoupling (This is what the book is about!)
In this phase Startups (especially), identify the activities that customers perform while buying a product or a service. Once identified, these Startups kept some of these activities for themselves while allowing incumbents to retain those activities that were difficult to replicate or had a high cost to setup. These steps or activities that customers perform while purchasing a product or service is known as a Customer Value Chain (CVC).
Example: Inorder to drive a car, a customer would perform these steps:
1) Search 2) Go to various showrooms 3) Inquire about price and features 4) Pay 5) Own 6) Drive. These steps are steps in a CVC. These are how traditional car manufacturing companies operated.
Enter ZipCar. Their innovation was separating the activities ‘owning a car’ & ‘driving it’. Inorder to drive a car, you no longer needed to ‘own’ a car.
Here technology is only an enabler. It are the customers who are choosing to perform different activities with different companies rather than performing all the activities in a CVC with one single company.
Disruptors Decouple!
Decoupling is a form of Business Model Innovation. Lets take a detour and ask ourselves what we know as a definition of a Business Model. So a Business Model tells how a company provides value and to whom. How does it charge for the value it creates and from whom.
Coming back, Disruptors broke the links or decoupled various activities that a customer would perform inorder to purchase a product or a service.
Every activity that a customer performs inorder to buy a product or a service can be classified as:
1) Value Creating
2) Value Capturing
3) Value Eroding
Lets take our Car example again. ‘Driving’ a car can be classified as a ‘Value Creating Activity’. Owning a car can be classified as a ‘Value Eroding Activity’. And when you purchase a car, companies charge money for the value they create. This ‘purchase’ is referred to as a Value Capturing Activity.
Now a ZipCar, kept ‘Driving’, a Value Creating Activity for itself, while allowing the incumbent Car Companies to retain the others like searching, inquiring, test driving, paying, owning.
Likewise, Startups can keep any of the category of the activities for themselves. Data however shows that Startups creating a Product or a Service that is Value Creating get the highest valuation followed by Startups that create a Product or a Service in the Value Capturing arena. The Startups with the lowest valuation typically provided something that were in the Value Eroding Arena.
How to be a Disruptive Company or a Startup?
Step 1: Find a Business
Step 2: Add a digital equivalent to its Product and Services
Step 3: Identify a segment of a Customer whom you would like to serve
Step 4: Map the Activities (or Customer Value Chain) a Customer has to perform inorder to buy a product or a service. Make sure to go in as much detail as possible while mapping the steps. Define it in as specific a language possible rather than a generic few high level steps.
Step 4: Classify the activities as Value Creating, Value Capturing, Value Eroding
Step 5: Decide which of the activities you can do 10X or exceedingly well than what the incumbents are providing at the moment and innovate!
This book is definitely worth reading and its concepts worth keeping in mind while launching a Company on an innovative Business Model!!
