Innovation Creates Industry Change

Innovation Creates Industry Change
By Clayton Christensen

Excerpt from Disruption Drives Growth: Ten Years After ‘The Innovator’s Dilemma’ Strategy & Innovation Newsletter, Volume 5, Number 3

Ten years ago, I published The Innovator’s Dilemma to explain how the very management principles that companies have learned to rely on actually can inhibit their ability to successfully master disruptive change. In industry after industry, my research has shown that disruptive forces can overwhelm even seemingly unassailable market leaders.

In this article, we take a look at a five of the biggest disruptors that have emerged in the decade since the term “disruptive innovation” first entered the business lexicon. These companies have been able to identify important, unsatisfied jobs that customers were trying to get done, create innovative new solutions to satisfy these jobs, and successfully commercialize these opportunities with innovative new business models.

1997: NetFlix develops a new model for home-video delivery
NetFlix’s online-rental and mail-delivery service changed the way millions of people watch home entertainment. Netflix did away with costly late fees on overdue movies, targeting one of the core profit drivers for brick-and-mortar retailers such as Blockbuster.

The company’s innovative business model was initially unattractive to the likes of Blockbuster, which not only was unwilling to give up its lucrative late fees but also was unable to leverage its existing real-estate assets to create a meaningful response. A similar subscription based service would have done nothing to boost the incumbent’s key metrics, such as sales-per-square-foot. At first, NetFlix basically solved a rather simple job: People were sick of going to a video-rental store on a weekend night only to find that they couldn’t get the movie they wanted. The company continued to improve its service, developing a sophisticated recommendation system that suggests alternative selections based on subscribers’ viewing history. With no retail presence and over $1 billion in sales, Netflix has had a real impact on the industry. Since the company went public in 2002, its stock has increased by more than 165 percent, while Blockbuster’s has fallen by 78 percent. Importantly, based on numerous statements by CEO Reed Hastings, the company realizes that further disruption in the media industry is forthcoming and understands it cannot glide along on past successes. NetFlix plans to leverage its predictive recommendation technology and devoted user base to move into the next big disruptive service—digital content delivery.

1998: Google creates new models for direct advertising
Sergey Brin and Larry Page set out “to organize the world’s information and make it universally accessible and useful” and, in the process, created one of the world’s most successful technology companies. Google had early success with its search engine, which quickly became the most popular on the web. In those early days, Google was a technology looking for a business model. As has become a company hallmark, Google began experimenting with a vast array of new products and services. Two years after its launch, Google began selling advertisements alongside its search results.

Instead of using simple banner ads that were common at the time, Google developed a system that allowed companies to bid for ad space based on the keywords being
searched. The service, named AdWords, let advertisers more effectively leverage their ad dollars. The company’s “pay-per-view” and “pay-per-click” services give marketers instant feedback and is largely responsible for pulling ad dollars away from traditional players, such as print media. Additionally, Google made it simple and economical for small companies to place highly effective advertisements. When Google went public in 2004, it raised $1.67 billion. Today, less than 10 years after its founding, the company’s market capitalization exceeds $160 billion. And with its mission of “organizing the world’s information,” Google still has ample room for growth.

2000: MinuteClinic creates a new way of delivering healthcare services
From the start, MinuteClinic’s low-cost healthcare clinics were highly disruptive. The company placed its kiosk-based services in convenient locations, such as drug stores and supermarkets, allowing consumption of healthcare in entirely new contexts. Performing a disruptive “triple-play,” the company also reduced the cost of certain medical services and made the simple diagnosis of a number of common conditions more convenient. At a MinuteClinic location, licensed practitioners diagnose common illnesses using a set of rules-based procedures to quickly guide them through the examination and testing process. The practitioners then quickly deliver prescriptions, which often can be filled at an onsite pharmacy. Unlike with a primary care physician, appointments are not needed and wait times are significantly reduced. With operations and displays modeled after McDonald’s, including a menu of available services, the firm’s goal is to treat patients in no more than 15 minutes. Its slogan—“You’re sick. We’re quick.”—is prominently displayed at all of its locations. The company not only is easy for consumers. It also is attractive to others in the notoriously complex healthcare value chain. By reducing the cost of treating an assortment of the most common maladies, insurers were relatively quick to embrace MinuteClinic’s innovative new offering. CVS/Caremark acquired the company in 2006 for a reported $170 million.

2002: IRobot’s Roomba cleans up the vacuum market
iRobot, founded by three people who had worked in the Massachusetts Institute of Technology’s Artificial Intelligence Lab, got its start developing complex, one-off robots that, while technically stunning, were not profitable. Although engineers resisted the move, the company made the strategic decision to move into the mass market by producing a robotic vacuum, dubbed Roomba. The product allowed busy people to stop doing the timeconsuming and unpleasant task of vacuuming floors. The product was a major success for the small company. iRobot’s invention optimized the vacuum cleaner entirely on convenience. Roomba requires no work and can clean hard-to-reach places, like under tables and beds. iRobot has sold more than two million Roombas and is growing quickly. In 2006, year-over-year revenues surged more than 30 percent to close to $200 million. The company has also moved up market, tackling more complex jobs. Its Scooba robot washes floors and its Dirt-Dog robot can pick up items like nuts and bolts from a workshop floor. Interestingly, iRobot has not abandoned its original mission of developing world-class robots for complex jobs. It still works with military and corporate clients to develop custom solutions, but its disruptive business affords it the profitability to play in this space, offering the hope of future growth in new areas.

2003: MySpace.com delivers the right solution at the right time
When Tom Anderson and Chris DeWolfe created MySpace, it was not the first social networking site on the web. At the time, a competing site, Friendster, was a popular place for teens to create online profiles and connect with one another. But MySpace largely captured social networking by creating a holistic solution that nailed the job customers were trying to get done. In many ways, the story is similar to Apple’s success with the iPod. When the iPod came to market it was far from the first MP3 player. In 1997, SaeHan Information Systems launched the MPMan F10, the world’s first MP3 player. A number of other solutions came out in the following years from companies such as Diamond Multimedia and iriver. But many of the devices were clunky, hard to use, and had poor sound quality. Apple’s launch of its sleek, intuitive iPod transformed the category. But people forget that the iPod was not an overnight success.

It took the creation of the iTunes music store and several product generations before the product became a “must have.” It took the iPod more than three years to break
through $1 billion in revenues. (For more on this, see the chart on page 9.) MySpace similarly developed an easy-to-use site that helped people quickly set up a home page and made posting events, playing games, listening to music, and socializing with other users simple and convenient. The company’s solution nailed the job and consumers flocked to the site. The company’s central role in connecting its users is a model that cannot be easily replicated by incumbents such as newspapers, television stations, magazines, and movie theaters. Having grown its user base rapidly, in 2005, News Corp purchased MySpace’s parent company, Intermix, for $580 million. Currently, MySpace’s revenues are estimated to be $360 million and are forecasted to double by early 2008.

In industry after industry, companies have created growth by following – explicitly or implicitly – the patterns of disruptive innovation. Disruptors create growth by redefining performance. They either bring a simple, cheap solution to the low end of an established market, or enable “nonconsumers” to solve pressing problems. Disruptive innovations have reshaped numerous industries and created tremendous consumer welfare and corporate profits.