The never-ending cycle of disruptive innovation

Unlocking Potential is a newsletter by me, Francisco H. de Mello, CEO of Qulture.Rocks (YC W18)

Howdie,

One of the things that drives me crazy is when people use “disruption” in verb, noum, or whatever form without actually knowing what they're talking about.

“Disruptive innovation” probably doesn’t mean what you think it means. The term was first coined by Clayton Christensen on his The Innovator’s Dilemma to mean the process in which an attacking company creates a simpler, cheaper offering of some incumbent's product or service and wins customers that are overwhelmed by the more complex and expensive offerings of established players [1]. What makes disruptive innovations so interesting is that the rational, optimal thing for the incumbent to do is often to do nothing at all, or worse, to double down on focusing on its “premium” offering.

An example: Salesforce

Let’s take the example of Salesforce. A disruptive innovation attacking Salesforce would be Pipedrive: a simpler, cheaper version of Salesforce’s CRM system (sales force automation??) that gets the job done just fine for a great number of customers, but for much less of a - time and money - hassle.

Here, the concept of a “job” is important: a job, or job-to-be-done, is the actual progress a customer can make given a set of circumstances. Sales managers probably need more process, organization, and data data so therefore they buy a software product and some services to do just that. And that product is usually a CRM system.

But Salesforce’s CRM offering goes much further than what a “simple” CRM is expected to do: aside from storing prospective customer information and allowing for a pipeline of deals to be managed, it has all sorts of bells and whistles, such as industry-specific reports, complex workflow automations, and LOTS of flexibility that cater to all different sophisticated customer needs; it costs a lot and takes long to be implemented.

Salesforce does all that to sustain its high price point for the offering, and has come to look what it looks like after almost two decades of incremental innovation. And it's fair to say that Salesforce “overserves” a giant portion of its customers, who don't need all that complexity and all those features.

If we take into account that Salesforce’s CRM is a multi-billion dollar business, there are opportunities for new entrants to build simpler, cheaper solutions that get the basic job done and cost half of the price, and can be implemented fast, and still build huge companies in the process.

That’d be a heck of a disruptive innovation.

Do disruptive innovations ever end?

So, my point here is that companies will continue to be “disrupted” forever. Products will always be created to serve overserved customers. They will be simpler, and cheaper. These products will draw customers away from incumbents. These new entrants, that built the products, will grow, bloat their products to better serve their customers, and start to overserve a big part of them, and so on and so forth, ad eternum.

Some questions remain unanswered: does this phenomenon happen in all industries? It looks like it happens quite often in enterprise software.


That's it for today :)

Cheers,

Kiko

Notes

[1] When we think of the word innovation, we think - at least I think - about something new. About a new solution to a problem. Big product innovations come to mind, like the Oculus Rift, for example.

But the concept can be expanded. There are smaller kinds of innovations as well, like adding heated seats to a car, or FaceID on iPhone. There are also other types of innovations, less related to a product or service and more related to how business is done, like ordering food through an app. Delivery isn’t new, neither are apps. But ordering food through an app was kinda “new” 5 years ago. Also, renting some stuff instead of buying, like the Software-as-a-service revolution in the early 2000s, was also a type of innovation. D2C is an example. Enough with that argument.

Disruptive innovation, under Christensen’s definition, can be seen as almost no innovation, as described above, at all. You’re taking a product and making it worse. And by doing so, you’re capturing overserved customers from an incumbent. Customers that are happy with a good enough product that costs less.