Tesla launched its Roadster in 2008. While a radical entry into the electric car market, it received only mediocre acceptance. Over time a truly unique business model emerged, requiring consumers to order online. The release of Model 3 is Elon Musk’s true end-game, a mass-produced car that the masses can afford.
I’ve been honored to work with pretty eccentric inventors and tinkerers. We are often mesmerized by their splashes of creativity and innovative new products. But as proved by Tesla and many others, the type of innovation that is relevant in a market has everything to do with life cycle. Whether you are a startup or mature company, it’s critical to know which industry phase you are innovating in:
Market Disruption
When a new entrant creates a market in a white space, it has the largest upside for expediential growth. The entrant is competing against non-competition and thus can command high margins, as in the case of Square (the merchant services firm). This window of opportunity closes quickly, and the innovator has a finite amount of time to position itself as the market leader.
After adoption, the number of brands will proliferate quickly. I work with a startup launching a beauty line. Whenever they launch a new concept, their own customers try to copy them. Few startups ever graduate from this stage to the next.
In this phase, ensure you have robust intellectual property protection, gain a foothold in a few strong customers, create success stories, and manage your cash very, very carefully.
Up Market Disruption
When a market is nearing maturity but is not yet saturated, entrants may attempt to provide new features or benefits that improve the utility of its products or services. A classic example is the shift to on-demand content. Famously, Netflix founder Reed Hastings approached Blockbuster CEO John Antioco in 2000 and offered to sell him the company for $50 million.
Antioco passed, saying he perceived Netflix as a “very small niche business.” Blockbuster ceased operations in 2013. According to Statista, online movie subscription services, including Netflix, had a 59 percent share of U.S. movie revenue by 2016.
What’s interesting about the rise of Netflix and streaming video is that the core product didn’t change– the delivery system did. But business model innovation would not have been as relevant if movies hadn’t already been positioned as a viable product. Renting a movie at Blockbuster was an alternative to the theater; then Netflix became an alternative to Blockbuster.
In this phase, be very aware of the value chain, so you can find new ways to innovate your business model as opposed to developing new products. For example, one of our clients recently offered a monetization method new to their industry. They allowed customers to lease their equipment instead of buying it, adding a new profit center in the form of financing.
Low End Disruption
The term “disruptive technology” was first introduced by Clayton Christensen in his revolutionary book, The Innovator’s Dilemma. Since the book’s release in 1997, many have misused the term “disruptive innovation”, which is often used to describe any radically transformative business model. But that is not the proper application of Christensen’s theory.
Disruptive technology describes technologies that scale existing product categories, generally at lower costs. Phase 3 innovations may include products or services that do not offer a leap in terms of new utility. Larger, well established companies will invest more heavily in supporting the status quo but make subtle changes in terms of utility or usefulness.
When McDonald’s, to combat Starbucks, began offering its McCafé coffee line, it did not offer new varieties of coffees. The expansion of its menu merely supported the status quo, because McDonald’s enjoys such massive scale that a duel with Starbucks based on sameness played to its strengths.
In this phase, embrace the path to a billion-dollar brand. Focus on scale, cost reduction and efficiency. Ensure you have the operations people who can take your business to the next level.