Sunday, December 2, 2012

Is this Innovation Disruptive?


   Organizational Strategy for Disruptive Innovations


By Gary Randazzo

A few years back I was invited by Harvard’s Clay Christensen to be on a panel at a conference hosted by he and George Gilder. The panel would be discussing disruptive innovations that were impacting the newspaper industry.  At the time the Internet was having an impact but it wasn’t clear yet what the impact would be.

The conference was a 3-day program and the attendees were investors and business people looking for the next big investment opportunity. For my part, I told the crowd that I felt like newspapers were likely to survive the Internet and that the new technologies were more of a sustaining technology than a disruptive innovation.

It has taken several years to really try to understand what the Internet has done to the newspaper industry and to try to make sense of how newspapers reacted to the challenge

Basically the disruptive innovation theories say that disruptive innovations are likely to occur when industries continue to improve their products at a faster rate than the new improvements can be found useful by a meaningful segment of the customer base. This allows a new company to come in with a “good enough” product at a lower price that attracts the least profitable customers. Over time the new company (the disruptor) improves its products and takes more and more of the industry leader’s customers. The customers attracted by the disruptor are usually the least profitable for the industry leader because they don’t need all the product attributes offered and will accept a good enough replacement for a lower price.

These theories also introduce the concept of a sustaining innovation. A sustaining innovation allows the industry leaders to better serve their customers.

Throughout the discussions of disruptive innovations Clay discusses how the structure of an organization can prevent an industry leader from successfully competing against an industry entrant with a disruptive innovation. One primary reason is that the industry leader’s most profitable customers demands prevent a focus on innovations targeting their least profitable customers. Clay suggests that the industry leader should spin off an organization that is solely focused on competing in the realm of the disruptive innovation.

For a sustaining innovation, a spin off company is not recommended because the innovation is intended to improve the ability to serve the needs of the current customer base.

A final point for consideration is the thought that businesses shouldn’t focus on the customer but rather the job the customer is “hiring” the company’s product to perform.

With this basic description of disruptive and sustaining innovations it is interesting to consider the impact of the Internet on the newspaper business and how the newspaper industry reacted.  More importantly, I think there are answers for how newspapers can move forward and how they might have prevented the severity of the financial impact on the industry. Finally, I think that other industries may be able to use these lessons to improve success in both the disruptive and sustaining innovation categories.

First consider the impact of the Internet on the newspaper industry:
1.     It allowed the very profitable classified business to move quickly to technologically advanced format,
2.     It allowed newspaper’s largest, most profitable customers to better segment and target their customers by linking to word searches,
3.     It allowed smaller advertisers (not necessarily less profitable customers) to rotate digital ads at a lower price than newspapers (not necessarily a lower cost per customer reached).

This doesn’t suggest that newspapers had improved its products beyond the levels needed by its customers. Rather it suggests that there were pent up demands by customers that were waiting for a new platform that better performed the jobs they needed done.

As the Internet’s impact on the newspaper has increased so have the programs to serve its users. Social networking, social gaming programs and interactive entertainment are attracting huge audiences. These are all new programs that could not be performed by newspapers but were wanted by newspaper customers.

The Internet was and is a sustaining innovation. That is, if each and every innovation mentioned above had been introduced by the newspaper industry the customer base from least profitable to most profitable would have quickly adopted the programs.

This can be verified because almost all newspaper customers quickly adopted or experimented with those programs. Facebook, Twitter and similar programs allow networks to share news as it happens. Linked In allows professionals to stay networked. Interactive games allow entertainment platforms that include multiple players. All of these programs and a growing number daily could have been under the umbrella of newspapers products.

So why did newspapers miss the boat? Interestingly, newspapers acted as though the Internet was a game changer. Most newspapers set up a separate organization to operate their website. Most of those remain as a separate entity today. These new organizations created their own programming, content and ad programs.  

Unfortunately because they were a separate organization they began to compete with the newspaper and began converting newspaper programs to a website. They didn’t look at new ways to serve current newspaper customers rather they looked at new ways to present the newspaper digitally to the market. Some saw the newspaper website as a means of reaching newspaper readers that had been lost or new markets. This approach led to reformatting traditional news stories, entertainment and advertising.

To jump-start the advertising the newspaper website was given a share of the print revenue. This unfortunately had the impact of making it difficult to determine the success of the website programs.

In other words, newspapers treated the Internet and the products as disruptive innovations when in fact they were sustaining innovations. A corollary to the organizational structure for disruptive innovations is that by treating a sustaining technology as a disruptive technology and creating a separate structure, the industry leader impedes its own ability to serve its customers and opens opportunities for competitors to enter the market. I believe this is what happened to the newspaper industry.

It appears that if there had been a litmus test that could have categorized the Internet as a sustaining technology the outcome might have been different. If the Internet had been defined as a sustaining innovation then the organization would have structured the Internet components as part of the current organization. For example, the web-based innovations for classified would have been structured as part of the advertising department.  Rather than determining ways to add on classified newspaper ads to the newspaper website, newspapers might have been the ones to create interactive searches for their classified customers. Instead they found themselves reacting to innovators outside of the industry and giving away any value they might have retained.

 The ability to update stories might have provided a marketing assist for the circulation department. Interactive updates might have been the invention of newspapers had the newsroom had the responsibility for the digital news projects.

Clearly, there would have been no organization using newspaper resources and competing directly with the newspaper – a structure that should only be used with disruptive innovations.

Unfortunately at the time of the impact of the Internet, the theories of disruptive and sustaining innovations were new and there wasn’t a widely accepted process for identifying innovation types and relating them to organizational structures.

What should newspapers do now? They should begin integrating the web functions with the newspaper. It should not be a separate entity. Begin finding ways to understand the jobs advertisers and readers are hiring newspapers to do and use all of the technologies to create a symbiotic array of products to do those jobs.

The Houston Business Journal for example, a weekly paid subscription product targeting business executives, has found a way of building on its print product by using new technologies. First it introduced the digital version of the print product and began marketing bulk subscriptions to businesses, which provided a digital copy for each of the subscribing company’s executives. The journal then provided a daily email to these executives updating local business activities through a link to their website. Here the HBJ clearly understood the job that needed to be done was to make business executives more effective in the Houston market and went about doing that job in a way that was meaningful to executives and created a business opportunity for HBJ.

What should industries do in the future? First they should identify the jobs that a new innovation does for the consumers. If it does the same jobs that the industry performs but with greater efficacy and offers product attributes previously unavailable then the innovation should be classified as a sustaining innovation. Why is this sustaining? Because by adding the innovation the current leader improves its ability to serve its best customers better.

If the new innovation does the same jobs but does so at a lower cost with a “good enough” product that offers no new capabilities then it should be classified as a disruptive innovation.  Why is this disruptive? Because by adding the innovation the current leader would have to change its business model to compete for its least profitable customers. To be proactive here it is better to add a separate organization that focuses only on that market or that innovation.


Gary Randazzo is founder of GWR Research, a marketing and management consulting firm. Mr. Randazzo served as Senior VP at the Houston Chronicle and EVP and General Manager of the San Francisco Chronicle. He can be reached at gary@gwrresearch.com.


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