In a recent conversation between Harvard Business School Professor, Clayton Christensen and Silicon Valley investor, Marc Andreessen, an observation was made on how start-ups enter established markets and topple incumbents.
Conventional knowledge would conclude market leaders who were poorly run organisations would be the ones to fall foul to new competition. However, Andreessen observed how the opposite is often true. In fact, a well run company would be more susceptible.
The companies considered ‘well run’ would’ve likely built a solid organisation focussed on serving their existing customers, with their existing products, built on existing technology and infrastructure.
This strength actually turns out to be a weakness.
The reality is, whatever brought an incumbent to their market leadership position in the first place, will likely be the very thing that causes their demise when things change. Perhaps new technology is developed that benefits the industry; facilitating lower product costs or more efficient operations. Or perhaps someone figures out a leaner business model and route to market. Whatever change occurs, the incumbent’s excellence in running their businessone particular way will impede their ability to adapt.
The start-up’s agility is its greatest asset.
The rapid pace of technological development, coupled with falling costs of starting a start-up means these moments are only ever going to become more frequent. And companies with a heavy reliance on an existing ways of doing things are going to be the most vulnerable.
So how can an incumbent organisation keep itself agile enough to respond?
A critical part of what goes wrong lies with the company’s leadership team and the type of data they rely on to inform decision making. At some point during the company’s reign, the type of data used switches from deep insight around the customer problem, to data on competitor products, features and market trends.
This data is an abstraction of the true customer needs. It misses the changing context and nuance of the customer’s daily life. Attention is diverted away from the people the company is supposed to be serving and instead encourages derivative ideas. Ideas which become predictable because they’re referencing what has come before.
Another way of looking at the problem is how an organisation defines what it does. Defining themselves by the industry they’re in is a mistake and leads to the behaviour described above. When things change — as they inevitably do — a company’s prior technology or business model becomes a burden because it no longer serve the customer’s needs effectively (see: the music industry).
Alternatively, organisations should look to define themselves by the job they help their customers get done. Building their business around the ‘customer job’ would put them in a far better position to adapt and continue to serve their customer’s needs, even when things do change.
It is via this ‘jobs-to-be-done’ framework that businesses can remain in touch with their customer’s motivations and develop new, relevant solutions. Sadly, for most established organisations, these new solutions often come from new players.
Better understanding can be obtained by looking at how these new solution emerge, for which there are usually three inter-related reasons.
Providing a better solution
When something becomes significantly better — because of better technology, design or route to market — it usually arrives carrying a substantially higher price tag. These innovations are initially dismissed as niche or toys for rich people; but those observing fail to see the impact of the innovation once it eventually gets cheaper.
Tesla approached electric cars in this manner. They knew they first had to win over sceptics on non-gasoline powered vehicles. The Roadster, an expensive, high performance sports car was the way to do it. Most criticised Tesla for talking big on sustainable transport and then proceeding to release a product only for the elite. What people didn’t see was what would come after the six-figure sports car. Starting with a significantly better product was enough to build an initial customer base of ‘innovators’ and establish the precedent for the brand. This momentum was necessary for kick starting the electric car innovation adoption cycle — starting niche before slowly expanding into the mainstream.
Right now, we’re witnessing Tesla execute on this strategy by making new, less expensive models. Something which incumbent automotive manufacturers are now struggling to catch up with. The engineering hurdle is too high and there’s too much sunk cost in combustion engine technology. Tesla’s strategy is bolstered with the confidence the financial markets have in them as a business. At time of writing, Tesla have a price-to-sales ratio more than 18 times that of Ford, GM or Chrysler. This provides Tesla with significantly easier access to the capital they need; allowing them to transform their low-to-medium volume manufacturing operation to high volume one. Elon Musk’s compelling vision of sustainable transport is also effective in diverting short term profits away from shareholders and back into in Tesla for further R&D. And this is a good thing! Businesses SHOULD be allowed to accumulate large amounts of captial if they intend to put it to use for societal or environmental good. Even if Ford, GM and Chrysler are trying to recruit the best talent in the world to catch up; their limited access to capital would most certainly be a hinderance.
Tesla’s remarkable feat wasn’t simply their world-class engineering efforts to develop a high performance electric power-train. It was, however, in their ability to compete with established auto manufacturers, build a compelling luxury brand and a produce significantly better car.
Sustainable transport is Tesla’s concern but superior handling, comfort and design is the customer’s.
At all times, Tesla have stayed focussed on the ‘customer job’. When new companies enter the market by being better, they do so by competing for the more-demanding customers who are already served by incumbents. The hard part is identifying the particular niche to start in that has relatively weak and beatable competition.
Providing a cheaper solution
When something significantly cheaper emerges, it’s often called ‘disruptive’ innovation. Through either new technology or an innovative business model; previously over-served customers can be attracted with a less expensive offering. Part of the job for companies attempting to disrupt the low end of the market is figuring out what these customers don’t actually want from their existing product or service, in order to provide a cheaper alternative.
Netflix started out competing with the likes of blockbuster back in 1997. They began gaining share of the video rental market by providing a cheaper offering. Their strategy was to send DVDs via mail, therefore, negating the need for costly infrastructure such as brick-and-mortar stores like Blockbuster. The final nail in the coffin for Blockbuster was when Netflix innovated againinside their own business to transform themselves into a video streaming service. Increasing broadband speeds meant online video was finally starting to become feasible; and watchable. Not only was Netflix’s offering stillcheaper, but it also became significantly better.
Again, looking at Netflix and Blockbuster: both had very different strategies, but focussed on the same customer job. The remarkable thing about Netflix was their ability as a company not to be held back by their original business model and distribution method. Transitioning from mail delivery to online was their only option. It was a disrupt or be disrupted moment. And focussing on the customer job kept the latter from happening. (Side note: Netflix’s recent expansion into acquiring exclusive, original series is yet another innovation. And a signal that they are still intensely focussed on serving that very same customer job).
Serving new use cases
The third reason for disruption is often the most difficult to predict. The above examples of Tesla and Netflix illustrate how a newcomer can succeed in anexisting market by solving the existing customer problem in a better or cheaper way. But things get very interesting when new technologies have applications beyond the initial customer job they serve.
IBM’s Thomas Watson (allegedly) predicted that we’d only ever need 5 computers to serve the entire world. It was assumed the current use case back in the 1943 would somehow remain the same. Whether it was a misquote or not, it would’ve been phenomenally hard to predict all the things that got built during the decades afterwards. PCs, the internet, smartphones.
Predicting an innovation’s true potential requires a step back from what it looks like in the beginning and to speculate ‘what could be’. Judging potential by the size of the addressable market at that moment in time is often misleading. It fails to consider other applications when the technology becomes better or cheaper. Focussing on the customer jobs which new technologies could serve is a far better approach to understanding long term impact on the market.
No other innovation in recent times illustrates this point better than Uber. Pretty much global leader in the co-ordination of networked transportation.
Starting out back in 2010, UberCab let rich people in San Francisco tap a button on their smartphone to hail a Mercedes S-class. Better than a taxi, novel but too expensive for the masses. 6 years later and an Uber is often more competitively priced than regular taxi.
But even now; the long term, potential of their innovation is still provokingdebates around their gigantic company valuations. All, essentially, are speculations on the future value of the company and how many additional use cases they can apply their technology to.
It would be obvious to estimate how successful Uber might become based on how much share of the global taxi market they can win. However, there are many other ‘customer jobs’ which they could address. These include:
Existing use case — taxis: Gaining share of the current taxi market by offering a competitive service. The previous use case is still applicable. They did ‘better’ then followed it up with ‘cheaper’. Based on performance, it can be assumed some share of the existing, total customer base will switch to use Uber’s service, instead of local taxi services.
Adjacent use cases — drive, bus, train: Uber’s (occasional) low prices make it an attractive alternative to people who were previously deterred by the lack of transparency with taxi fares and unreliable services. The use case here may have been where a customer may have driven or taken the bus or train. This increases the overall size of Uber’s addressable market compared to just the ‘taxi market’.
New use case — higher usage frequency: As people use the service and are impressed not just by its price, but also by its convenience and delightful user experience, it becomes an attractive proposition for using more often. Some may take an Uber when they may have previously walked. Uber are also likely influencing the total number of trips people take. Offering something at the right price with the right level of convenience is potentially equating to an increase in total mobility.
Indirect market — replacing car ownership: A significant market size expansion for Uber lies in positioning themselves as a viable alternative to car ownership. CEO, Travis Kalanick has already stated that this is a goal for Uber. Some inner-city residents — faced with ever rising parking and insurance costs — are already selling their cars and surviving on Uber alone. The cost equation for this proposition is likely to improve in cities which have a great driver supply to rely upon (more ‘nodes in the network’), thus driving down costs for riders by more frequently avoiding surge pricing. The down side to this is a less attractive proposition to drivers as there are fewer opportunities for higher earnings. However, it’s no secret that Uber’s long term ambition is to provide driver-less transport. A future that is a lot closer than most realise and one which will radically change Uber’s cost structure.
Indirect market — goods: A telling sign about Uber’s long term trajectory can be seen in their recent brand overhaul. “Moving bits and atoms” doesn’t restrict their innovation to just transporting people around. They’ve already began experimenting with delivering goods in some of their cities. Uber Rush (package delivery) and Uber Eats (restaurant meal delivery) being two of the most notable services; which are currently expanding.
Indirect market — logistics: This probably the most stretching of speculations but Uber may well be building one of the world’s largest logistics networks. Their current operations are focussed on short distance, inner-city journeys at the moment. And logistics is a significantly different beast compared to taxiing people. However, there’s nothing to say that Uber’s core innovation, of coordinating the movement of physical things efficiently, couldn’t extend to better serve the transportation of goods over long-distances.
Focussing on ‘mobility’ rather than taxiing gives Uber a broader range of use cases to apply their technology to. It also doesn’t cap their business simply to the taxi market. Does it justify their recent ten figure valuations? Maybe. But only if they go on to create that amount of value in the world for each of these use cases.
Innovations can only truly be called ‘innovations’ when they affect human behaviour. And they can be judged to be successful if they not only have economies of scale; but also economies of scope. Such ‘scope’ can be defined as the number of different jobs a customer can get done.
What job does your company help customers get done?