All types of innovations have a place in business and economy. Having the right balance is important for all of them. The good thing here is, when you have cash and jobs released from efficiency innovation, you can turn those jobs and cash towards disruptive innovation.
About the same time during the last year my kids were at home, courtesy school holidays, and were on the verge of being slammed by boredom. In the quest for entertainment my son and I decided to play chess.
For the first game I used simple tactics and, obviously, won. In the second round, I tried to make it difficult for him to win. He improved his game too, but eventually lost. The third time, I used even better tactics while he too raised his game. Yet, I won the third game too.
Before we could begin the fourth round, he said, “Let’s play something else.” Then he brought Snakes-n-Ladders, a game that levelled the playing field for both of us as we continued.
The disruptive innovation myth
One of the famous quotes that are making circles in the industry is, “Uber didn’t kill the taxi business; limited access and fare control did!” People often use this quote to signify how disruptive innovation happens. Although somewhat cliché, let us roll with it. With this type of quote, a typical response I have seen comes in two ways.
One camp of CXOs strongly believes that the right amount of incremental innovation can beat that level of disruptive innovation. They remain confident that incremental changes eventually pile up and can result in a big meaningful change. If you do all these small incremental changes you can fix many problems and stay on top.
The other camp, however, believes that incremental is not the best way to go. Instead, they prefer the disruptive innovation playbook, which in my view is neither enough nor sustainable. Before I explain why it is so, let us understand the other kinds of innovations and how they affect capital or the economy in general.
Companies have followed mostly three types of innovations for many decades. Most CXOs are often focused on only the first two types, whereas the third type has radically affected many industries. I will also introduce you to the fourth type, which can help you change the game.
Three types of innovations
In his seminal work, ‘The Innovator’s Dilemma,’ Clayton Christensen has discussed the three primary forms of innovation. Borrowing from that idea, let me explain the first three types of innovations and their impact on jobs, capital, and the economy.
We are looking at these innovation forms from a capital and job perspective for one key reason. These are the two important aspects that often and significantly affect the economy. More jobs or more available capital will lead to a drastically different market or economy than one with fewer jobs and restricted capital.
Incremental innovation. Incremental innovation is best defined as good-getting-better. The product or service does not change significantly. Only a smaller portion of it, feature or function, improves. It only helps in marginally improving customer experience and (or) the business bottom-line. Due to the nature of incremental innovation and its magnitude, it does not affect the job market. Moreover, there is no impact on capital, or cash-flow, for the business or the market in general.
If you look carefully, almost everyone is doing it. Without even realising it, most of us try to get better at what we do, bit-by-bit. So, it has become part and parcel of business and human life as such.
Efficiency innovation. Most of the transformation projects in business are geared towards this type of innovation. Whether your business is on the digital transformation journey or any other kind, the goals will likely dictate efficiency improvement.
By definition, efficiency means output divided by input. It means businesses want to increase the output or stay at the same level by reducing the input.
The input for any business comes in many different forms. It could be workforce, raw material, natural resources, money, machinery, parts, time to perform the work or produce output, and many others. So, when businesses want to improve efficiency, they are looking to reduce one or more of those inputs while increasing the output as much as possible.
Essentially, it means you want to have fewer people doing the same things, less material to produce the same thing, or to spend less time in production or service delivery. This more often means job losses or significant displacements. But by using lesser input, the business can free up the capital tied in those resources. This freed-up capital or cash-flow can then be utilised for other purposes.
Disruptive innovation. This type of innovation has remained the poster-boy of all innovations until now. Disruptive innovation in the real sense means making a product or service democratised, so that more and more people can use it. It often means businesses need to produce more products or need to deliver services to more customers.
It almost always results in needing more people to do the job and, therefore, it results in more jobs. However, business needs more capital to produce, perform, and hire more people. Disruptive innovation, in the ideal sense, creates more jobs and ties up a lot of capital.
But make no mistake, disruptive innovation is different than disruption. Mere disruption in the market is an annoying disturbance without creating much value for business or customers. It is much like someone throwing a spanner in a smoothly running machine without improving the machine’s efficiency. Several businesses, especially startups, confuse disruption with disruptive innovation. This conflation is aggravated by the glamour this term attracts.
Efficiency vs disruptive innovation
Think of the Internet, for example. Only one third of the world population does not have proper access to it. However, this was not the case ten to fifteen years ago when only a handful of people were on the Internet. Personal devices, such as tablets and smartphones, have contributed to democratising the Internet. So, many more people can now access it. Therefore, it will be fair to say that smartphones and similar personal devices are disruptive innovations.
However, if you think about artificial intelligence (AI), most AI-related products or services promise a reduction in input while increasing the output significantly. That is classic efficiency innovation. Due to all the glamour around AI technology, people try to dub it as a disruptive technology. It may work well because of a disruption in the economy, but it is certainly not a disruptive innovation. AI-related products and services are not disruptive innovations. These are efficiency innovations, and as long as businesses understand this difference, they can make appropriate and right decisions.
If you have been wondering which innovation is the best one, the answer is not singular. All types of innovations have a place in business and economy. Having the right balance is important for all of them. The good thing here is, when you have cash and jobs released from efficiency innovation, you can turn those jobs and cash towards disruptive innovation. So, while doing efficiency innovation projects in your company, always look for an opportunity to invest and reroute that cash and jobs in disruptive innovation.
Disruptive innovation should closely follow efficiency innovation for economic stability and sustainable growth!
The new kind of innovation
The fourth type of innovation, which I mentioned earlier, is different from all the three types we have discussed so far.
Take the case of a car brand such as Volkswagen, BMW, Tata, Maruti, or Tesla. All of them are in the ‘What’ category. What do they enable you to do? They enable you to commute from place A to place B.
The ‘How’ part of the commute was changed by Uber, Lyft, Ola, and some others like them. They still enable you to go from place A to place B, but you can now easily hire instead of driving yourself or owning a car. So, ‘what you do’ remains the same, but ‘how you do it’ has changed.
Now, instead of ‘What’ or ‘How,’ if you focus on ‘Why’ your answer will change. When you ask why someone needs to go from place A to place B, it will give you different perspectives and ideas. Knowing ‘Why’ behind the use of the service or product will help you identify a new product or new positioning, even both.
If you focus on your company’s purpose and the value you want to deliver to your customers, your outlook will change. You will ask, “What is my customer trying to achieve?” This approach will make you think deeply about transforming the problem to match it to improve the overall value proposition. If the purpose of travel is to meet colleagues in office and discuss some work with them, you may offer a Zoom or Skype-like solution.
The fact of the matter is, when you attempt to compete with a disruptive innovation using another disruptive innovation, there is little room to wiggle out sustenance. So, most companies trying to do so end up playing a catch-up game with the disruptors.
Change in perspective
While others are going at disruptive innovation, understand the landscape and think: How can you transform the business model, customer problem, or the value proposition of the entire industry itself? How can you pioneer something so transformative that disruptive innovation becomes irrelevant?
When you start to think about tomorrow and over-morrow, that is, the day after tomorrow, your strategy changes radically. For most businesses, digital transformation is overdue; I suggest you get over with it. However, all the others need to understand that it is not the end. You must progress beyond it and start thinking about problem transformation.
This level of innovation, in my view, is transformative, and hence it is apt to call it ‘Transformative Innovation!’
Businesses must progress beyond business transformation and start thinking about problem transformation.
Are you still trying to make a better hammer or have started making a drill machine? Perhaps you should, instead, start focusing on how you can help your customers make a hole in the wall.
But think again: Did you want to help your customers display beautiful pictures on their walls? Depending on how you see it, what you do will change significantly.
After all, why would someone make a hole in the wall when they can use removable stickers?
People who used taxis before shifted to Uber et al for their urban commute, which significantly covered (about 65%) office going population. However, when this working population starts to work from anywhere, they will not need to use taxis much. Instead, they will use Zoom, Skype, or MS-Teams, eliminating or reducing the need for taxis significantly.
This change will morph the competitive landscape, and you will find Uber and others competing for the customer’s wallet share with Zoom and others.
Disruptive innovation was a solution to supersede incremental innovation and compete with incumbents. Transformative innovation is about problem transformation, which changes the game and makes disruptive innovation almost irrelevant.
When my son and I were playing, we intended to entertain ourselves. When he realised that he was being outsmarted, he transformed his problem. He changed the game and levelled the playing field by staying focused on our intent.
You can also transform and change the game, but only if you think two steps ahead of disruptors. If you want to do that, you must shift your focus from customers’ problems to customers’ intents. When you respond to those intents in the best way you can, you will stay ahead of the curve!
So, how do you embrace transformative innovation? Well, that is the topic for our next few articles. But here are some pre-requisites. You need to acknowledge these distinctions and accept that you are going to need incremental and efficiency innovation.
However, most organisations are not designed for the third type of innovation, that is, disruptive innovation. So, when they attempt doing that, they look like a dad dancing at a teenager’s party.
Leave disruptive innovation to the startups. Instead, you change the game while they are busy changing the business model.
Anand Tamboli is a serial entrepreneur, speaker, award-winning author, and an emerging technology thought leader