3 Ways To Evaluate Disruption Potential.
In our work as advisors to startup founders, company executives and investors, we are often asked for our opinion on the disruption potential of new service and product ideas. In this article we share 3 questions we use to quickly evaluate an idea's disruption potential and highlight where the execution and operational focus for a potential investor should be.
QUESTION 1: DOES THE IDEA DRAMATICALLY REDUCE COST FOR THE END-USER?
The ability to produce and deliver at a low-cost is a mandatory part of a company's continuous improvement process. In our evaluation we look for a "secret" ingredient within the idea that creates a cost base many times lower than any evolutionary optimisation could ever achieve.
As an example, think of the introduction of the quartz wrist watches. The "secret" ingredient was using an electronic oscillator regulated by a quartz instead of mechanical parts and springs. This architectural change meant that quartz watches could be produced at a small fraction of the cost of mechanical watches. The redefined cost base and resulting low price points made wrist watches accessible to a large low-end market who "did not need the full performance valued by customers at the high end of the market". A Low-End Disruption as per Clayton M. Christensen's, Disruptive Innovation terminology.
An important point to make is that the definition of "cost" goes beyond monetary aspects. Depending on the idea the cost can be defined as the cost to the person, the business, the society and the environment (as well as combinations thereof).
QUESTION 2: DOES THE IDEA RESULT IN A RADICALLY SIMPLIFIED USER EXPERIENCE?
Offering a great user experience is the aim of every company. We are looking for those re-imagined user experiences that will allow to reach "customers who have needs that are unserved by existing incumbents". A New-Market Disruption as per Clayton M. Christensen's, Disruptive Innovation terminology.
Apple's iPhone User Interface is a deservedly overused example. Apple created a user interface so simple that anyone could use a highly sophisticated smartphone without reading a manual first. The concept of associating applications to tasks created a new service consumption pattern that was proven to drive increased service consumption. This has opened the path for the mass smartphone adoption we experience today and challenged the use of laptops as the only means of working on the go.
QUESTION 3: DOES THE IDEA RESULT IN A REDEFINITION OF REVENUE FLOWS?
This question aims at identifying if the new idea changes the revenue structure and movement within and across industries.
- Within the same industry, we look if the idea significantly changes the revenue distribution across participants in the value chain or, more drastically, allows to bypass participants in the value chain and earn what has been their revenue. A great example is TransferWise who enable low-cost money transfers across countries. The "secret" ingredient: a process that avoids costly currency conversion and money transfers crossing borders. In other words TransferWise (a Financial Conduct Authority regulated company) bypasses banks for international money transfers.
- Across industries, we look if the idea can employ an asymmetric business model approach i.e. create value in another industry, and create a "hook" that allows to transfer the revenues from that industry. The Android Operating System is a great example: Google develops and offers Android for free to phone manufacturers, and uses the bundling of Google Apps to turn any owner of an Android phone into a customer of Google's advertising business. Thus revenue "flows" from customers acquired through software in the telecoms industry to be "captured" in Google's advertising business.
BRINGING IT ALL TOGETHER
Understanding how a service and product idea reshapes cost base, user experience, and revenue flows is helpful to quickly evaluate the idea's disruption potential and highlight where the execution and operational focus for a potential investor should be. For example, providing the best possible user experience is not a mandatory condition for a low-end disruption to succeed. Similarly, an idea applying an asymmetric business model requires initial investment to create value and a "hook" to acquire customers in another industry, and transfer them to capture revenue flows within one's own business model.
A service and product idea can be disruptive in more than one way. For example, TransferWise is a low-cost and revenue flows disrupting service within the banking industry. Google's Android is a low-cost and revenue flows disrupting product across the software and advertising industries. Polymorphic Service Propositions have the potential to be disruptive in terms of low-cost and user experience.
An idea does not have to be disruptive in multiple areas to be considered. It is worth noting that Apple's iPhone has been primarily a user experience disruption at the time it was launched. The new user experience was so profound, that it resulted in Apple being able to negotiate revenue flows redistribution between Apple and carriers, while at the same time creating a high margin product.
CREDITS & REFERENCES
For the avoidance of doubt, Neos Chronos is not affiliated with and has no financial interest in any of the companies mentioned in this article. All names and trademarks mentioned herein are the property of their respective owners. Please observe the Neos Chronos Terms of Use.
- Wikipedia: Quartz clock, Clayton M. Christensen, Disruptive Innovation
- TransferWise: Website, How TransferWise works
- PhoneArena: List of phone manufacturers
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