These days (and nights) I spend quite some time debriefing, business planning, strategizing, VC-wrestling, conference jockeying and web-evangelizing. Regardless of initial theme, these various activities often seem boil down to revolve around how to make money and who’s money we’re gonna take. Scarily enough, it’s very seldom (erh, make the never) about “why” we’re gonna make money in the first place; most people are too lazy or too arrogant to realize that “value” is key.
Forgetting about the importance of a rock-solid value proposition may be one thing, but what actually annoys me the most is the utter disregard for keeping key strategy/economics/marketing concepts straight; competitive advantages are confused with business ideas, are confused with business models, are confused with sales models, are confused revenue models ad infinitum.
Enough whining; let’s save the business world and clean up the most disturbing misuse of these wonderful, and useful, concepts:
- USP (Unique Selling Proposition/Point). Very often confused with value proposition or competitive advantage. It was coined by Rosser Reeves and is a communications-concept referring to that your communication should stress one benefit (uniqueness 1) that no other company claims/can do (uniqueness 2) that is of significance to the consumer in it’s purchase. The “one benefit per ad” part is to make sure that people aren’t overwhelmed communicationwise, and the other part relate to value (there it is again) and “positioning mechanics”, a concept that was later defined and refined by Al Ries & Co.
- Revenue model vs. Business model. A Revenue Model is how we charge for the value we create. A business model relates to how we are structured to create value and make money: it includes our offering (value proposition), how we convince people we create value (sales model), how our organization is structured (organization), infrastructure (core competencies, partnerships etc.), what it costs to run our business (cost model) and some other stuff. A restaurant’s revenue model is (usually) to charge money (cash or card) in relation to what and how value much guests have consumed after each consumption.
However, the business model includes stuff like the fact that they provide food as value in exhange for the revenue stream, where they provide the food – restaurant or home delivery – how they provide that food; cook it in their own kitchen or offer take-out menus from alot of different places (there are actual restaurants that do this heh) etc.
- Disruptive vs. sustaining innovation/technology. This is probably the most misused business word of our time. It’s just about he new “strategic planning”, “SCA” or “human capital”
I often wonder if anyone of the people have even bothered to read Clay Christensens fantastic books on the subject. Or listened to the podcast from 2005 OSCON. Or even read the Wikipedia entry, for that matter. It’s dynamite stuff, one of the most important books of our day I’s say. But a little dry and too some extent, boring. But worth a read, or two.
Most guys you’ll meet have their very own interpretation of what a “disruptive innovation” means. People equal it to a “game changer”, a “technological quantum leap” or something along those lines. But disruption is a process, not an event. And it isn’t really about the complexity of a new technology, but mostly relates to simplifying and making something more convenient, enabling a new form of use (so called “new market disruption”). It can also be about a more lean and efficient business model, that enable new users to buy a product, or picks up consumers in the low-end that other companies don’t want.
Another factor is that for a disruption to be really effective, it must be something that the incumbent business model doesn’t allow them to do; for example mini-computer manufacturers in the seventies (Digital, Wang, Nixdorf etc.) were structured in a way with their sales model that demanded them to have high-priced sales at high margins (typical computer sold for $200 000 at 60 percent markup) which made it very unattractive for them to pursue Personal Computers that promised price tags of $2000 at 30 percent markup. And it didn’t matter that it was obvious that the PC market was gonna be substantial and that their engineers could have designed the PC blindfolded. Their business model was structured as such that they couldn’t target this business without sacrificing some of the old one; the new game began befor the old one ended.
But… it’s one big but, when an innovation strikes against a piece of the market that is considered financially important by an incumbent company, the odds are that the entrant will loose. Key to understanding disruptive vs. sustaining innovation is that as long as it helps incumbent companies to make products that improve the performance trajectory in the way that their best customers “measure goodness”, these companies find a way to get it done. But improving this trajectory almost always drives the market to at one point overshoot what all but the most demanding consumer’s are willing to utilize. It’s at these stages that disruptive innovations really make a killing and get that oh-so-sweet hockey-stick-growth curve by either bringing a new dimension to the table, or being able to deliver what consumer’s are actually willing to pay for, but for a much lower price.
Problem with VC’s, and other investors too for that matter, is that they want something with big volume and super-high-margins (and they want it fast to boost the almighty IRR), which means targeting a piece of financial real-estate that is attractive to incumbent companies and thus stacks the odds against success. Also they want a “proven” market, meaning that there has to be data to support the investment, which there of course isn’t because at that point there is only theory. So they go for incremental innovation, thinking it’s disruptive since it’s too complex for them or anyone else to understand
And this might be a good way for a small company to make a quick sell to a big company, but it’s not a way to build new growth businesses. And it might account for the one-out-of-ten-home-run-kind-of-thinking that venture capital seem to be all about.
Phew. There it is, black on white. Hopefully I hae gotten it almost right, disruption is a bit tricky to explain since it’s three books and a gazillion papers to get the full perspective. E-mail me if you have any questions.
