If an online publisher targeted college students, it would meet that first litmus test because the present customer who chooses the textbook is the professor, not the student. But this a great example that relates to my second litmus test for disruption. An innovation will get traction only if it helps people get something that they're already doing in their lives done better. In the case of college students, that would be cramming for exams. The safest assumption is that people won't change the fundamental things they want out of life. An online service that helps students cram more easily and more effectively has a much higher probability of success than an online capability that helps students explore and learn more deeply the things that are only touched upon in textbooks and professors' lectures. That means that you need to be very observant about what people are trying to do -- not what they say they wish they were doing. If you can facilitate what they're already doing -- maybe make it cheaper, easier, and more convenient to do -- then your disruption has a much better chance of success.
Can you give us some some real-world examples to illustrate that assumption?
Think about digital photography versus film. What are people right now trying to do in their lives? We take our film to CVS and almost always order double prints. We do that because it's cheap and just in case a photo turns out great, we want a convenient copy to send to Grandma. Then we bring the prints home, we sit down at the dining-room table, and we go through them. And then what do we do? We put them back in the envelope, and put them in a box or a drawer. More than 95% of all prints get looked at only once. Very rarely is somebody conscientious enough to go back and put the most memorable in a photo album for posterity. But we do put some in an envelope and send them to Grandma.
The digital-photography people come to market with the proposition of "If you'll just take the time to learn this software, you can upload all these images onto your computer, and you can edit out the red-eye in all of those photographs you only ever looked at once. And you can keep those images organized in these online photo albums, and we'll store the albums for you in data warehouses." People who own digital cameras just don't do that stuff. There's no point in making it easier for people to do what they aren't prioritizing in the first place; they aren't going to do it. On the other hand, people do send digital images of their babies and their vacations all over the Internet. That helps them get something done that they're already trying to do.
There are a lot of companies -- not just Sony and Kodak -- that have spent a lot of money trying to make the quality of the digital images comparable with film. But when you're sending these things over the Internet, they don't have to be high quality. In fact, what do you do when somebody sends you images? You click on them, look at them once, and then you close them -- just the way we put photos back in the envelope. You don't print them and store them in your photo album. Almost always, you just close them. You can get faked out by asking people what they want. You've got to watch what they really do and how they prioritize things in their lives.
Your third test goes against everything we hear in these days of quality. You talk about crummy products' being a necessary characteristic of disruptive innovation. What's that all about?
The mistake that makes launching a venture expensive is when you try to make a disruptive technology so good that it can compete on a quality basis with an established product. If, instead, you find a new set of customers who are already trying to get something done, and you can facilitate that, they'll be delighted to have something that's actually not very good but is better than nothing.
You need to be very observant about what people are trying to do -- not what they say they wish they were doing. If you can facilitate what they're already doing, your disruption has a better chance of success.
If you go back through the history of disruptive innovations, they've all smelled like that. The first crude transistors took root in hearing aids. Then transistors got better and popped into radios that teenagers carried around to listen to rock and roll. Then we put them in portable TVs, and by the mid-1960s transistors were sophisticated enough to use in floor-standing televisions. The earliest personal computers were toys. Kids were delighted to have an Apple to use, and most businesspeople just had no use for them. People were delighted to have the PalmPilot even though it couldn't do most of the things that a notebook computer could do. And residential-housing contractors were delighted to have hydraulic backhoes, even though they could lift only a quarter cubic yard of earth, because now they didn't have to dig ditches by hand.
Do any obvious new markets come to mind -- even an example where you'd be willing to put up with a crummy product?
Sure. Think about voice-recognition technology. IBM tried at the outset to make voice-recognition technology good enough so that you could speak your word-processing documents rather than type them. That's a very complex problem. Simple voice commands are a much more likely first market. And then what about developing voice-recognition software targeting kids in chat rooms so they could speak rather than type? After that, an embedded algorithm that allowed us to speak E-mail into our BlackBerries or our Palm VIIs -- I'd be thrilled to have a voice-recognition algorithm that was 80% accurate in a mobile E-mail world, even though I wouldn't tolerate 80% accuracy when word processing on my desktop computer.
So far your tests are about expanding markets, either by bringing new people into a market -- what you call creating consumption from nonconsumption -- or by making it easier and cheaper for people to do what they're already doing or wish they could do. Are those the two primary ways to create a viable company in a market dominated by powerhouses?
If you can't do either of those things, you can still create a disruptive new business without expanding the existing market, provided two conditions are met. One condition is that the existing technology has to be more than good enough for what customers in the least demanding part of the market need. Second, you've got to be able to profitably provide the product or service at a low price point, from a business model that isn't attractive to established companies. Steel minimills did that. They didn't create new markets for steel, but they produced rebars that were good enough for the lower end of the market at a 20% lower cost. Had the minimills tried to attack the market for high-quality sheet steel, maybe technologically they could have figured that out, but it would have taken billions to do it. And when they got there, they would have just occupied the piece of real estate that the established mills wanted to own. But by attacking rebar at the bottom, the lower-cost business model took away customers that the established steelmakers cared the least about. The test is whether you can create a lower-cost business model and earn attractive profits at those low price points.
