[I originally posted a version of this article on LinkedIn.] Do you want to unleash explosive growth? Own a market? Crush your competition? Open up completely new markets? Be the next Apple, Tesla, Uber, Airbnb, Amazon, MinuteClinic or Sharkbite? This article describes a three-part process based on my analysis and insights of how strategic models apply to companies that disrupt industries that you can apply in your industry. While simple in principle, it requires different behaviors and disciplines than companies generally develop. In other words, it’s hard.
Part 1: Do You Understand Your Customer?
What do your customers “hire” your product (or service) to do for them? This is the heart of the “jobs to be done” approach: people don’t buy products or technologies – they “hire” them to do a job. Theodore Levitt summed up the principle: “People don’t want a quarter-inch drill, they want a quarter-inch hole.” The “jobs to be done” approach is particularly valuable when segmenting your market. Most companies segment by demographics (common attributes are age, gender, and income for consumer products, or company size, income, or industry for business-to-business firms.) As Clayton Christensen points out, what you establish with these segmentation methods is (at best) a correlation between some observed characteristic and buying behavior. What you do NOT establish is a reason why they buy. If you understand the jobs your customer is trying to hire your product to do, you will establish that causality – you can almost make them buy. Christensen addressed this in “The Innovator’s Solution”:
[Customers’] thought processes originate with an awareness of needing to get something done, and then they set out to hire something or someone to do the job as effectively, conveniently, and inexpensively as possible. The functional, emotional, and social dimensions of the jobs that customers need to get done constitute the circumstances in which they buy….Companies that target their products at the circumstances in which customers find themselves, rather than at the customers themselves, are those that can launch predictably successful products. [i]
When you adopt this approach, you will also have a much broader (and more accurate) vision of not just your customers’ needs, but who your competition really is. Put yourself in your customer’s shoes: who else is your customer thinking about “hiring” to do the same job that you do for them? A customer-jobs matrix[ii], shown in Figure 1, can guide you in creating new solutions and/or identifying new customers, all around the “job”.
The “job” is actually much more likely to be a series of jobs, or “outcomes”, that the customer is trying to achieve. These outcomes will vary in importance, and the customer will have different levels of satisfaction with how they are being performed. You should focus on filling the most important jobs that have low levels of satisfaction. These important-but-poorly-satisfied needs are most often referred to as the customer’s “pain points.”
Part 2: Do you have the resources?
Note: Startups can skip this part because all their resources are already geared toward disrupting the market. In established organizations, however, most resources are devoted to the status quo, or as Rita Gunther McGrath puts it, the “exploitation phase of transient advantage.”[iii] This is a key point: even if you aren’t interested in disrupting your industry, you can’t sit still. In fact, if you are asking yourself “how can I avoid being disrupted?” you are asking the wrong question. Sticking to the status quo sets you up to be the disruptee. Harsh truth: what customers think is important today is not what they will think is important tomorrow. Adrian Slywotzky wrote about this phenomenon, which he called “Value Migration:”
It is widely acknowledged that products go through cycles, from growth through obsolescence. It is not as well recognized that business designs also go through cycles and reach economic obsolescence. Customer priorities – the issues that are most important to them, including and going beyond the product or service offered – have a natural tendency to change; business designs tend to be fixed. When the mechanism that matches the company’s business design to the structure of customer priorities breaks down, Value Migration begins to occur. Value migrates from outmoded business designs to new ones that are better able to satisfy customers’ most important priorities.[iv]
Getting back to disrupting your industry – it is clear that you are going to have to operate your current business for maximum profitability while looking for new opportunities. The question is “do I have resources allocated in a manner that will enable me to invest in new opportunities?” An excellent model to frame this discussion is McKinsey’s “Three Horizons” model (Figure 2).
- The Horizon 1 business is your profit driver today, and for the next 12-18 months.
- Horizon 2 businesses are new lines of business that have proven that there is a market for what they provide. They are in the ramp-up phase, with an aim to replace the Horizon 1 business as the primary revenue generation engine for the company.
- Horizon 3 is about exploratory efforts to see whether or not viable Horizon 2 businesses exist around new ideas.
McKinsey calls for a pretty stern self-assessment about the health of each of the horizons.
Our research shows that the vast majority of companies have a less than healthy set of horizons. That’s the bad news. The good news is that an accurate diagnosis provides the starting point for a cure. Knowing the strong and weak spots in the pipeline gives managers a good indication of how to prioritize growth initiatives. In some cases, a particularly poor snapshot may even suggest that a company is not yet ready to pursue growth.[v]
They find six basic patterns of unhealthy horizons, illustrated in Figure 3 (“X” is unhealthy.)This “checkup” can identify where to re-allocate resources into the unhealthy horizons; the optimum balance varies by industry, phase of business cycle, and other factors. (A 70/20/10 allocation might be a good place to start.) Obviously, if you are “Under Siege”, you aren’t well positioned to do much disrupting; most of the other patterns can be corrected.
Part 3: How Will You Compete?
You know what your customers want, and you’ve got the resources to proceed. The final part of creating disruption is execution. As we’ve seen, value migrates, and it is happening faster and faster. Market segments appear and disappear with astonishing speed. For every innovative offering, there are uncountable copycats. It seems impossible to provide a differentiated offering, and everything seems to become a price war. “Blue Ocean Strategy” provides a playbook. The sub-title is “How to Create Uncontested Market Space and Make the Competition Irrelevant,” which is exactly what is called for when disrupting an industry. The premise is that most industries converge, and companies compete using the same levers. In high tech, “speeds and feeds” (technology features and performance), are often the basis of competition. The levers are well known throughout the industry, and all competitors place roughly equal emphasis on them. This is equally true in fast food, fitness clubs, golf equipment, aircraft, autos, personal care products – pretty much any industry. By completely reimagining the levers of competition, new customer value can be created. You know what “jobs” customers want to get done. You know the functional, emotional, and social dimensions of those jobs. Apply the “Four Actions Framework” to reconfigure the levers of competition and create a new value curve.In addition to reconfiguring the levers of competition, you should also look beyond your existing customers.
[C]ompanies should challenge two conventional strategy practices. One is the focus on existing customers. The other is the driver for finer segmentation to accommodate buyer differences. Typically, to grow their share of a market, companies strive to retain and expand existing customers. To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before. [viii]
These non-customers can be broken down into three types, or “tiers”, as shown in Figure 5.
- Tier 1 customers are soon-to-be-non-buyers. They are customers because they have to be, and are buying out of necessity rather than desire. They would rather not be buying from you at all.
- Tier 2 non-buyers are potential customers who actively resist buying what you sell. They know about your offerings, but choose not to consume.
- Tier 3 buyers don’t even know about you, or if they do, never considered themselves potential customers.
A key takeaway about these non-customers is that, given the right offering to do the right job in the right way, they will become loyal and enthusiastic customers, and in far greater numbers than the customers you already serve.
- Know what your customer wants to get done (not just what they buy), and how that changes with time.
- Make sure that you have a balanced portfolio of businesses, opportunities, and options across all three horizons to enable you to prosper as value migrates away from your core business.
- With deep knowledge of your customers (and non-customers) and a pipeline of new businesses, change the emphasis on the factors on which your industry competes to those that matter to customers.
This process describes how the companies mentioned at the beginning of this article disrupted their industries. Now it’s your turn.
[i] “The Innovator’s Solution: Creating and Sustaining Successful Growth,” Christensen, Clayton and Michael Raynor, Harvard Business School Publishing, 2003, pg. 75. [ii] “What Customers Want: Using Outcome Driven Innovation to Create Breakthrough Products and Services,’ Ulwick, Anthony W., McGraw-Hill Companies, New York, NY, 2005, pg. 6. [iii] “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business,” Rita Gunther McGrath, Harvard Business School Publishing, 2013, pg. 13. [iv] “Value Migration: How to Think Several Moves Ahead of the Competition,” Slywotzky, Adrian J., Harvard Business School Press, 1996, pg. 4. [v] “The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise,” Baghai, Mehrdad, Stephen Coley, and David White, McKinsey & Company, Basic Books, 2000, pg 19. [vi] Ibid., pg. 20. [vii] “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant,” Kim, W. Chan, and Renee Mauborgne, Harvard Business School Press, 2005, pg. 29. [viii] Ibid., pgs. 101-102. [ix] Ibid., pg. 104.