The Power of Being New

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In Russia, Alpina Publisher unveils Paul Hague’s Business Models Handbook: Templates, theory and case studies as an ultimate guide. But instead of reading it cover to cover, you may well opt to skim through this collection of tools and find the one that’s right for you — few works can claim to be as neat and to the point in describing management principles and approaches to market analysis and business strategy. BRICS Business Magazine invites you to read two excerpts and see it for yourself.

Diffusion of innovation

Launching new products and services

What the model looks like and how it works

We all love something new. New is one of the most powerful words in the marketing vocabulary. It promises improvements. It suggests excitement. Yet we all react to ‘new’ in different ways. Some of us cannot wait to get our hands on a new product. We love ‘new’ for the benefits it gives us and the status it conveys. Equally, some of us are fearful of ‘new’. Experience has told us that it often does not deliver what we hoped and wanted and for this reason we prefer sticking to what we know.

It follows, therefore, that new products and services are not embraced by everyone in the same way. An innovation that is launched into a market is diffused rapidly to some people and slowly to others. In order to explain the process by which a new idea or product is accepted, several theories have been proposed, as set out below.

The two-step process

This theory argues that new products and ideas are accepted first by a small group of the population – opinion leaders. These people are key to the diffusion of the new product – because if they like it, they will promote it and the general population will accept it. We can see this happening in certain markets where the voice of the opinion leader really does count. New cars are reviewed by journalists and their comments can have an enormous effect on the success of the launch. Theatre critics can make or break a new musical or play. Within companies there are gurus whose views on new products will influence people who work with them.

The trickle-down effect

Many new products are expensive in the first instance. Only the wealthy or the privileged few can afford them. This may give the product status in the eyes of the masses, who wait for the time when the price of the product falls and becomes more affordable. The first mobile phones cost a relative fortune and were the size of a brick, but they were only available to those with a high income or a high position in politics or business. As the prices tumbled they became available to us all, including kids at school.

The diffusion of innovations

This theory was promoted by Everett Rogers, who argued that any new product would be received in a different way by five groups of people:

  • Innovators (accounting for 2.5 per cent of the population): a group of people who are always eager to be first to own a new product. These people are risk takers and want to be seen as leaders.
  • Early adopters (accounting for 13.5 per cent of the population): this is an educated group of people, often young rather than old. They are leaders in their social environment.
  • Early majority (accounting for 34 per cent of the population): as the name of this group suggests, it addresses a mass market where informed people begin to adopt the product.
  • Late majority (accounting for 34 per cent of the population): eventually the product is accepted by a large but sceptical and traditional group of people, often made up of the lower socio-economic classes.
  • Laggards (accounting for 16 per cent of the population): when everyone else has accepted the new product, those who have resisted it to the end finally give in.

Crossing the chasm

This theory assumes a gap or chasm between the different groups recognized by Rogers. The chasm theory was promoted by Geoffrey Moore, who began life as an academic, moved into corporate management and eventually became a consultant. He argues that in the earliest stages of a product launch there is a significant gap between the innovators and the early adopters and the early adopters and the early majority. He sees the very first buyers within a market as technology enthusiasts who will buy anything new just to see what the products are like. These geek-like people may not have any or much buying influence within an organization and so it is important to engage beyond them and move the products into the early adopters. This may be easier said than done because of the chasm that separates the groups.

Technology acceptance model

This theory is particularly associated with new technologies in which the adopter would need to believe that it would enhance their job performance without a huge degree of effort.  For example, when computers were first launched, many people were fearful of the technology, believing that it would be a big effort to learn how to use these new tools and, to what effect, as they could do the job just as quickly in the traditional manner. The same could be said about software products, including dictation software, which, by the way, is being used to write this book.

It goes without saying that in order for someone to buy an innovative product they have to have knowledge of it. This means that the AIDA model plays an important role in building awareness, interest, desire and action. The decision to buy the product is based on someone’s belief that there will be a relative advantage compared to the product it supersedes. However, this is uncertain and many people are risk averse and so will postpone the decision until they have more evidence of its utility.

The diffusion of innovations

Rogers’s model of diffusion has become the most accepted of the theories. In his work, he determined proportions of any population that are likely to fall into the different groups – innovators, early adopters, early majority, late majority and laggards. He proposed that the distribution of these groups closely follows that which we would expect in a normal bell curve. He split the five groups so that half the population is to the left of the curve (people who are early to embrace innovation) and half is to the right-hand side of the curve (people who embrace innovation at a later stage). However, the classification of the adopters is not symmetrical and there are three categories adopting early and only two adopting late. This is because research shows that innovators and early adopters can be recognized as exclusive groups whereas the laggards are homogeneous.

There are many innovations that simply never get off the ground. In order that an innovation can get traction amongst a large group of people, there needs to be a ‘tipping point’ – a proportion of people who find the new product attractive and in sufficient numbers to spread the word to the next group. It is widely held that the tipping point exists between the early adopters and the early majority; that is, at the point where 16 per cent of the population have accepted the innovation. It is at this point that there is a chasm, which if not jumped, will mean that the innovation is in danger of atrophying.

The diffusion of ideas spreads quickly in some markets. This is the case in toys and electronic products, which quickly catch the imagination of people in sufficient numbers to pass the chasm and spread quickly through the wider population. There are many examples of electronic and digital products that have made multimillionaires out of their inventors in just a handful of years.

Many other products can take years to develop to commercial fruition. Carbon fibre was invented in the 1950s but its use was restricted to sports goods and limited applications for nearly 30 years until accepted in aerospace engineering. Even now, it will be many more years before it moves beyond the early adopter stage. In 2008, graphene was invented; a new material that is ultra-lightweight yet stronger than steel. A product such as this needs time to prove itself as suitable in different applications and also as a material that can be easily and cheaply mass-produced. It is likely to be many years before this passes through the whole diffusion curve.

The origins of the model

Diffusion was studied in the late 19th century, principally by anthropologists, geographers and sociologists. Marketers had for many years been interested in innovation but mainly for the purpose of promoting new products. They understood the importance of building knowledge, awareness and interest in innovations in order to create a curiosity that leads to a purchase. These models focused on the launching of innovations rather than exploring the beliefs and attitudes of a general population to innovation. In 1957 Rogers completed a doctoral dissertation based on the usage of a new weed spray by Iowan farmers. This led him to propose the concept of different groups with different adoption rates. He later looked at innovations in a variety of other industry verticals and found a considerable commonality in his original theoretical framework. In 1962, while an assistant professor of rural sociology at Ohio State University, Rogers published the first edition of Diffusion of Innovations. It is now in its fifth edition (2003) in which he relates it to the spread of the internet and how this has affected the communication and adoption of new ideas.

Developments of the model

The diffusion of innovations is now widely accepted as a viable business model. From its origins showing the diffusion of a new pesticide, it has been adapted to the fast pace of technology innovations in electronics and software. The focus of interest in diffusion has helped other researchers to understand the subject better. Researchers have pointed out that the diffusion of an idea does not necessarily mean that it is used continuously by the audience. Innovators and early adopters may be the first to try it and they may also be the first to abandon it and move on to something else that is new.

The model only explains the behaviours of a population with regard to a new product. It does not explain how to motivate that population to buy the new product. There have been many new keyboards developed that are quicker and arguably better than the old QWERTY keyboard, but none have yet gained traction with a wide population. Similarly the idea of speaking a common language around the world, such as Esperanto, might make a lot of sense but persuading large groups of people to use it has proved impossible.

The model in action

Many innovations are the repackaging of old wine in new bottles. These are not true innovations in the sense that they are discussed in this chapter, they are a presentation of the same product in a different form. Small tweaks and improvements that are made to products are not innovations in the way that they were described by Rogers.

Knowing that a population is made up of the five different groups of people from innovators to laggards is useful to marketers who want to develop new products or new value propositions. This opportunity was recognized by a large paper merchant that delivered to printers throughout Europe. The company carried out research to gauge the interest of printers in a range of new value propositions. These included different delivery options such as super-rapid delivery, night-time deliveries and deliveries at specified hours of the day. In the survey, printers were asked how likely they would be to buy additional services such as consignment stock, additional products not currently in the portfolio, and a variety of consultancy and advice services. In the same survey, respondents were asked to what extent they identified their company on the innovation spectrum suggested by Rogers. The questions were phrased so as not to bias the response:

Which statement best aligns with your company’s views on new technologies?

  • New technology is important to us and we would be one of the first to use a new product or service (classified as innovators).
  • We are perhaps not the first users, but use new technology before most others (classified as early adopters).
  • We prefer to wait until the early problems are worked out (classified as early majority).
  • Our organization is not in a hurry to buy or deploy the latest technologies (classified as late majority).
  • We would always wait as long as possible and only deploy new technologies when our existing infrastructure is redundant and there is no alternative (classified as laggards).

The distribution of printers in the survey mirrored closely the distribution suggested by Rogers in his 1962 thesis. Crucially, it was determined that a certain type and size of printing company was more interested in the new value propositions than others and this enabled the paper merchant to segment its customer base to offer service innovations where it knew they would be well received.

Some things to think about

A useful segmentation of your customers is to understand where they sit in terms of the diffusion of innovation. This will enable you to promote new products and services where they will be more readily received.
In B2B markets, radical innovations can take a number of years to gain traction.

Aim to get your new products accepted by opinion leaders who will influence the rest of the market.

Disruptive innovation model

Identifying unique ways of beating the competition

What the model looks like and how it works

Mature markets often have a small number of suppliers. These oligopolies become fat and lazy and may stop caring about their customers. Most of the care and attention is focused on large customers and it is not unusual that smaller customers are ignored. Such environments are fertile ground for disrupters.

A disrupter is a new entrant to a market who sees a gap left by the large incumbent suppliers. Usually the disrupter is small and eager to win business from anywhere. The smaller customers that are eschewed by the oligopolists are easy pickings for the disrupter. Indeed, the oligopolists do not notice or do not care when, in the first instance, small crumbs are taken from underneath their table. The disrupter does things differently. They find ways of meeting the needs of the mass market, usually by producing a product or service in a more cost-effective way. The first motor cars did not disrupt the market for horsedrawn buggies. They were expensive and available only to a privileged few. Horse-drawn buggies were disrupted only when Henry Ford launched his Model T, which was highly competitive because it was mass produced to the simplest of designs.

Over time most customers expect the performance of products to improve and generally they do.

When incumbent suppliers in a market seek growth through innovation, they tend to focus on the middle to higher end of the market. These are customers with money. However, with these innovations the incumbents are in danger of producing products that are overspecified for the low end of the market and eventually for the mainstream market.

It is into this environment that a new entrant can be disruptive. The lack of interest that the incumbent supplier has at the bottom end of the market means that the new entrant’s disruption will hardly be noticed and it will be tolerated in the first instance. The product offered by the new entrant might be of lower performance than existing products, which may themselves be overspecified for the needs of this bottom-end segment. The disrupter’s products win sales because they are good enough and significantly cheaper. This allows the new entrant to gain traction and rapidly build up sales because it is addressing a significant part of the market. In a short space of time the disrupter can move from the low end of the market into the mainstream, by which time it is too late and too difficult for the incumbent to take retaliatory action.

Low-cost airlines disrupted the market, not only by taking business from the legacy airlines, but also by opening up air travel to people who previously could not afford it.

The dilemma for the incumbent is holding on to their profitable business. They are driven by the need to maintain profit margins and find easy pickings at the high end of the market rather than competing in the mainstream or the aggressive low end. It is for this reason that large companies set up separate business units to attack and disrupt the market. It would be hard for them to do so within the traditional set-up, which hates to rock the profitable boat.

There is a distinction between the disruption that takes place at the low end of the market by a more efficient supplier and one that better meets the needs than the products served by incumbents. A new importer offering cars with a better build quality or superior fittings is not a disruptor, it is simply a better supplier.

The origins of the model

The concept of the disrupter was introduced in 1995 by Joseph Bower and Clayton Christensen in an article in Harvard Business Review entitled ‘Disruptive technologies: catching the wave’.  The model was originally described as disruptive technology but it was recognized that disruption may also take place in forms other than technologies such as a new entrant offering lower prices, a new channel to market, or a more efficient method of production of the product. Following the seminal article in Harvard Business Review in 1995, Christensen expounded his theory in what has become a bestselling book, The Innovator’s Dilemma (1997).

Developments of the model

The theory of disruptive innovation is easily understood and best described by case studies. Christensen, the academic father of the model, produced many subsequent articles and papers providing additional explanations. Those additional explanations were required because it is easy to become confused. Is a market that becomes disrupted by an entrant offering a new high-end, premium-priced product, one that is truly disrupted? Is Tesla disrupting the automotive market? At present it could be argued that this is not the case as the Tesla brand and electric cars in general have a very small share of the overall market. They have not disrupted the automotive market yet, even though they may be threatening to do so. The theory of disruptive innovation argues that disruption begins with the low-end mass market. Most of us would think that Uber and the effect that it has had on the taxi industry makes it a classic example of disruptive innovation. Christensen argues that Uber is not a disruptive innovator. He believes it is a company offering innovation in the sense that it represents incremental improvements to the existing taxi industry.

It seems to the author of this book that the precise definition of disruptive innovation detracts from the usefulness of the concept to marketers. It does not really matter whether the disruption begins at the low end of the market and moves upwards or starts at the high end of the market and moves down. Either way, the innovation is disruptive of the traditional market. 3D printing has not yet disrupted the market but it may well do so in years to come as it becomes a much more cost-effective method of producing components.

The model in action

There are many examples of disruption:

  • Traditional encyclopaedias have been disrupted by Wikipedia.
  • Traditional telephone companies are being disrupted by Skype.
  • Personal computers are being disrupted by smartphones.
  • Lightbulbs have been disrupted by light-emitting diodes (LEDs).
  • Metal, wood and glass have been disrupted by plastic.
  • CDs have been disrupted by digital media.
  • Traditional film has been disrupted by digital photography.
  • Typewriters have been disrupted by word processors and computers.
  • Short-distance flights have been disrupted by high-speed rail.

Disruptive innovation can in theory be the brainchild of any company. However, the drive to disrupt a market is much greater by someone who is not an incumbent. It is understandable that an incumbent will fear disruption because it threatens its position in the profitable market. An entrepreneur, a small company and a new entrant have less to lose. Their ability to invest in order to exploit their innovation may be limited but this need not matter. They are looking for a small number of people who will embrace the innovation – these are the innovators and early adopters in the diffusion of innovation model described by Rogers. The diffusion of innovation identifies hurdles that have to be overcome early in the life cycle of the product launch. These ‘chasms’ that need to be jumped between the innovators and early adopters and the early adopters and the early majority can be sticking points for a disrupter.

For many years, steel was produced in large integrated steelworks using the Bessemer process. These huge mills had a high energy cost associated with heating the blast furnace. Blast furnaces need to operate continuously and this can be a problem during periods of low steel demand because the furnace must be kept hot. At times of full production these steelworks are highly efficient. However, demand is seldom steady as it pulses around the world. This opened an opportunity for a new form of steel production – the minimill. Minimills use scrap steel as their raw material. The electric arc furnace used in a minimill is much more flexible and can easily be started and stopped on a regular basis. They do not need to produce the massive volumes of the integrated mill. Minimills can be located close to a point where there is a high demand for steel. Integrated steel mills are under pressure to locate close to supplies of energy and raw materials.

The minimill disrupted the traditional market for steel production. It began producing simple products such as reinforcing bar and, since the late 1980s, has produced steel strip. This enabled companies such as Nucor in the United States to rise quickly from nowhere in 1968 to become one of the world’s largest steel producers.

Large corporations know the threat of disruptive innovation. They nearly all have research and development programmes that are aimed at discovering a profitable disruption. We can imagine the difficulty that a large manufacturer of lightbulbs would face if its research and development department invented the everlasting bulb. Would it hide the technology or would it launch it and disrupt its own profitable business?

Disruptive Innovation Model

Companies such as Google have business units aimed at launching disruptive technologies. They are big enough and rich enough to do so and they still maintain an entrepreneurial spirit. More traditional companies find it difficult and may deal with the disruptive innovation threat by making acquisitions of small companies that offer promising innovations that could gain traction in the market.

Some things to think about

To be a successful disrupter you need to have a low-cost solution that can attack the bottom end of the market. Disruptors offer cheaper products and they also offer innovative products. The Dollar Shave Club is not only cheaper, it is delivered by mail.

An incumbent company can best protect itself by setting up a standalone separate unit. Dow Corning protected itself in the silicone market by launching an online source of silicones called Xiameter.

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