I’ve recently been working with a large Australian company in the human resources sector, helping them think through the impacts of disruptive innovation on their existing, profitable business. The company, like many others, is facing some major competitive threats from new entrants that are using the internet to streamline and globalise aspects of what has until now been a fairly labour-intensive business.

In this case the company realised that someone (or maybe a lot of someones) will almost certainly eat their lunch by launching a cut-down, web-based offering, and if that’s likely to happen the company might as well cannibalise its own business rather than sit back and watch someone else do it.

That’s exactly what Kodak and Polaroid didn’t do – to their peril.

The same logic was used by Getty Images when they recently announced that they would make tens of millions of images available for free. They recognised that their images were being stolen anyway, so by making social sharing of their images easy Getty could retain some control over how they were used.

This got me thinking about what disruptive innovation really is, and how it can impact established companies.

What is disruptive innovation?

The term disruptive innovation has become a popular business buzzword, but sadly is often misused by startups and corporates alike.

The term was coined by Clayton Christensen, who defines is thusly:

“A process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

The term is often incorrectly used in reference to technological breakthroughs, but the reality is that disruptive innovations are usually based on business model innovation combined with a paring back of the product offering to deliver just what’s needed.

Christensen asks us to consider what job the customer needs to have done – and to build a product or service that delivers just that, avoiding the temptation to add other bells and whistles.

It’s a bit like applying Occam’s Razor to the product to determine what elements are superfluous and could be removed.

The internet is an amazing enabler of disruptive innovation because it allows small companies to compete with much larger companies by removing the now unnecessary step of having to physically sell and deliver a product or service to a customer. All of a sudden global markets are within easy reach, and startups can compete from day one with companies that have taken decades to build up a global footprint.

Some examples? Google (disrupted many types of advertising by removing the need for a physical ad medium such as the Yellow Pages), Netflix (when was the last time you walked into a video store and walked out with a DVD under your arm?) and Amazon (whose Kindle reader is rapidly making book shops a thing of the past).

All of these innovations centre on taking something away from the product. Dollar Shave Club is a great example of a company that’s taken this to an extreme. They provide basic shaving gear that does the job (removing facial hair) without all the unnecessary product features (battery-powered, triple-aloe moisturising strips and the like) that consumers have become prepared to buy through a long process of desensitisation and incremental product improvements. That’s why they can provide basic razors for as little as $1 per month. It’s also why some top tier VC funds have invested $23 million in this three year old startup.

So what?

Let’s look at this from two perspectives: that of an existing company and that of a startup.

If you’re an existing business that’s facing the prospect of having your lunch eaten by some guys in jeans and T-shirts, then take a look at the Disruption Susceptibility Score and see how likely you are to be disrupted.

If you’re a startup that’s using disruptive innovation to tackle an existing market, then take a look at the Disruptive Potential Score.

The Disruption Susceptibility Score (no, I haven’t trademarked that yet. . . maybe I should)

If you’re in an established business, give yourself one point for each question to which the answer is “Yes”:

__  I am providing a product or service with features that could be dispensed with

__  My product or service is not currently delivered via the internet, but parts of it could be

__  My business is highly reliant on skilled labour

__  My industry has been relatively stable for more than 50 years

__  My industry is worth more than $10 billion per annum

__  Customers in my industry are generally dissatisfied, but don’t have a lot of choice

__  The main players in my industry are viewed as complacent, even indestructible

__  My profit margins are high, but customers keep buying from me

__  My customers are loyal because of my trusted brand

__  My company is big enough to not be concerned about what smaller competitors are doing

My score: ___/10

I’m going to go out on a limb here and say that if you’re in any of the following sectors you probably should have scored at least 7 out of 10 (and therefore should be thinking hard about how your business could be disrupted):

• Education (Sitting in lecture theatres to absorb content is so 20^th century, student attendance is steadily declining, and we’ve already seen major inroads made by Udacity, Kahn Academy, Coursera and peer-to-peer services such as weteachme)
• Retail (Lots of sectors that are ripe to go the same way as bookstores and video rentals)
• Media (Especially TV and print)
• Auditing (Plenty of opportunity for big data and AI to do what is currently a highly profitable and mostly manual task)
• Consumer banking (In particular loans – already being disrupted by peer-to-peer lending, and loan assessments no longer need to be done my humans)
• Insurance (Consider the impact of micro- and peer-to-peer insurance, and what happens when driverless cars greatly reduce driver error-related crashes)
• Real estate (How is it that agents still make large commissions on what is ostensibly a buyer-seller matching service?)
• Legal (Particularly generation of standard contracts and provision of commonly sought advice)
• Recruitment (Same issue as for real estate agents – much of what is being provided could be self-serve or peer-to-peer)

The Disruptive Potential Score (no, I haven’t trademarked that either)

If you’re in a startup, give yourself one point for each question to which the answer is “Yes”:

__  My product or service is simpler and has fewer features than those of my established competitors

__  I am using the internet to deliver a product or service that has traditionally been delivered face-to-face

__  I have found a way to automate processes that were previously reliant on skilled labour

__  I have found a way to devolve manual tasks to freelancers or workers in lower labour cost countries

__  My users engage directly with each other without me having to do anything other than provide the platform

__  I am tackling an industry that has been relatively stable for more than 50 years

__  I am tackling an industry that is worth more than $10 billion per annum

__  The customers I’m going after are generally dissatisfied with the service they get from the incumbents

__  My users / customers actively refer other users / customers to my service

__  My incremental cost of servicing another customer is close to zero

My score: ___/10

If you scored 7 out of 10 or more there’s a good chance you’re on to something. If you #flearn effectively and execute well there’s a good chance you could be building a billion dollar business.

So what?

Well, if you’re a startup with a high Disruptive Potential Score, then all power to you!

If you’re an established business with a high Disruption Susceptibility Score, you should be thinking about the following three scenarios:

Scenario A: Status quo

Life goes on, we keep making money, we’re not disrupted and nobody eats our lunch

Probability: Low

Scenario B: One or more smaller companies disrupt our business

In the absence of decisive action this is the most likely outcome. You’ll know it’s happening because you’ll read about some startup raising seemingly obscene amounts of money from investors and hiring people in your peer group for their advisory boards.

Probability: High

Scenario C: We disrupt our own business

This is the most difficult scenario to get your head around, but as was the case for Getty Images (and could have been for companies like Kodak and Polaroid), it requires an assessment of the probability-weighted loss of revenues from having smaller competitors eat your lunch vs the probability-weighted loss of revenues from you cannibalising parts of your own business.

Probability: All depends on your cohones!