CS419 Info. Technology Entrepreneurship

CS419 Info. Technology Entrepreneurship

Building a Lean, Scalable StartupFall 2012 – 2013

Emre Oto

www.CS419online.comFollow on Twitter: @CS419Bilkent

http://www.eng491bu.org/




New Lanchester StrategyMarket Share Cost of

Entry (vs. Leader’s sales / Marketing Budget)

Appropriate Entry strategy

Monopoly > 75% 3x Resegment/newDuopoly > 75% 3x Resegment

/new Market Leader

> 41% 3x Resegment /new

Unstable Market

> 26% 1.7x Existing/resegment

Open Market < 26% 1.7x Existing/resegment

CS419 Technology EntrepreneurshipWeek #2 «Disruptive Innovation»

How should we, then, build startups? New markets

or hybrid strategy New Market / Resegmentation

Disruptive Innovation Primarily new market disruptions

Value Innovation + Blue Ocean Strategy Making the competition irrelevant


Sustaining Innovation May involve incremental refinements or radical

breakthroughs

Improve the performance of established products and services along the dimensions that mainstream customers in major markets historically have valued. (e.g. Moore’s Law)

Targets demanding, high-end customers with better performance than previously available Higher margins Greater motivation to fight Incumbents always win battles of sustaining innovation


Up-market movement Caused by the growth imperative

Companies must exceed the consensus forecast rate of growth to boost share price

Sustaining innovation to capture higher margin customers to sustain growth

Asymmetric motivation: Incumbents are always motivated to go up-market They are never motivated to defend the new or low-

end markets Fight vs. flight


Disruptive Innovation Doesn’t attempt to bring better products to

established customers in existing markets

They redefine the trajectory by introducing products and services that are not as good as currently available products

Offer other benefits: Simpler, more convenient, less expensive etc.

Appeal to new or less-demanding customers


Let us summarize with a video... http://www.vimeo.com/5729898


You can’t stand still!


Disruption is relative An innovation must be disruptive with

respect to all players in the target market to be called a true disruption


Examples of Disruptive Innovation

Digital photography vs chemical photography High speed CMOS video sensors vs photo. film

Downloadable digital media vs CD/DVD

Tablet vs Notebook

LED vs Incandescent light bulb

LCD vs CRT


Two Types of Disruption New market disruptions

Creates a new market by targeting non-consumers

Create a new value network

Low-end disruptions Attack the least-profitable and most

overserved customers at the low-end of an established market


Two Types of Disruption


The Value NetworkContext within which a firm establishes a coststructure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers

New valuenetworks


Disruptive Channels Disruptive innovations almost always require disruptive

distribution channels

Channels of the sustaining innovation are likely to make the disruptive innovation fail

There needs to be symmetry of motivation across the entire chain of entities that add value to the product

Disruptive products must enable the channel to disrupt its competitors

Channel must view the products as a fuel to move up-market


New-Market Disruptions Compete with non consumption

Much more affordable to own / simpler to use They enable a whole new population of people to begin owning

and using the product ..and possibly in a more convenient setting

New-market disruptions initially compete against nonconsumption in their unique value network

As their performance improves they become good enough to pull customers out of the original network into the new one, starting with the least demanding tier


New Market Disruptions They don’t invade the mainstream market

They rather pull out customers out of the mainstream value network in to the new one

Incumbent leaders feel no threat or pain until the disruption is in its final stages New Market Disruptions start stealing customers

from the lower end, so the incumbent doesn’t mind due to upmarket movement

Compare with the idea of “making the competition irrelevant” in Blue Ocean Strategy


Examples of New Market DisruptionsSony pioneered the useof transistors in consumer electronics

Its portable radios and portable TVs disrupted firms such as RCA that made large TVs and radios using vaccuum tube technology


Low-end Disruptions Disruptions that take root at the low-end of the

original or mainstream value network

They do not create new markets

Low-cost business models that grow by picking off the least attractive of the established firm’s customers

New market disruptions induce incumbents to ignore the attackers, low-end disruptions motivate the incumbents to flee


Most disruptions are hybrids


Litmus Test for New Market DisruptionsQuestion #1 Is there a large population of people who..

..historically have not had the money, equipment, or skill to do this thing for themselves,

..and as a result have gone without it altogether

..or have needed to pay someone with more expertise to do it for them?


Litmus Test for New Market DisruptionsQuestion #2

To use the product or service, do customers need to go to an inconvenient, centralized location?


Litmus Test for Low-end DisruptionsQuestion #1

Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price?


Litmus Test for Low-end DisruptionsQuestion #2

Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these overserved customers at the low end?


Litmus Test for Disruptive Innovation

Is the innovation disruptive to all of the significant incumbent firms in the industry?


How do we reveal Disruptions? The answer is “circumstance-based

segmentation” vs “attribute-based segmentation” (attributes of products and/or customers)

The critical unit of analysis should be circumstances rather than the customer Statistics, demographic data, psychographic

profiles etc. are people.

Essential for revealing new market disruptions (true competition is nonconsumption)


Circumstance-based Segmentation Customers have “jobs” that need to get done

When customers become aware of a job they need to get done, they look around for a product/service they can hire to get the job done

They set out to hire something/someone to do the job as effectively, conveniently, and inexpensively as possible

Functional, emotional, and social dimensions of the jobs that customers are trying to get done constitute the circumstances in which they buy


Circumstance based segmentation Position a disruptive product on a job that has been poorly

adressed in the past

Develop hypotheses by carefully observing what people seem to be trying to achieve for themselves and ask them about it Compare with the idea of Customer Discovery

Observation and questioning to determine what customers are trying to do, coupled with strategies of rapid development and fast feedback, greatly improve the probability that a product converges quickly upon a job that people are trying to get done.


Don’t Ask Customers to Change Jobs!‘cause they won’t.. “A business plan predicated upon asking

customers to adopt new priorities and behave differently from how they have in the past is an uphill death march through knee-deep mud.”


A quote from Clayton Christensen’s Innovators Solution

Don’t Ask Customers to Change Jobs!‘cause they won’t..

An idea stands little chance of success if it requires customers to prioritize jobs they haven’t cared about in the past

Customers don’t just change jobs because a new product becomes available

The new product will succeed to the extent it helps customers accomplish more effectively and conveniently what they are already trying to do.


Don’t Ask Customers to Change Jobs!‘cause they won’t.. The “jobs question” is a critical early test for a

viable new-market disruption.

A product that aims to help nonconsumers do something they weren’t already prioritizing in their lives is unlikely to succeed.


Extracting growth from nonconsumptionStep #1

Target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.



These customers will compare the disruptive product to having nothing at all.

As a result they are delighted to buy it even though it may not be as good as the other products available at high prices and/or to current users with deeper expertise in the original value network



Disruptors deploy the technology to make the purchase and the use of the product Simple Convenient Foolproof

The “foolproofedness” creates new growth by enabling people with less money and training to begin consuming



The disruptive innovation creates a whole new value network

The new consumers typically purchase the product through new channels and use the product in new venues


For more on Disruptive Innovation… Read the HBR paper by Clayton Christensen..

Read the Innovator’s Dilemma and the Innovator’s Solution by Clayton Christensen.. Read the Innovator’s Solution for more on New

Market/Low-end Disruptions, Circumstance-based segmentation, and great insights on creating and managing disruptive innovation


CS419 Info. Technology Entrepreneurship

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