PwC’s Kandybin: CMOs Must Be Able To Identify Different Types Of Innovation

Misdiagnosis can lead to poor management decisions, market loss, or outright failure, said PwC Advisory principal Alex Kandybin.

The term “disruptive innovation” is losing its meaning because it is too frequently used to describe what is actually breakthrough or sustained innovation, according to PwC Advisory principal Alex Kandybin.

This misdiagnosis can lead to poor management decisions, market loss, or outright failure, he said. In this exclusive interview with CMO.com, Kandybin sets the record straight and discusses how to identify which one best supports a company’s strategic goals.

CMO.com: You have studied the differences between breakthrough and disruptive innovation quite thoroughly, so I was hoping we could start there.

Kandybin: There are many, many terms describing different parts of innovation–radical innovation, breakthrough innovation, disruptive innovation–and different people put different meanings in them. The one type, which is disruptive, was defined by Clayton Christensen and has a very particular meaning. Disruptive innovation typically comes from having a need that is oftentimes unexpected, unnoticed, and maybe initially inferior to existing projects, but over time it really shoots the market and changes the market.

Examples of that would be personal computers and how they disrupted the mainframe computers in the ’70s. Many manufacturers thought those just were toys, very inferior in capability, but over time they took over and shifted the market. That’s disruptive.

However, what we’ve noticed is that disruptive innovation describes only one type of innovation that results in this, let’s call it, transformative market share. There are some other types. An example of that would be most recently at Tesla, but because they didn’t really come from underneath; they came at a pretty high price–I would say the top of the market–but still they shifted the market. They changed it. So Tesla doesn’t qualify to be called disruptive. It’s not only semantics. The way you would respond to innovation that comes from Tesla would be very different than the way you would respond to the disruptive innovation that comes from underneath.

To make things even a little bit more complex, we have examples like Airbnb or Uber, and they came kind of from the side. Airbnb is not as cheap as some of the cheapest hotel chains, like Motel 6 or Super 8, but they are far cheaper than the high-end hotel chains. So they came from the side, but they also changed the market. They shifted the market.

What we actually like to do is to consider all types of innovation comprehensively, the ones that are changing or shifting the market. That includes disruptive, but it’s not only disruptive. That also includes the innovation that comes from the top or from the side. You can call them radical or breakthrough or discontinuous, but the one common feature of all these innovations is that they result in this transformative market shift. So they shift the market in a way that the market operates differently.

CMO.com: What are some of the pitfalls of failing to recognize breakthrough and disruptive innovation?

Kandybin: Let’s say that the misuse of the term “disruptive” could lead to mistakes from the standpoint of strategy. Let me give you some typical responses you would give for disruptive innovation. I’ll go back to the same example of the mainframe computer manufacturer and Cray or Digital Equipment Corp. back in the ’70s, and you see this little game machine is coming, Atari. You can basically ignore them–that’s one of the options–and really hope that they will never take off or develop to the point that they can really replace what these mainframes are doing.

You can try to buy them and say, “Maybe there’s some potential. I can acquire them.” Or you can actually respond to that, but the way you want to respond, you don’t want to change your mainframe computer to be competing with this game toy. You would set up your separate division with a separate structure, but you probably would do that only if you believed that little toy had the potential to overtake the market.

The next example would be similar to when ink-jet printers were trying to disrupt the laser printers. They initially came kind of poor quality, not as good as laser. So HP probably did the right move. They created a separate division, an ink-jet division, that was just competing with ink-jet printers.

Now imagine if now Tesla comes into the market and how Ford should react to that. If they start doing the same thing as disruptive innovation, create a separate division to compete with that, I’m not sure that’s the best strategy because it will be probably very expensive. When Tesla comes in, it takes customers from the current customer base of Ford, and what Ford needs to do is change their main product line in order to compete with Tesla. They need to adapt their product so it is more convenient or better-suited to customer needs.

When disruption happens, the initial disruptor does not go after the main customers. They go after either the very, very low-end customer, which is not possible for the incumbent, or for most customers. It’s similar to when Southwest disrupted the airline industry; they were mostly going after customers that were riding the bus, not taking a flight. Therefore, the response from the major airlines should have been to set up separate divisions that compete with Southwest.

Instead, airlines tried to actually make their own flights cheaper. They discontinued food service and many other things. And that was absolutely the wrong idea of how to compete. So for something that’s not disruptive, like Telsa, you want a different strategy. You want to change your main product line. So Ford has to change their main product line to be competitive with Tesla.

So all this innovation, Tesla, Southwest, personal computers, ink-jet printers–they all shifted the market, but depending whether that’s disruptive or it’s innovation that comes from the side or from the top, you would need to choose different strategies to defend your position and how to compete with this innovation and new entrants.

CMO.com: How do you identify the type of innovation that would best support your company’s strategic goals?

Kandybin: That really depends on your capabilities, and that also depends on the vulnerability of the incumbents. If, for example, you believe that incumbents are really serving mostly high-end customers, and their products evolve to the point they are really too expensive or have too much functionality for the average or lower end user, you would want to enter that market as a disruptor from the low end and start capturing these customers that are neglected by the current industry. Only then would you expand your way and overtake that industry.

At the same time, if you believe that you can offer substantially greater value to the medium, average customer or to the high-end customer, substantially greater value, you would definitely want to enter from the top and start stealing share from your main competitors.

The advantage of the first one, the disruptive way, is that you initially are not noticed. Small companies, for example, tend to enter new markets in a disruptive way because they don’t want attention at the beginning. The advantage of entering from the top or from the side is that you can actually realize potential a lot faster because you are going after the unserved customer.

So, again, depending on what technology you have, if you have inferior technology but believe it has great potential and the customers are overserved, that company goes disruptively from underneath. If you believe you have a superior offering for the average or the top customer, go the top way, and that’s typically a large corporation that usually has the muscle and capabilities involving innovation that is clearly superior to the existing product. They tend to enter from the side or from the top and disrupt the market in a different way.

That basically describes what strategy you would choose given what capabilities you have, what size you are, what the current market looks like, whether it’s overserved or underserved, from the standpoint of the bottom and top customer.

CMO.com: What’s your advice to chief marketing officers around some of the findings you’ve uncovered in studying the difference between breakthrough and disruptive innovation?

Kandybin: First, they need to have a specific capability to identify new entrants. Let me talk about the two sides of the chief marketing officer role. It’s how will I defend myself against new entrants, companies that are trying to disrupt or change my market? That’s one. The second side is, how can I change somebody else’s market? How can I really come into some other market and change the rules of the game there and take a big share of it?

So in terms of the shares, they need to constantly watch the market in terms of what’s coming and what’s available. It’s easier to do for new entrants that come from the side or from the top because once you see your customer going somewhere, it’s probably not too late to develop a response to that type of innovation or new strategy. You just need to watch your sales. You need to watch your customers. And that’s what chief marketing officers mostly do typically. Once you see your market share being impacted, that’s the time for you to take action.

It’s a little more difficult for disruptive innovations because the moment you see that your first customer is gone, it’s already too late to do anything. Because they come from underneath, they’re initially not targeting your customers. They build scale while they are in the shadow. Then once they start taking your customers, they already have enough scale. They already are at the point that it’s really hard to compete with them. So to really watch out for disruptors, they need to see new companies. They need to see anything that is related to their current market and has the potential. That is more difficult to do.

Actually, Christensen wrote a very nice book, called “Seeing What’s Next,” that is focused on what chief marketing officers and strategists, more generally, need to do to identify the potential for disruption of their market.

The second side of what they need to do is to constantly think about what other markets they can take over or impact in a substantial way, either disrupting them or entering them from the top. That market analysis needs to be continuously there for adjacent markets.