Tag Archives: disruption

Why Transforming an Organization is Difficult: Resources, Processes, Values and the Migration of Skills

Why do organizations find it difficult to change when facing a disruption? The question is not new but it continues to puzzle researchers and managers alike. Part of the answer lies in the observation that over time, what an organization knows migrates: its capability initially lies in its resources (especially human), then it evolves to processes and finally to values. It is at this last stage that change is the most difficult.

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Disruptions: A Wrong Impression of Speed of Change

Everything is going faster! Change is accelerating! At least that’s what we hear all the time. What if this platitude reflected a misunderstanding of the nature of disruptions and how they develop? And what if, therefore, it led to the wrong answers by incumbents and startups? Let’s analyze the nature of disruptions and our relationship to time.

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My New Forbes Piece: The Cargo Cult of Digital Transformation

My latest post on Forbes, written with Milo Jones, is a reflection on difficulty of transformation by incumbent companies in the face of digital disruption. It’s available here.

Disruption Is Not a Question of Technology, but of Business Model

We hear a lot about “disruptive technologies”, but what makes an innovation disruptive is not usually its technical dimension, and the distinction often made between radical innovation and incremental innovation is not so pertinent. Indeed, we can observe two examples to illustrate this point.

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New Product Adoption Is the Art of Incentives: The Example of Photoelectric Kits in Africa

In the 1970s, the French government decided to help Africa develop. The lack of lighting had long been identified as an obstacle to development: without lighting, for instance, children could not do their homework at night. Thus the French government decided to subsidize the design and manufacturing of light kits. A small solar panel charged its battery in the day in order to be used at night. The tender was launched, a company that designed robust kits won the contract and the kits were sent to Africa to be distributed. But just a few weeks after the operation was launched, it failed. The kits were not used. Why?

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Five mistakes to avoid when managing a disruptive project: 3- Trying to be the first

This article is the third part of a series of fives articles on mistakes to avoid when managing a disruptive project, extracted from my new book “A Manager’s Guide to Disruptive Innovation”.

The disruption theory can shed new light on the first mover advantage. The first mover advantage theory states that the first entrant in a new market has the advantage of being able to take leadership of the market and effectively resisting the entry of subsequent competitors. This theory forms the conceptual basis of a popular approach known as “blue ocean”.

By advancing the premise that the main factor of competitiveness is the order of arrival on the market, this theory recommends to companies to go as quickly as possible to be the first. However this theory suffers from a major flaw: it is rarely supported by the facts. Many leading players in their field were late entrants, to name just a few: Procter & Gamble with its disposable diapers, Gillette with its disposable razors, Google with its search engines, and Apple with its iPhone.

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Educating for the Digital Transformation: Four Common Mistakes

Digital is everywhere. As Marc Andreessen, founder of Netscape, a Web pioneer and now star investor in the Silicon Valley, wrote: “Software is eating the world.” There is no industry today that is not impacted by the digital revolution. How to prepare our executives, current and future, for this revolution? The question is not new but it seems that many mistakes are made in the approaches, including by those who design training programs on the issue. Let’s review four of these mistakes.
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When their “talents” prevent firms from innovating

This is unfortunately a common experience: during an executive seminar on innovation I ran for a large group, we outlined an innovation strategy based in particular on the development of intrapreneurship. We designed programs that would allow employees to develop their ideas, and defined appropriate structures and devices to make it work. Then finally came the crucial moment, when one of the participants asked the fateful question: “But do we have the people to do this?” Everyone looked appalled. The HR manager – fortunately she was present – answered, embarrassed, “Well actually, no we don’t.” Game over.

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Power to the user: how innovation puts technology in the hands of the users

One of the characteristics of innovation is to simplify and make more accessible technologies that previously required experts to handle them. Pregnancy tests illustrate this phenomenon: while in the 60s it was necessary to visit a doctor to perform such a test, it can now be performed by buying a $5 kit in a pharmacy. The change for a given technology is therefore translated by two factors: a reduction in costs and simplification. In other words, because the technology becomes cheaper and easier to use, experts are less and less needed for a given problem to solve. Indeed, those pregnancy tests are more and more bought online, thus removing the need for the pharmacist. In 50 years, solving this problem have moved from the doctor to the pharmacist, then from the pharmacist to the user.

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Nespresso: victim of a low-end disruption?

Interestingly, the posts on Nespresso are among the most popular on this blog. Every time I write about this product, audience shoots up, so why not continue… especially given that there is an interesting news with the launch of Nespresso compatible capsules by a new company called Ethical Coffee Company (ECC).

It is well known that Nespresso’s business model is mostly based on selling capsules on which Nestlé is able to make a very high margin. This margin is significantly higher than for the traditional filter coffee, Nestlé’s main business. This is in fact the same model as that of ink jet printer manufacturers: you buy a printer at a very low price; it usually barely covers the cost of the printer. The manufacturer makes its margin not on the printer, but on the cartridges, which are (relatively) very expensive.  This model comes from the razor and the blades model invented by Gillette. This model is not without benefits for some users, in particular for those who have limited needs in terms of quantities. In that case, the high relative cost for one page matters less than the low absolute one. What is interesting in the case of Nespresso is that Nestlé has been able to position the product in the premium segment, so they are able to sell the machines at a high price as well, thus having it both ways…

This positioning helped fuel the success of the product and drove its exceptional profitability. It was reinforced by the creation of the Nespresso Club, adding a sense of exclusivity, and the use of actor George Clooney in the ads. In addition, the Club provides valuable customer information for Nestlé, another innovation for a company that had until then always sold only through distribution channels.

Of course, the idea of a high-quality coffee at home quickly attracted competitors such as Senseo, a partnership between coffee house Douwe-Egberts and home appliance manufacturer Philips, or Tassimo. However, despite their success, and quite unlike what Pr Clayton Christensen would predict, these lower end competitors have not been able to really to “go up” and threaten Nespresso’s position in the higher end of the segment.

This could change thanks to the entry of a new type of competitor having a different strategy: Ethical Coffee Company (ECC). ECC’s idea is quite simply to create capsules that are compatible with Nespresso machines, yet cheaper. This is a strategy that has already been successful for printers and that manufacturers were not able to successfully counter. ECC, which like Nestlé is based out of Switzerland, assures that they have found a way not to violate Nespresso’s patents and produce perfectly legal compatible capsules. ECC’s threat should be taken seriously by Nestlé because its founder is no other than Jean-Paul Gaillard, the man who successfully launched… Nespresso back in the early 1990s. Gaillard is the manager called “Yannick Lang” in the infamous and controversial Nespresso case study from IMD written by Joyce Miller and Kamran Kashani. In addition, ECC has raised €20 million in private capital and is already in production.

ECC’s capsules are legally compatible with Nespresso machines, but 20% cheaper. In addition, they can be completely recycled, a very important point as the use of aluminum capsules by Nestlé has long been criticized by environmentalists. Each Nespresso user has probably experienced a growing sense of unease when throwing away the capsules. Lately, Nestlé has undertaken a recycling program but the way it is organized does not seem to be environmentally friendly.

What can Nestlé do? Moving “downwards” is difficult for two reasons. First, because the success of Senseo and Tassimo in the mid-range market means competition is solidly present, with big brands that have strong experience of the business and the distribution network, and for which the segment is core. So expect strong resistance here. Second, because ECC’s entry will quite likely successfully occupy the “value” segment of the capsule market. Third, because it is always difficult for a firm to move downwards, regardless of the competition: margins are lower but the cost base is the same, a sure crash. This would mean hurting the brand, a key issue as the brand, more than the quality of the coffee, is what drives Nespresso’s success since the beginning. It is difficult to imagine Nestlé introducing “value” (ie low end) coffee machines or selling the capsules in supermarkets (which would instantly mean losing 25% of the margin), sitting next to Tassimo’s.

The question is whether Nespresso’s positioning can be sustained. One can certainly expect a “Clooney fatigue”, not to mention the risk, shown recently by Tiger Woods, of associating a brand with a star who is also a human being, and as such subject to image problems. Despite all the talk about experience, Club exclusivity, and choice of over dozens of coffee types, what customers want is a nice cup of coffee, and too much complexity risk turning them off. Even a visit to a Nespresso shop can be an unpleasant experience when facing the snobbery of the clerks. Last time I went there, I felt like a peasant visiting the castle.

Can Nestlé move upwards? One could imagine Nestlé introducing diamond plated Nespresso machines at €1,000 and partnering with some luxury house. Despite the fact that times of economic recession are usually not appropriate for such positioning, this would smell classic “retreat in the high-value segments”, giving away lower segments to the competition, and putting itself into a corner eventually, something that GM has experienced with SUVs.

Clearly, Nestlé seems concerned. The Swiss firm recently sued a French Web site comparing prices for “disparagement” because the site had contended that Nespresso’s capsules where expensive and environmentally unfriendly. This is surprising because these are two well recognized facts. Nespresso is clearly positioned in the high-end of the market and Nestlé gets good margins on it. This is not a crime and nothing to be ashamed about, simply a positioning that has help fuel Nespresso’s success. Similarly, the environmental unfriendliness is still very common in manufacturing, and Nestlé has made efforts recently to address this question, albeit insufficiently. The trial seems to reflect more on Nestlé’s disarray and lack of strategic clue than anything else. Let’s hope the company will find better ways to deal with its strategic problem. ECC is now sold in France through the Casino supermarket chain. Let the consumers decide…

My previous post on the Nespresso innovation story here.

Note: I no longer update this blog. Instead, I am now writing a blog with a slightly different focus with my colleague Milo Jones on geopolitics, strategy, disruptions, and intelligence. Find it here: http://silberzahnjones.com.