Monthly Archives: October 2009

Oliver Yeh, a first-year Mechanical Engineering student at MIT, just successfully designed, launched and retrieved a camera 17.5 miles into the atmosphere and took 4,000 photos — at a cost of just $150.00! That’s probably less money than he will spend on his celebratory dinner.

Not only is this story inspirational to someone like me, who after millions and millions of miles in the air (no exaggeration) still sits glued to the window when I fly over Manhattan or the Grand Canyon, but it points out how the minimum efficient scale of doing fantastic things is getting orders of magnitude lower in some industries. This lower cost of entry can be magnified and accelerated when you have someone come to the design problem with an entirely new set of expectations.

Craig Newmark’s Craig’s List is estimated to have about $100,000,000 in revenue — with 30 employees. That’s $3.3 million per employee, and even if it costs $70,000,000 to run it (which it can’t), that’s a profit-per-employee of $1,000,000. (Compare that with Amazon’s profit-per-employee of approximately $30,000.) His model is so disruptive because he gives away all the ads except those for jobs, thereby turning what was once newspaper profits into what economists know as consumer surplus.

Now, there’s been a lot of interest in “disruption” ever since Clay Christensen did his pathbreaking work on The Innovator’s Dilemma, which chronicled how incumbent companies were upended by competitors or substitutes who arose from “lower” markets to create a new cost and demand base. Southwest Airlines did it in air travel, and Wal-Mart in retail. You know the story.

So what is the toolkit to create a disruptive design? Here are some ideas:

1. Simultaneously simplify a number of advantages together to create a new cost base. When Southwest Airlines launched they flew only one aircraft — the Boeing 737. Today, they still have one aircraft. They have one class of service. They have simple fare strucutures. They sell direct to end customers. They go to the less frequented, second-tier airports. They have broad job descriptions and cross-train so that one person can do many jobs — including pilots handling luggage. The created radical simplicity by simplifying many dimensions. They are not the only business where complexity has stopped adding value. New, radically simple business models can be created in everything from financial services to healthcare.

2. Give away the other guy’s razor! Craig Newmark garnered dominant market share by giving away almost all the blades. Put more formally, every “two-sided market” has a vulnerability — and if you can enter by aiming at that vulnerability, you can win. In China, Google is now giving away MP3′s and sharing the ad revenue with the artists. Paid music is now all marketing promotion. In addition, at Wired magazine’s Disruptive by Design conference, a featured book was Chris Anderson’s Free.

3. Look for new, radically cheaper ways to do the job. Yeh used run-of-the-mill technology — cell phones, video cameras, and even a styrofoam cooler — to create a much cheaper design. Consumer technologies and on-demand services like Amazon’s Mechanical Turk enable new business designs that could have a fraction of the cost to deliver the same services. Imagine a security company that was truly designed around the inexpensive, internet connected, monitoring equipment available today.

4. Think about leveraging a very few individuals with extraordinary talent. It is possible today for a small group of people to make a spectacular movie (think Pixar) or to manage billions in capital (think hedge-funds). Is there a way to create incredible value for your organization by leveraging the power of a small group across millions of consumers or billions of dollars?

One good way to get at these disruptive designs is to do what we at my firm call a “Fiercest Competitor Workshop,” which starts with the premise that you have been fired from your old organization but you have access to ample capital and talent. Your task is to design the fiercest competitor that could take the market from your old firm. In my experience when running these workshops, it takes people about an hour to get out of their old mindset — but when they do, they often design the most wonderfully dangerous potential competitors. No one knows their company’s vulnerability to a disruptive design better than their own employees.

It is the leader’s job to unlock this disruptive design potential so that it can be harnessed to help the incumbent make more money for its current shareholders, employees, and provide better surplus value to customers.