- Asymmetric Motivation
This is a term that describes when an incumbent gladly gives up a lower-end part of the market because the company is motivated to move up market. The motivation to flee is most often fueled by higher gross margins. This is often called “flying under the radar”. For more on this term, read here. http://hbswk.hbs.edu/item/the-innovators-battle-plan.
- Autonomous Unit
An organization that for all intents and purposes operates as a separate company with different resources, processes and profit formula(we use “profit formula”) than the parent company. This includes support functions (HR, finance, operations, marketing) and most importantly sales teams.
- Bad Money
Whether money is “good” or “bad” depends upon the circumstances in which a business finds itself. Emergent Strategy: conversely to good money, bad money is impatient for growth and patient for profit. This type of money will likely get you into a self-reinforcing spiral of inadequate growth because you haven’t tested the profitability of the market.
Deliberate Strategy: conversely to good money, bad money here is patient for growth, but impatient for profit. In this case, the laser focus on target margins will prevent the business from achieving its growth targets.
- Business Unit
An organization or organizational subset that is independent with regard to one or more accounting or operational functions.
- Celeron Processor
A product that Intel Corporation first introduced in 1998 as the processor at its very low-end of the product line. It has lower performance, and lower margins, than the rest of Intel’s product portfolio, yet has achieved the purpose of defending the low-end market from AMD.
The process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market and/or consumers.
- Compensating Behaviors
Behaviors people exhibit because no existing solution adequately solves their problems. Customers stretch a product to do something it was not designed for, or “hack” together several products to produce a less than optimal solution. (see Scott Anthony’s book, The Innovator’s Guide to Growth)
An Idea of theory containing various conceptual elements, typically considered to be subjective and not based on empirical evidence.
- Core Competence
The main strengths or strategic advantages of a business. A combination of pooled knowledge and technical capacities that allow a business to be competitive in the marketplace. These tend to be difficult for competitors to replicate.
- Correlation vs Causality
Correlation: the extent to which two datasets are related to each other. Statistics such as “Millennials are 2.5x more likely to make New Year’s resolutions” rely on a high correlation factor between the dataset “Millennials” and “New Year’s resolutions”. Being a millennial doesn’t cause you to make a new year’s resolution.
Causation: the extent to which one dataset or event causes another. Understanding what causes what and why is the focus of the entire physical science world, yet in business we often rely heavily on correlation to understand our customers (to our own detriment).
- Cost of Goods Sold (COGS)
Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of goods made by the business include material, labor, and allocated overhead.
The processes and values embedded into an organization by assumption, rather than by conscious decision.
- Customer Segmentation
This is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing. Using the lens of disruptive strategy, it is critical to segment customers by circumstances rather than by demographics.
- De-coupling Point (Interdependence vs Modularity)
The hand-off point between subsystems (products) or customers and suppliers (supply chain). As a product/service/industry becomes more modularized, many de-coupling points arise as the interfaces between subsystems or the supply chain become well defined. If a product/service/industry has an interdependent architecture, and subsequently a business adopts an integrated strategy, de-coupling points will be few and far between.
- Deliberate Strategy
A deliberate strategy is one that arises from conscious and thoughtful organized action. It’s generated from rigorous analysis of data on market growth, segment size, customer needs, competitors’ strengths and weaknesses, and technology trajectories.
Shifting out of parts of the value/supply chain to focus on a specialized strategy. Companies should disintegrate in a world with a modular architecture.
The classic definition of disruption is a disturbance or problem that interrupts an event, activity, or process. With a traditionally negative connotation, this term has taken on a life of its own in the business world to basically mean anything that is counter to the norm. As it pertains to D-Strat, we will define it more precisely.
- Disruptive Technology
- Efficiency Phase
When companies sell mature products or services to the same customers at lower prices. Companies accomplish this by developing a business model that can still make money at lower prices-per-unit sold in order to increase profitability.
- Emergent Strategy
An emergent strategy is one that arises from unplanned actions from initiatives that bubble up from within the organization. It is the product of spontaneous innovation and day-to-day prioritization and investment decisions made by middle managers, engineers, salespeople and financial staff.
- Getting the Categories Right
It is part of human nature to put things into categories; it helps us make sense of the universe in which we live. The concept of “getting the categories right” with regards to disruptive strategy is understanding the circumstances underlying a phenomenon, rather than surface-level attributes, and creating categories based on these. For example, if you are attempting to predict adoption rates of a new in-home IOT device, it would be unwise to use the adoption rates of the iPhone as a comparison because “hardware” is an attribute-based category and not a circumstance-based category.
- Good Money
Whether money is “good” or “bad” depends upon the circumstances in which a business finds itself. Emergent Strategy: during the nascent years of business, good money is patient for growth but impatient for profit. Money needs to be impatient for profit to accelerate a disruptive venture’s initial emergent strategy process. It forces management to test as quickly as possible the assumption that customers will pay a profitable price for a product.
Deliberate Strategy: upon switching to a deliberate strategy (after exiting the emergent strategy process), good money is now money that is impatient for growth, but patient for profit. This is because the profitability of the market has been fully tested and now the business needs to invest for growth.
- Gross Margin
Gross Margin = (Revenue – COGS) / Revenue
This refers to setting up check-points while executing a strategy plan to ensure you are translating strategic concepts into tangible, practical plans of action correctly.
Simply put, an incentive is a thing, typically money in business context, that motivates or encourages one to do something. The sales team incentive structure is of huge importance in determining whether your company’s intended strategy will indeed be your actual strategy.
Adding parts of the value/supply chain to deliver on an integrated strategy. Companies should integrate in a world with an interdependent architecture.
- Integrated Strategy
This strategy focuses on the entire system to deliver an end product/service to meet the minimal satisfactory performance requirements for the customer. An integrated strategy is best suited for industries with an interdependent architecture, i.e. each component in the product/service is design dependent on each other and cannot be separated.
- Interdependent Architecture
The structure of a product or service if one part cannot be created independently of the other part – if the way one is designed and made depends on the way the other is being designed and made. Optimize performance. (Innovator’s Solution, Page 127, Getting the Scope of the Business Right)
The place where any two components fit together. Exists within a product, as well as between stages in the value-added chain, i.e. Design -> Manufacturing -> Distribution.
- Job to be Done
A job-to-be-done is defined as the progress an entity, customer or business, is trying to make during the course of day-to-day life. A job-to-be-done is a circumstances-based description of understanding your customers’ desires, competitive set, anxieties, habits and timeline of purchase.
Integrating around the job-to-be-done is how a company organizes itself and product/services offerings to deliver on a set of experiences that perfectly “nail” the JTBD. This means instead of organizing around traditional categories, i.e. marketing, product development, sales, etc., companies should organize and integrate in order to deliver a product/service perfectly centered around the JTBD.
- Low-End Disruption
A product, service or business model that enters the market at a lower performance and price point than an existing offering. A low-end disruptor has the following characteristics:
1) Initially, target “overserved” customers who are unattractive to incumbents due to low margins
2) Product/service performance is simple, yet deemed “good enough” compared to existing solution
3) Incumbents either ignore or cede the market easily to the new entrant. This is called asymmetric motivation.
- Market Creating Phase
The early stages of a new product or service when a company is focused on the development of the product or service to meet the customer’s job-to-be-done.
- Modular Architecture
The structure of a product or service where the fit and function of all elements are so completely defined that it doesn’t matter who makes the components or subsystems, as long as they meet the specifications. Optimize flexibility. (Innovator’s Solution, Page 128, Getting the Scope of the Business Right)
- Net Margin
Net Margin = (Revenue – COGS – OpEx – Interest & Taxes) / Revenue
- New-Market Disruption
A product, service or business model that creates an entirely new market by targeting non-consumption and offering inferior performance according to traditional metrics, but superior performance according to new metrics. These new metrics often focus on simplicity and convenience. A new-market disruptor typically has the following characteristics:
1) Targets traditional non-consumption by focusing on the underlying Job-To-Be-Done, Since we don’t give examples for the other ones I think we should keep it consistent. If we want to keep this example then I think we should add examples to the others. But as this is a glossary I don’t think it’s necessary.
2) Incumbents don’t see the entrant as competition because of different performance metrics and/or product/service characteristics.
3) As the new-market disruptor gains market share, incumbents are unable to respond, even if they want to, because they cannot compete on the new performance metrics.
This term describes how we traditionally think about people who aren’t buying a product in a category.
To compete against non-consumption, introduce a product/service that is focused on the Job-To-Be-Done.
- Performance and “Good Enough”
Performance: the criteria your customers determine to be important in product use and adoption. Performance is usually defined by metrics relating to the end-user experience, but also may be defined by inherent product metrics as a proxy for the end-user. Understanding how your customers define performance is critical to success and understanding your true competitors.
Good-Enough Performance: this is the performance point at which your customer adopts your product. Understanding what performance is “good enough” enables you to know whether to adopt an integrated or specialized strategy for your industry, as well as understand potential entrants.
- Performance Defining Component
The component in the value stack that provides the functionality that customers care most about. This is typically where the most profit can be made. It is IMPERATIVE to understand this can change. For example, the performance-defining component for Intel Microprocessors in the early 2000s was speed, or cycles per second (hertz). With the advent of Wifi and the laptop form-factor, the customer’s performance defining component shifted to battery life. This shift caught Intel flat-footed, even though Intel was the one who developed Wifi in the first place, and they lost a substantial amount of market share to rival AMD. Intel eventually was able to weather the storm and shift its product line to this new performance-defining component, but not without a lot of organizational and financial pain.
- Permission to Grow
Any business needs the implicit permission of society, as manifested in laws, regulations and taxes, to grow, operate and simply exist. In the new sharing economy, laws/regulations have changed to grant or refuse permission for this new business model. See this article by HBS Professor Derek van Bever on Uber and the permission to grow. https://hbr.org/2015/02/uber-needs-our-permission-to-grow
The patterns of interaction, coordination, communication and decision making through which the transformation of resources into products are accomplished. They include the ways that products are developed and made and the methods by which procurement, market research, budgeting, employee development and compensation, and resource allocation are accomplished. (Innovator’s Solution Page 183)
- Product Architecture
How a product’s components and systems interact – fit and work together – to achieve the targeted functionality.
- Profitability vs. Profit Formula (Charles Schwab Case)
Profitability: measured with income and expenses, using both real numbers as well as ratios, i.e. net profit, net income, net margin, etc.
Profit Formula: the profit formula is how organizations internally determine which projects to select. Often consists of specific ratios targets, i.e. X% gross margin, IRR of Y, etc.
- Purpose Brand
A purpose brand links customers’ awareness that they need to do a job with products that have been designed to do it well. The highest level in the job architecture.
- Resource Allocation Process
The process by which resources are deployed to drive initiatives within a business. There is always a process, regardless of whether it is explicitly stated or otherwise. A resource allocation process alone isn’t “good” or “bad”; it’s just the process. The question should be, does the process prioritize the initiatives we’ve strategically said we want to take on? Does it create the right incentives that align with our strategy?
People, equipment, technology, product designs, brands, information, cash, and relationships with suppliers, distributors, and customers. Usually people or things – they can be hired and fired, bought and sold, depreciated or built. (Innovator’s solution, page 178)
- Return on Net Assets (RONA)
RONA = Net Income / (Fixed Assets + Working Capital), where working capital = current assets – current liabilities
- Skate to where the "money/puck" is
A phrase popularized by Wayne Gretzky, a famous Ice Hockey player, when discussing the success of his career. The analogy to business is that instead of focusing on where the money is today, use business theory to understand where the money will be tomorrow and orient your company towards that future.
- Specialized Strategy
This strategy focuses on one piece of a system and doing that piece superbly. A specialized strategy is best suited for industries with a modular architecture, i.e. the inputs/outputs and clearly defined and standardized.
- Sustaining Innovation
A product, service or business model that provides performance improvements in attributes most valued by the industry’s most demanding customers. The improvements may be incremental or breakthrough. A sustaining innovation typically has the following characteristics:
1) For new entrants, the incumbent has every motivation to fight your entrance to the market and sees you as a direct threat.
2) A product/service improves upon traditional performance metrics and charges more money for the improved performance.
3) For incumbents, uses the existing company’s resources, processes and profit formula to develop and execute the offering.
- Sustaining Phase
After the product or service has been defined and deployed into the marketplace, the company tries to evolve the product or service to meet the needs of the best customers in the market in order to beat the competition.
- The Innovator's Dilemma
In The Innovator's Dilemma Professor Christensen introduces the concept of disruptive innovation.
- The Innovator's Solution
In The Innovator's Solution Professor Christensen offers frameworks to help business leaders face disruption. These ideas may be applied to companies wanting to become a disruptor or to incumbents who are trying to avoid disruption.
- The Role of the CEO
The CEO, or other similarly high ranking executive, is critical at the beginning of the creation of a disruptive growth engine. Because the processes and values of the mainstream business by their very nature are geared to manage sustaining innovation, there is no alternative at the outset to the CEO or someone with comparable power assuming oversight responsibility for disruptive growth.
- Value Stack
The structure of how value is created and captured in a product/service/industry.
The standards by which employees make prioritization decisions – those by which they judge whether an order is attractive or unattractive, whether a particular customer is more important or less important than another, whether an idea for a new product is attractive or marginal, etc. (Innovator’s Solution page 185). Values and prioritization decisions in for-profit businesses are almost always dictated by the profit formula.