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18.8 Three Principles for Applying Agile Practices

Let’s begin with the principles for applying the practices.

18.8.1 Tailor the Approach to the Circumstance

The core meaning of agility is adaptability, and nowhere is this attribute more apt than for the agile approach itself. As in Fight Club (the novel and film by the same name), the first rule of an agile corporate culture is that there is no agile culture—or no single one for all situations. The agile practices that an organization adopts must be tailored to fit the mission of the enterprise and the values that matter most to it—and those practices should evolve as the mission changes over time. For example, Apple’s original mission was “To make a contribution to the world by making tools for the mind that advance humankind.”21 A corporate culture tailored to this mission would embrace most, if not all, of the agile practices discussed in this chapter, such as fail fast. In contrast, Apple’s mission today is the more prosaic and product-focused statement that “Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with iPad.”22 A corporate culture aligned with the new mission’s emphasis on past and current products and successes would lean more toward predictability and reliability and less toward experimentation and transformational change than one aligned with the first. It’s not a question of what’s right—but what’s right for the organization at that time.

Culture can also vary within an organization. Suppose an established enterprise has created a new business unit to develop an innovative service. Even while the rest of the enterprise adopts a culture that supports predictability, the new business unit would be wise to adopt a highly agile culture that promotes learning and embraces change due to the novelty of the product.

18.8.1.1 Disruptive Innovation

  • “Remember that the things that they fire you for when you’re young are the same things that they give lifetime awards for you when you’re old.”

    —Francis Ford Coppola23

One of the most important factors that determine the appropriate level of agility for an organization is the degree to which it is (or is not) involved in disruptive innovation. For that reason, it’s essential to determine whether the product being developed is—or has the potential to be—a disruptive innovation.

To understand disruptive innovation, let’s examine one that many people use in their daily lives—Crest 3D Whitestrips, a fourteen-day teeth-whitening system introduced by Procter & Gamble in August 2000.24 Before Whitestrips, teeth-whitening was a professional procedure requiring a visit to the dentist—something that many people could not afford. Whitestrips disrupted this status quo by offering a low-cost alternative that anybody could use at home. By getting the job done more conveniently and at a lower cost than a dental procedure, Whitestrips took existing business away from the professional dental industry. Note that Whitestrips didn’t do the job of whitening teeth as well as a dentist; it did it well enough for consumers unwilling to pay a premium for extra quality they didn’t need. This situation is typical of low-end disruptions.

The product also created new customers—people who hadn’t used whitening products and services before because of the cost. Furthermore, it transformed the oral-care-product market, previously associated almost exclusively with toothpaste, by creating a new product category—teeth-whitening products—and a vibrant demand for those products. Consequently, Whitestrips can also be characterized as a new-market disruption.

Crest’s disruption was so successful that three years after the introduction of Whitestrips, teeth-whitening products were responsible for almost 20 percent of Crest’s sales and had captured “almost two-thirds of the entire tooth-whitening category” according to Information Resources.25

The determination of whether a product is disruptive not only informs investment decisions but also affects how we plan and develop the product. This is because disruptive innovation occurs under conditions of extreme uncertainty on multiple fronts. Since the business is doing things that have never been done before, there’s no way to know in advance how customers will react, how they will use the product, and whether the business model itself is realistic and sustainable. Agile methodologies are a means for addressing this uncertainty through practices that optimize learning and adaptability.

We’ll begin by defining innovation. Next, we’ll explain what it means for an innovation to be disruptive and the different kinds of disruptive innovation that can occur.

What Is an Innovation?

To determine whether a particular innovation is disruptive, you first need to define innovation. An innovation is a new idea, design, product,26 or service or the evolution of an existing thing that fulfills an unmet need—whether conscious or unconscious.27 Note that this definition (and the ones that follow for innovation types) may not apply to all industries, and different organizations may define those terms differently. Also, keep in mind that while the definition focuses on the idea or product, any concept—even a great one—will fail if the necessary cultural conditions for innovation are not present within the organization.

Types of Innovation

Every company must continuously innovate—but not every innovation is (or needs to be) a disruptive innovation. It may be a sustaining innovation. Please note that these categories are a convenient over-simplification of a complex issue and that there is no hard line separating the two types. Nevertheless, they provide a useful framework for considering an idea or product proposal, its potential to transform the market and the strategies that should be used to develop and market it—or defend against it, if you’re an incumbent.

What Is Sustaining Innovation?

Sustaining innovation is the type of innovation incumbents tend to be good at. It refers to the continual improvement of established products and services. (This definition differs from Christensen’s formulation, which includes progress leaps under certain conditions—not just incremental changes.28) For example, CDs were a sustaining innovation when they were introduced because, while they were an improvement, they didn’t change the underlying business and distribution model in the music industry. CDs were distributed to retail outlets that sold them to customers—just like vinyl records.

One way to think of sustaining innovation is as a business equivalent to the natural world’s evolutionary process—small, incremental changes leading to continual improvement. Like its evolutionary counterpart, the general drift of sustaining innovation in business is toward higher and higher levels of quality.

What Is Disruptive Innovation?

Disruptive innovation refers to the development of novel products and services that transform their industries in some way (e.g., through innovative features, how they deliver value to the customer, or the benefits they provide to their customers, such as low cost and greater convenience). (Note that this definition differs from Christensen’s, as discussed in an upcoming section.) Disruptions can also disrupt other industries, as was the case with Crest 3D Whitestrips, which disrupted not only the oral-care industry of which P&G was a part but the dentistry profession as well.

Often, a disruptive innovation introduces an entirely new way to get a job done that is more convenient or cheaper than the available alternatives. For example, Whitestrips performs the job of whitening teeth without requiring an expensive and inconvenient visit to the dentist. We’ll be exploring Flickr later in this chapter: it’s also an example—though a less obvious one. Flickr performs the job of building a social community in a way that is different (and more profitable for the company developing it) than its founder’s original venture—Game Neverending.

The disruption often solves a pressing problem by hacking together existing services in unexpected ways. The problem may be global—such as a pandemic or climate change—or one that a market or submarket cares strongly about.

An example of the latter is Trint (discussed in Chapter 12, section 12.4.2)—an automatic transcription service. It began when its founder, a former journalist, realized he could eliminate the tedium of transcribing videos by combining a manual user interface with an automated speech-to-text AI component. In his vision, the AI part would do the heavy lifting of transcription, leaving the user to focus on quicker tasks that needed human intervention, such as verifying and correcting text. Trint’s customers were not new to the market; they were already consumers of transcription services. Moreover, many weren’t even aware they had a problem until Trint provided a solution. Today Trint claims to be the leading speech-to-text platform for content production and has recently received additional funding from the New York Times and other outlets.29

Disruption as an Evolutionary Leap

We can find biological analogies to disruptive innovation in the evolutionary leaps that occur in response to

  • Extreme environmental stressors

  • Random mutations (experiments) that yield outsize results

  • Convergence

Extreme Environmental Stressors An example of an extreme environmental stressor leading to an evolutionary disruption is the Cretaceous-Tertiary, or K-T, extinction event. According to a prevailing theory, a meteor crashed into the earth 65.5 million years ago on the edge of the Yucatán Peninsula,30 causing global wildfires, earthquakes and volcanic eruptions, and other cataclysmic changes that wiped out many forms of life, including the dinosaurs. Small mammals that could burrow under the ground survived and filled the ecological niches left behind. A similar dynamic is at play when a company’s competitors suddenly disappear (e.g., when more than 450 banks failed during the global financial crisis in 2007–2008 and the five years that followed). Another is businesses closing en masse during a pandemic—as is currently occurring at the time of this writing. Like the post-K-T mammals, those who will thrive in the new environment will be the entities that can quickly adapt and transform themselves to fill the niches that will open up due to the event.

Random Mutations (Experiments) That Yield Outsize Results Genetic mutations can be thought of as nature’s experiments. Sometimes a mutation or set of mutations yields an outsize result (e.g., the mutations for an opposing thumb enabled humans to use tools—a capability no other mammal has had before or since to a comparable degree). In the business world, organizations should mimic nature and conduct experiments. As with genetic mutations, those experiments often lead to incremental improvement, but every so often, one of those improvements or innovations has far-reaching effects. A business example is the invention of computers, which created new markets and opportunities in multiple industries.

Convergence This happens when several smaller improvements combine to create a sum that is greater than its parts. An example from the natural world is the convergence of two improvements—language and an opposing thumb—which contributed to early Homo sapiens’ ability to convey knowledge across generations and greatly accelerating the advance of human civilization, art, and technology. A business example is the convergence of touch-screen technology, Wi-Fi, mobile data services, and an innovative business model (the app store), transforming the mobile device from a telephone into a personal digital assistant (PDA).

Updates to Christensen’s Disruptive Model

It’s worth noting that the preceding definition for disruptive innovation differs in significant ways from that advanced by Christensen, Raynor, and McDonald, the originators of the concept. They define disruption as “a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.” In their view, the innovation must gain a foothold first in a fringe market—either at the low end of an existing market or in a new market (customers who have never used the product before). Furthermore, the disruptive product must “initially be considered inferior by most of an incumbent’s customers.”31 According to this understanding, Uber does not qualify as disruptive to the cab industry because it did not emerge in a low-end or new market; it targeted mainstream cab customers from the start. Moreover, the authors argue that Uber was not considered inferior to traditional cabs by most customers.

As the authors explain, they created this definition to describe a phenomenon they’d noticed—companies transforming their industries before competitors had a chance to react. When they realized that their first draft, focusing on low-end disruptions, failed to take into account new-market disruptions, they adapted the definition.32 Why stop there, though, when there are other scenarios where new products and services have successfully disrupted traditional ways of doing business? The problem, in my opinion, is that the authors’ definition and conditions for disruptive innovation are too restrictive in the first place.

Let’s begin with the first restriction—that the disruptor must be a small company with limited resources. Nevertheless, the authors accept that Apple’s iPhone was disruptive to the laptop industry because it “was able to challenge laptops as mainstream users’ device of choice for going online.”33 This belies their definition of disruption because Apple was by no means a small company with limited resources.

Similarly, by all practical measures, Crest’s Whitestrips was disruptive to dentistry because it offered a profoundly new way to do the job of whitening teeth without the inconvenience and expense of going to a dentist. Yet Crest, too, is far from being a small company. It seems clear that though disruptors may often be small, they don’t have to be.

What about the condition that a disruptive innovation must target low-end or new-market customers? Again, this is a common occurrence but not a necessary condition. For example, the authors consider Netflix to have been a disruptor of Blockbuster, yet it targeted existing customers, not new ones, and did not focus on the low-end market. What’s clear, therefore, is that the authors’ definition is not only overly restrictive but is even inconsistent with their own usage.

Is Uber Disruptive?

As noted previously, by the authors’ reckoning, Uber is not disruptive to the taxi industry because it started in San Francisco, where the cab market was well-served. Furthermore, it would be disqualified because it didn’t target the service to low-end markets; its first customers already used cabs. Yet, Uber has transformed the cab business and done so in a textbook disruptive fashion. Christensen, Raynor, and McDonald tacitly acknowledge this problem by arguing that artificial legislative constraints explain why Uber has all the hallmarks of a disruptive company without being a “disruptor.” At best, it’s a distinction without a difference.

In contrast, the definition I’m using sees disruptive innovation as development that transforms the way business is done (e.g., by creating a new business model or making changes in the value stream, the way the product is developed, its features or benefits). According to this understanding, we would quickly recognize Uber as a disruptor because it has radically changed every aspect of the cab industry. These changes include its relationship to customers and providers, its underlying business model, how it delivers its services, the benefits it provides, and the technology it uses. Unlike traditional taxi companies, Uber is based on a marketplace model; its value is derived from connecting people who need a ride with people who have underutilized cars and want to earn more income with flexible hours. Moreover, the company’s ultimate vision is an even more transformative one—to replace cab drivers entirely with automation.

Besides, Uber would likely qualify as a disruptor even by the authors’ restrictive definition. For example, Uber’s initial release was a new-market disruption in the sense that it changed what it meant to be a customer: in Uber’s sharing economy, the company’s customers are not just riders but drivers, too. More recently, Uber has brought other new customers into the fold, including restaurants and people looking for micro-mobility transportation solutions, such as scooters.

Why Disruptions Do Not Have to Be of Low Quality

What about the contention that the disruptive product must initially be considered inferior by most customers? I would argue that while a disruptive innovation is often of lower quality, it’s wrong to insist that it must be. For example, Trint offers verifiable voice-to-text automated transcription with similar reliability to traditional, manual services and with much faster turnaround times. In other words, the product offers comparable or enhanced quality by the yardsticks used by its most demanding customers. Nevertheless, it is successfully disrupting its industry.

Types of Disruptions

With the preceding adaptations to the theory, most disruptive innovations can be characterized by the following types:

  • Low-end disruptions

  • New-market disruptions

  • Mainstream disruptions

  • Business-model disruptions

Low-End Disruptions

Low-end disruptions target customers who currently use the product but would be willing to pay less for an acceptable but inferior product if it provided other advantages they care more about.

Over time, low-end disruptive innovations often improve—to the point that they can capture the middle and high end of the market as well. Digital cameras are one such example. The first versions available in the general market were inferior to film and didn’t appear to pose a direct threat to higher-end film-based cameras. Despite the low quality of digital cameras, new customers who wouldn’t have purchased an analog camera bought digital ones because of other attributes: ease of use by an untrained photographer and the ability to view images instantly at no cost. Today, digital cameras have improved to the point that they have taken over not only the consumer market but most of the high-end art market as well.

Once digital cameras produced acceptable images for the mainstream, they were incorporated into mobile phones. This is an interesting case of one disruption providing the opportunity for a second disruption:34 the inclusion of a digital camera helped transform the mobile phone from a device used to make calls to a personal digital assistant and media device—a Swiss Army knife for the modern consumer.

New-Market Disruptions

The next type of disruptiona new-market disruptionopens up entirely new markets, customers who have never before used the product or service. The PC is one example because it brought computing for the first time to individuals. Another example is online brokerages, which attract customers who had never purchased stocks before.

Mainstream Disruptions

A mainstream disruption is one that targets existing mainstream customers—as opposed to low-end or new-market customers. Typically, a mainstream disruption solves a problem that most customers have learned to live with and may not even recognize as problems. When the disruptor offers a solution, customers’ expectations change, transforming the industry. Trint is an example of a mainstream disruption: it solves the journalist’s problem of having to hit pause-rewind-play repeatedly when transcribing interviews.

Because this type of disruption is directed at the incumbents’ primary customer base, it is less likely to enter the market under the radar. Consequently, when considering a mainstream disruption, it is particularly essential that the organization have a plan for rapidly scaling the product and growing the customer base.

Business Model Disruptions

A business-model disruption is any other innovation that transforms the fundamental business model in its industry. After the disruptor introduces the disruptive business model, competitors follow suit until even established incumbents soon must adapt to the new model or disappear. As noted earlier, one example is music streaming, which transformed the business model for the music industry. Another is the transition from one-time software sales to the Software as a Service (SaaS) model.

The trigger for a business-model disruption is often a transformative event that affects the entire industry, such as the COVID-19 pandemic that is rapidly transforming the retail sector (and many others) as people look for online solutions and alternatives to in-person shopping. The trigger may also be a revolutionary technology, such as the inventions of 5G and CRISPR genome editing—each of which has the potential to transform multiple business sectors.

Any aspect of the business model may be transformed by a business-model disruption, including the following:

  • Production process (e.g., from manually produced prescription glasses to methods that rely heavily on robotics and automation)35

  • Service delivery (e.g., from delivery of hard-goods to digital delivery). The disruption involves a radical shift in how a customer receives and interacts with a service (e.g., medical services delivered online).

  • Product distribution (e.g., from retail stores to an app store or from Netflix’s release of its content to its streaming platform vs. traditional studio release to theaters)

  • Revenue streams (e.g., from sales to subscription fees or Airbnb’s replacement of traditional hospitality revenue with a revenue stream based on service fees to renters and hosts)

18.8.1.2 Is It a Disruption? The Litmus Test

This understanding of disruption can be summarized in a litmus test for determining whether an innovation has the potential to be disruptive. Keep in mind that business strategy cannot be boiled down to a simple formula. The litmus test (adapted from Christensen’s formulation) is a useful first cut at determining whether an innovation has the potential to replace existing market leaders but is only a rough guide.36

According to this scheme, to be a disruptive innovation, a venture, product, or feature must pass either test 1, 2, or 3—and it must pass test 4.

Test 1.

Is it a new-market disruption?

Are there many people who need the service but manage without it (e.g., because they would have to pay a skilled person to do it or have to go to an inconvenient location to use it)?

Test 2.

Is it a low-end disruption?

Are there customers who would purchase a lower-quality, lower-priced product in this category than is currently available—and can the company make a profit serving these customers under those conditions?

Test 3.

Is it a main-stream disruption?

Does it solve a problem that current customers have learned to live with but would appreciate a solution for—if one were available?

The final test is based on one advanced by Peter Thiel (discussed further in sec-tion 18.9.3):

Test 4.

Does the business possess a credible plan for accelerating growth shortly after the product’s release and for scaling up its operating capacity quickly enough to outrun incumbents if they launch a counterattack? If not, it might be more prudent to wait until they do.

It’s important to note that the disruptive nature of a product or service may change over time. It may be disruptive when first introduced but, once established in the market, become the incumbent—at which point the relative predictability of the circumstances argues for a more plan-based, less agile culture.

18.8.1.3 Adapting the Culture for Disruptive versus Sustaining Innovations

Once you’ve determined the type of innovation the organization is involved in, you can adapt the target agility level accordingly. For example, an organization that embarks on a disruptive venture knows very little at the start about who its customers are, how best to market and deliver the product to them, how customers will incorporate the product into their lives, or what features they will find most useful. These conditions of extreme uncertainty call out for an aggressively agile culture.

In contrast, a sustaining innovation is an improvement to a well-established product or service. Because there is less uncertainty than is the case with disruptive innovation, the business culture can afford to be more plan-based. Furthermore, business forces in an established enterprise are more likely to lean toward minimizing risk than experimentation and acceptance of failure because of the gravity of past success, as we discuss later in this chapter. All of these factors lean toward more planning and less agility than for disruptive innovation.

It’s important to clarify three things, though, about enterprises in this established, sustaining stage of development. First, established business units also benefit from some level of agile adoption—because even if an innovation is only a sustaining one, the sooner it is brought out to the market, the better. That is best accomplished using agile approaches.

Second, agile approaches provide essential guidance, even for sustaining innovations, on responding to unexpected challenges. For example, if progress toward a new product version is lagging, the agile approach recommends slicing off high-value pieces for immediate delivery rather than prolonging the release date.

Third, the survival of incumbents today often hinges on getting ahead of the startups nipping at their heels before they become a threat. As a result, it’s safe to say that there should be at least some agile in every enterprise.

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