Established companies engage in incremental innovation; start-ups engage in disruptive innovation. It is a fight between David and Goliath, and we all know how that turned out.
Imagine a lush meadow under the spring sunshine. Two professional musicians in smart suits are playing Sonata for flute and harpsichord by Johann Sebastian Bach. Suddenly those sweet sounds are ripped to shreds by an electric guitar. It is the well-known riff from Start Me Up, the hit song by The Rolling Stones. When the bass and drums also join in, the classical music perishes in an orgy of electrically amplified instruments. Keith Richards' furrowed face is lit by a wicked grin.
The fantastic music by J.S. Bach symbolises the established companies here. Their approach is well-considered; their products are polished. They have built a longstanding relationship of trust with their customers. Everyone thinks that they can continue like this for a very long time to come. Is The Rolling Stones' music as great as Bach's? That is certainly up for discussion. In any case their music is different. Rough, less polished, aiming for a direct impact. And certainly not less commercial. The rock songs by Jagger and Richards symbolise the young start-ups here. They disrupt the peace of the established companies and sometimes even bring the biggest players down.
Playing by different rules
The Rolling Stones were innovative. They revamped the old blues, consciously cultivated their bad boy image and made good use of the mass media to put themselves out there in the market. They were disruptive – rupturing and devastating – before their time. Of course, classical music also uses modern recording and distribution techniques, but that is more of an incremental innovation, a gradual change. The product itself does not evolve much anymore. The difference between these two notions – incremental and disruptive innovation – is essential for companies, according to Cedric Donck, business angel and founder of the Virtuology Academy.
"Established companies engage in incremental innovation. They improve their products or services step by step, but they stay in the same business model. In the hotel sector, this means we make sure our rooms have Wi-Fi, we are on TripAdvisor, we have an attractive website and so on.
Start-ups engage in disruptive innovation. They play by different rules. One example is Airbnb. Another are the banks. They try to outdo each other with apps and other digital innovations, which are necessary, but not enough. Disruptive players such as Lendio offer peer-to-peer money lending to companies without the involvement of a traditional bank. This type of 'uberisation' is emerging everywhere. Disruptive innovation cannot be stopped."
How different is disruptive innovation?
- Disruptive innovation never emerges from the sector itself
Spotify was not established in the music industry, Uber was not created by a taxi company, The Huffington Post is not part of the conventional media world and Tesla is not the result of a car manufacturer. Disruption wiping the floor with existing companies does not arise from those companies themselves.
- There is a fundamental difference in the vision of technology
In conventional companies, technology supports the organisation's business or marketing and is often a source of irritation or frustration. The CTO is rarely part of the board of directors. Start-ups are actually based on new technology (big data, artificial intelligence, new algorithms, robotics, etc.) and wonder, what can we do with it?
- The innovation is accelerating
Innovative companies are sometimes beaten themselves. Apple did not see Spotify coming. Google was outdone by WhatsApp in terms of speed. Disruptive companies are not immune to disruption themselves, and this process is only getting faster.
- Start-ups are currently finding it easy to raise money
Starters who can prove that their good idea has great business sense are currently finding it relatively easy to raise money in order to develop their idea. Being large and financially strong are no longer advantages.
Disruptive innovation: the Build - Measure - Learn cycle
In the lean start-up method, an imperfect minimum viable product is quickly tested on the market, modified and tested again until it is right. Or until the product is dropped.
In established companies, internal innovation tends to be top-down. The directors make a decision and instruct middle management, which passes the task on to the staff. Then it moves up, back down and up again several times. No wonder innovation takes so long. What's more, the initiative is taken by the management. This does not always guarantee that the market actually needs it.
Start-ups approach things differently. They see things through the customer's eyes, think about their problems and wonder how they can come up with a solution as a company. This hypothesis is tested in the market as a minimum viable product (MVP). An MVP is not perfect, but that's fine – its aim is to show whether there is a need for it. By measuring the right parameters, the product can be modified quickly and tested again. And modified again. This development cycle is often referred to as the Build – Measure – Learn loop. The start phase mainly focuses on finding out whether the product has a future. In start-up methodology, this is called pivot or persevere: to take a different direction or to continue down the same path.
Working with the lean start-up method: the right approach
Working with the lean start-up method in an established company can mean questioning and if necessary aborting one's own business model. This is not easy, but there is little choice.
It is not easy to apply the lean start-up ideas at an existing company. They can cause disruption, and not many companies are willing to cause damage to themselves. However, there is no choice: those not engaging in disruptive innovation may end up being wiped out or eaten up by the competitors that do. In 2013, The Washington Post, a venerable institution with 180 years of experience and Pulitzer prizes galore, was simply bought by Jeff Bezos, the man behind Amazon.
The Washington Post, a venerable institution with 180 years of experience and Pulitzer prizes galore, was simply bought by Jeff Bezos, the man behind Amazon.
So what is the best approach? Cedric Donck, business angel and founder of the Virtuology Academy, lists five recommendations.
- Get a top management sponsor
Real innovation means doing things differently. The team engaging in a lean start-up will certainly cause conflict with conservative forces, resisting legal and compliance departments and established departments defending their territories. Not all business structures are in the company's best interest. When the going gets tough, the team must count on the support of the top management sponsor to put their foot down when necessary.
- Put together a dynamic, diverse team
The lean start-up team is preferably a mix of dynamic, internal and external people. The internal people know the company and the external people offer a fresh perspective from the outside. All company levels (production, sales and marketing, legal, etc.) must be represented. This allows any stumbling blocks to be examined and resolved quickly from all the necessary angles. A good relationship between the young and old and the different levels also helps.
- Start from a different place
Engaging in innovation outside the company has no impact, but inside the company, the whole thing might collapse due to all kinds of delay mechanisms. Sometimes it is a good idea to start in a different place until a critical mass has been reached. About fifty people are often a good gauge. After that the team can be incorporated and integrated again. Processes (compliance, quality, accounting, etc.) must then be established, which will certainly benefit from the expertise of a big company. Timing is crucial: too early and you smother the new team, too late and the growth will make it explode.
- Train the team in a lean start-up
Several lean start-up methods have been developed in recent years. Many of them are included in Cedric Donck's top ten books.
- Look for the most fertile ground for disruptive innovation
The objective of disruptive innovation is to have as much impact as possible with as little input as possible. To do this, you need to look for fertile ground.
We can quote Nike in this respect: just do it! Note, however, that you will have to dispel two popular myths.
- I must not make any mistakes
Create a culture in which mistakes are not penalised: innovation is impossible without failures. Do perform a post-mortem analysis on why something was unsuccessful and what you can learn from it.
- I can only present a perfect product
Do not be afraid to present an imperfect product. Customer discovery and product improvement are central to the whole exercise. Your customer will be pleased to help develop your product.
Disruptive innovation in 4 quotes
We conclude with some provocative quotes by business angel Cedric Donck. Food for thought...
"Disruptive innovation should keep all established companies awake at night. And they need to step out of their comfort zone. People are finally starting to realise this now. French telecom group Orange has joined forces with an insurance group to set up a mobile-only bank. And media company Medialaan recently acquired mobile operator Mobile Vikings. Who would have predicted this three years ago?"
"Everyone is always talking about Amazon or Zalando, but some conventional companies have been engaging in disruptive innovation for decades. IBM sold mainframe computers in the 1970s and personal computers in the '80s and '90s. After that they moved to consulting. In the next four years they will be investing one billion euros in the artificial intelligence of their supercomputer Watson. IBM is sometimes considered a dinosaur, but that's not the case: it's a company that reinvents itself every ten years."
"Some start-ups focus only on increasing their market share without making a profit. That is like playing the lottery. There really is a different way. An internet company such as Immoweb grew steadily in a healthy way without too much fuss in the press. A couple of years ago, German media group Axel Springer, publisher of Bild and Die Welt, paid 130 million euros for a majority stake. Congratulations, is what I say to that. Unfortunately, many journalists only praise start-ups that are raising millions, even if they have no decent business case to show for it. In my opinion, raising money is gaining permission to operate at a loss. Spending someone else's money is hardly something to be proud of. Swedish scientists have recently analysed how start-ups established in 2008 were doing in 2013. The conclusion was that the more capital they had, the less they had achieved five years later. If you have too much money, you start to believe your own story and your own fantasies. If you have little money, you need to listen to your customers very carefully, and that is the best way to achieve success."
"Belgium is not doing badly. Big players such as BNP Paribas Fortis are launching internal initiatives, with Home for Innovation one example. Rather than business angels like me, they have more leverage to support their start-ups. The government is also starting to do what it needs to do. The tax shelter for start-ups is a tax scheme to encourage young entrepreneurship. Investors in Belgian start-ups will receive personal income tax benefits. When things are done right, this certainly deserves a mention."
Scale-up concludes mega contract in the midst of the coronavirus crisis
The Antwerp-based scale-up IPEE transforms ordinary toilets into innovative products. BNP Paribas Fortis is more than just the financial partner. IPEE have already come into contact with the right people via the bank’s network several times.
“The traditional urinal has no brain. The infrared eye simply detects that someone is standing in front of the urinal. The result? A lot of wasted water and misery”, says Bart Geraets, who founded IPEE in 2012 together with Jan Schoeters.
The scale-up devised new measuring technology that makes it possible to detect through the ceramic of a urinal when someone is urinating or when the urinal is blocked. With this innovative technology, the scale-up designed urinals that use half as much water and toilets that can be operated without touching them.
“IPEE is an atypical scale-up that innovates in a sector where little has changed in the past few decades”, says Conchita Vercauteren, relationship manager at the BNP Paribas Fortis Innovation Hub.
Jan Schoeters: “At first we mainly focused on durability. But we soon felt that with non-residential applications, the potential water saving is subordinate to the operational aspect. We had to be able to offer added value for each stakeholder in the purchasing process.”
We opted for sleek designs to appeal to architects and end users. The simple installation attracts fitters and maintenance people see the advantages of the sleek design - that is easy to clean - and toilets that do not overflow.
Until 2015, Schoeters and Geraets, along with Victor Claes, an expert in measuring methods and originator of the IPEE technology, put their energy into product development and market research. The financing came mainly from money that they collected in their network of friends, fools and family.
They had to go elsewhere to obtain the funds for production and marketing. Geraets: “We had a product, but it wasn’t ready to sell. To take that step, we needed investors.”
Looking for new investors was a challenge. Schoeters: “We aren’t software developers and we don’t work in a sexy sector. So we miss out with a large target group of investors.”
The young scale-up attracted the attention of Ronald Kerckhaert, who had sold his successful company, Sax Sanitair, at the end of 2015. “He pushed us to think big, more than we dared ourselves. And he never headed for an exit. His express goal was to put our product on the world market”, says Schoeters.
IPEE has achieved impressive growth since then. The product range was expanded and new sectors were broached: educational institutes, office buildings and hospitals. The technology is now used by Kinepolis, Texaco, Schiphol and Changi Airport (Singapore).
“We very soon turned to Asia, because new technology is embraced more quickly there”, Geraets explains. The IPEE technology is distributed in Singapore - where the scale-up has its own sales office - China, Thailand and Vietnam, among other places. About half the turnover comes from abroad, although the coronavirus crisis will leave its mark this year.
“My biggest headache is achieving healthy growth”, says Bart Geraets. One advantage for IPEE is that in coronavirus times, hygiene stands high on the agenda. The scale-up's touchless toilet facilities meet that demand.
At the same time, the shortage of water and the need to use water sparingly is very topical. Geraets: “We notice that in these strange times we are gaining an even bigger foothold. In the midst of the coronavirus crisis we concluded a contract with the world’s biggest manufacture of toilet facilities. Now it’s a matter of further professionalising our business, the personnel policy and the marketing.”
The company’s main bank is an important partner here. Schoeters: “It is more than just a financial organisation. We have already come into contact with the right people via the bank’s network several times. Our bank feels more like a supporter that is also putting its weight behind our story.”