How constant disruption has brought Darwinism to the marketplace
There was a time when referring to a company as “iconic” was a way of summarizing a certain set of characteristics that seemed desirable in a business: Stable. Powerful. Influential. There was a Blockbuster in every strip mall, a General Foods box on every supermarket shelf. People drove Oldsmobiles to Amoco stations and read newspapers that were delivered to their doorsteps.
But in this era, when the phrase “too big to fail” is starting to sound as ironic as calling the Titanic “unsinkable,” household name brands aren’t the only endangered species in the business world. Entire industries — from banking to transportation, hospitality to retail — wake up every morning to new realities, thanks to a cycle of unprecedented disruption that is gaining speed with each business cycle.
A generation ago, nobody would have imagined buying lunch with a pocket-sized phone, choosing from among hundreds of TV series to binge-watch all weekend, or taking live classes from a professor in another state. A generation from now, we are as unlikely to recognize our current way of life in the day-to-day routines of our children. And it’s all thanks to disruption caused by innovators who are constantly in search of new ways to engage customers by tapping into a deep vein of unmet needs.
Tepper School students need look no further than their doorstep to see that this is true. The steel industry, once synonymous with Pittsburgh, vanished in a puff of furnace smoke when foreign competitors found cheaper ways to make the same products.
The difference today is that technological advancement is allowing disruption to occur at a much more rapid pace. To stay ahead of the curve, the Tepper School is training its students in theories of innovation that can be adapted and applied at a pace that matches the shifting landscape.
In search of a better way
Though it may sometimes appear that successful entrepreneurs simply caught lightning in a bottle, the truth is more complex — and more calculated. At its core, disruption happens when an idea addresses an unmet need, and these usually fall into a classic set of categories, argues Peter Boatwright, Carnegie Bosch Professor of Marketing and co-director of the Integrated Innovation Institute.
“Some people might talk about the fickle marketplace. I would suggest that people’s desires don’t change very rapidly if you move to a deep enough level,” he said.
For example, people enjoy freedom from constraints. That desire doesn’t change, but technologies do, he said, making innovation possible.
That was the driving principle behind NoWait, a technology company that allows customers to use their smart phones to put themselves on the wait list at a restaurant remotely, then walk in when their table is ready.
Robb Myer, MBA ’06, had the idea for the company when he was looking for a place to eat brunch in San Francisco.
“I like to say I was a guy waiting in line, looking for a better way,” Myer said.
When one restaurant took his phone number and offered to call him when the table was ready, Myer had an epiphany: “I thought to myself, ‘This is a very simple level of hospitality that they’re giving us. Why doesn’t every restaurant offer that kind of service?’” And a company was born.
Six years later, NoWait connects about 20 million people every month to more than 3,500 restaurants nationwide, and employs 65 people. Its mantra is “Give people back their time,” and it allows restaurants to serve customers efficiently while also providing data on table turnover and customer reviews. Additionally, Myer says, more people patronize the restaurant if they can add their names remotely instead of waiting on-site.
The goodness factor
Another key motivator, according to Boatwright, is the customer’s desire for safety and security. That concept was illustrated when 4moms, a technology company that produces innovative baby products, realized that four out of five car seats are installed incorrectly.
With the help of automatic leveling and tensioning, and a smartphone app that monitors the seat’s status while it is in use, 4moms developed the self-installing car seat. Other products, such as a temperature gauge for bathtub faucets and an infant tub that constantly exchanges dirty water for clean, play into the same customer wants.
Mara McFadden, MBA ’10, was drawn to 4moms to serve as its director of product management after previously building a career in the medical device industry.
“What really appealed to me was this commitment to the vision of making dramatically better products,” she said. “We’re not going to make a car seat if we’re just going to make it a tweak better.”
Dave Mawhinney, associate teaching professor of entrepreneurship, executive director of the Swartz Center for Entrepreneurship, teaches students to avoid the so-called “me too” value: “You have to differentiate or die.”
Rather, he urges students to seek “the goodness factor,” a term coined by the entrepreneurship center’s namesake, the late Don Jones, former adjunct professor of entrepreneurship at the Tepper School and well-known tech entrepreneur who endowed the creation of the center. That means providing a product or service that is three to 10 times better than its competition at the same price, or three to 10 times cheaper at the same value.
As a rule, most people don’t want to change, so a newcomer must be that much more compelling to achieve disruption. But measuring that value is among an entrepreneur’s most difficult tasks.
Mawhinney advises students to break their product’s benefits down to these building blocks of value: saving time, saving money or creating new relationships that are valuable to customers. These, he said, become the return on investment calculations that students must make.
“Facebook is what it is today because it allowed people to create new relationships that they value and maintain relationships that are hard to manage when you have limited time,” Mawhinney explained.
But being able to deliver something much better or much cheaper is paramount, he added.
“If you don’t do those first two right, nothing else matters,” he said.
Generally speaking, any sector that has been relatively unchanged for decades is probably a good candidate for disruption. Yet despite being inundated with products, consumers are never satisfied to the point where they refuse to consider something new, observed Sunder Kekre, Bosch Professor of Operations Management and director of the PNC Center for Financial Services Innovation.
“There’s a point beyond which your psychological needs take over,” Kekre said. “You need something different.”
When 4moms began, its genesis was using low-cost electronics and robotics to shake up an industry. At first, co-founders Rob Daley, adjunct professor of entrepreneurship, and Henry Thorne, EMP ’00, E ’84, E ’82, planned to target the plumbing industry and do-it-yourself–minded men between 18 and 34. The company’s first product, a showerhead prototype that controlled water temperature, appealed to mothers who wanted to make sure they didn’t scald their children in the bathtub.
Realizing that the baby products industry hadn’t changed much in the past 100 years, Daley and Thorne had stumbled across their niche. They tackled strollers that were hard to fold and car seats that were difficult to install. An infant seat that mimicked a mother’s soothing motion when she rocks her baby — the mamaRoo® — was an instant hit.
“At first, when we talked to retailers about it, they didn’t know what to do or where to put it in the store. But parents got it right away,” McFadden recalled. “If your insight is strong enough, the market will move to you.”
Likewise, technology must be developed enough to allow cost-effective implementation of the idea. Myer’s epiphany of eliminating the need to wait for a restaurant happened in 2009. What made his company possible in 2010, but would have been impossible in 2008, was the proliferation of text messaging, which NoWait uses to notify people that their tables are ready.
Removing barriers through technology
Technology is also the engine that drives disruption within the supply chain. In India, the tea business — once dominated by a few big players — is seeing new competition from small growers who are able to ship hundreds of varieties in three days thanks to services such as Fulfillment by Amazon, which help the growers with advanced logistics and web-based order management.
“It’s a breath of fresh air,” Kekre said.
Mike Miller, MBA ’11, a senior manager and category leader for several divisions of Amazon, was in charge of developing Amazon Wine, which provides an international marketplace for wineries and wine resellers to connect with customers.
“When you’re not talking about a physical store that has practical inventory limitations, you have a lot more freedom,” Miller said. “That gets to the disruption: You’re no longer bound to physical inventory and the needs of a distribution system. It comes down to ‘Did you produce this thing, and do you want to sell it?’ If the answer is yes, then you can put it on.”
He recalled how a Washington state winery initially offered six bottles of wine on the Amazon site. Miller asked if they had any others, and discovered that they actually had hundreds of vintages dating back to the 1990s.
“We were inferring a limitation based on those six bottles of wine that no longer existed,” he said. “There’s nothing preventing them from bringing all those other bottles of wine. Your own mind, your own frame of reference is what creates those limitations.”
Amazon, a company that has become synonymous with innovation, has been able to reinvent itself through a variety of business ventures by observing one of entrepreneurship’s golden rules: Know thy customer. According to Mawhinney, it is the very first principle he teaches, and it applies to both startups and large, established companies.
For example, a substantial number of consumers search for handmade products, something offered by sites such as Etsy and eBay, but not Amazon, which built its reputation on listing existing products and delivering them quickly for a good price.
By contrast, handmade products are not always created at the time the customer places the order. Amazon needed to invent a process for customers to specify a product they wanted an artisan to create without being able to preview that item.
“When I think about innovation at Amazon, these are the kind of problems that I’m solving,” Miller said. Handmade at Amazon launched in fall 2015.
The fintech revolution
Even an industry like banking, an American institution, is experiencing its share of disruption. Customers conduct many of their transactions online, through smartphones and automated teller machines. The rise of financial technology companies — known as fintech — also is challenging banks’ dominance in lending and investments.
“At the core of what they’re trying to do is disrupt our industry in what is a very positive way for consumers. I compare it to the dot-com boom,” said Karen Larrimer, who recently was named head of retail banking for PNC Financial Services.
After the dot-com bubble burst, “what we were left with is the underlying technology that was created. With fintech, we’re going to be left with the underlying technology, and the ideas that are being created today to change the way banking is done. And even more importantly, they are where our consumers want us to be, which is speed, agility — to get a loan in a matter of minutes instead of a matter of weeks,” Larrimer said.
Where PNC once considered other banks its competitors, it now sees them as allies in the effort to evolve. Toward that end, PNC is drawing on expertise from Carnegie Mellon through the PNC Center for Financial Services Innovation, which Kekre directs.
“Carnegie Mellon has helped advance some of our products just by taking a different look at it and as a fresh lens on what the consumer or the corporate customer wants to see,” Larrimer said. “It brings a whole new viewpoint to us in terms of leveraging the data and the information we have about our customers in new and different ways.”
Fintech firms can provide services that banks can’t offer due to industry regulations, Kekre noted.
“The banks ought to be worried. It’s death by a thousand cuts. These little guys are whittling away at their services,” he said.
He believes banks should identify and partner with the best fintech firms in terms of their ability to attract customers and create interfaces. The fintech firms, in turn, can ride on the banks’ backbone, creating a win-win for everyone.
Larrimer agrees. “They need our customers, and they need some of the things that we offer. And it’s going to be the power of some of those partnerships that come together that will really yield a result.”
Hacker, hustler, designer
In addition to the “goodness factor,” Mawhinney teaches another strategy for cultivating innovation: the interdisciplinary team. The classic makeup of such a team is the hacker, the hustler and the designer, he said: a technical expert, a business person and a person who makes the idea look good.
At 4moms, teams closely mimic this model. Each team includes the leaders of the supply chain, engineering and industrial design and a product manager, known within the company as the “band of siblings.” Those teams sit together within the company’s flexible work space, allowing them to bounce ideas back and forth.
“I think organically, that really helps our innovation process,” McFadden said. “The best ideas can come from anyone, at any time.”
Physical proximity of team members is key to effective collaboration. According to Mawhinney, AT&T’s Bell Laboratories used to create subtle opportunities for teams to interact by placing bathrooms at the end of long hallways, which encouraged people from different departments to walk past each other.
Miller calls the Tepper School’s entrepreneurship classes “the hallmark of what we do” at Amazon. He recalled how all successful alumni who returned to the school to talk to students emphasized the value of organizational behavior. At the time, that endorsement surprised him — but now he understands what they mean.
“If you’re solving big problems, you have to work at scale through other people,” he said. Building and working with teams, navigating interpersonal conflicts, and creating a common vision all require the skill sets that organizational behavior courses confer.
Because the Tepper School’s approach to innovation is based on teaching a mindset, the utility of that education extends beyond would-be entrepreneurs.
“You can be a disruptor and an innovator in a large organization,” Mawhinney said. The difference is that within a corporation, innovation requires an in-house mentor.
Given the university’s strengths in technology, computer science, robotics and business — along with the plans to build the Tepper Quad, a structure designed as a catalyst for innovation — Boatwright believes Carnegie Mellon is well poised to develop the next generation to change the world.
“I’m really excited about the university as a whole,” he said. “I don’t know where the world’s going, but I think Carnegie Mellon’s in a great place for that future.”
Mawhinney said the university must stay on its toes, because the bar for achieving “the goodness factor” is rising: In past years, being three times better or cheaper than competitors was enough. But with so many players eager to take advantage of the technology that enables innovation, a factor of 10 is now a much safer bet.
“That seems hard,” Mawhinney said. “But in every industry we’re in, someone is able to achieve that bar of compellingly better or compellingly cheaper.”
That challenge is what drives innovators like Miller, who compares innovators to master chess players.
“Ultimately it comes down to intellectual horsepower. You have to have capable, highly motivated, highly intelligent, highly trained people with enough time and energy to be able to go through this process,” he said.
“It’s exciting times, because your mind and your thinking become your biggest limitation.”