Patrick Schwerdtfeger is a keynote speaker and business futurist who can cover Disruptive Innovation at your next business event, including predictive models and proprietary frameworks to help business executives predict the future in their respective industries. Contact us to check availability. The full transcript of the above video is included below.


Full Video Transcript:

Hi and welcome to another edition of Strategic Business Insights. Today we’re going to be talking about disruptive innovation and how to predict the future in your business. And you have to understand right off the bat that there are two types of innovation. There’s incremental innovation, which comes from the center of your field, the center of any given industry. There are experts that are refining processes, making incremental improvements year after year after year to increase productivity, create a better-quality product. That’s innovation and it comes from the center of your industry – incremental innovation. But the other type of innovation is disruptive innovation, and it tends to come from the sides. It comes from the edges. Disruptive innovation comes from what I refer to as adjacent markets.

And the distinction is that disruptive innovation invalidates existing business models. Incremental innovation does not invalidate your business model—it supports your business model—but disruptive innovation comes in and invalidates the model entirely and brings in an entirely new model. That’s why it’s so important. That’s why it’s critical for today’s executives to understand disruptive innovation, because you know what? Quite often they get caught off guard. Executives get caught off guard. There are so many stories of companies where the executives, very smart people, were completely caught off guard by disruptive innovation and saw their companies go bankrupt as a result. Kodak is a perfect example, but there are many that are in this camp.

So when you think about the adjacent market, think about examples like Apple, for example, Apple disrupted the music business, which of course today that’s a foregone conclusion, but back then when they first made that announcement that was shocking. It was very incredible. Who thought that a technology company would come into the music business? It was a surprise in the beginning. And then, of course, Apple disrupted the phone business as well and so did Google with their Android platform, and there are countless other examples of Facebook Messenger disrupting SMS, Uber disrupting the food delivery business with UberEATS, Tesla disrupting the—and Google and Apple for that matter, all disrupting the—automobile industry. Tons of examples. These are adjacent markets. The disruptive innovation comes from the edges.

So there’s a series of questions that you can use to understand or maybe anticipate where the disruptive innovation is going to come from. For example, who is your worst supplier? Can you do that in-house? Can you do it in-house? Can you do it better than they do it? What’s the biggest threat to your industry? Write some of these questions down.

If you look up the supply chain, who’s your worst supplier? You can also look down the supply chain: What else do your customers want? What’s the completely unrealistic thing that your customers are asking for? One day’ someone’s going to provide that. One day, someone’s going to provide that for them.

In fact, disruptive innovation quite often appeals to the least profitable market segment first. So when you think about your business, what is your least favorite, your least profitable market segment? The people that come in, the customers where you’re like, “Oh I hate these types of customers. I can’t make any money on this type of business,” who is that for you? What’s that market segment for you? Someone’s going to come and satisfy that market segment with a cheaper, simpler, more effective solution, and if it gains traction in that least profitable market segment it has the potential to go all the way up and disrupt the entire industry including the customers that you love. It’ll start with the customers you hate, but it’ll go from there.

How could your assets be used differently? That’s another brilliant question. How can your assets be used differently? So these questions can help you map out what’s likely to happen. Who’s your least profitable market segment? Focus on that one. It’s incredibly important.

And again, the real innovation comes from the fringe. So when you’re looking for content or you’re doing research to try and understand where trends are likely to go, figure out who’s the fringe in your industry. Let me give you an example. In the health supplements, nutritional supplements, what’s the cutting edge of nutritional supplements? Or, where is it, I should say? It’s in horseracing.

It’s in horseracing. That’s where they test because that’s not regulated by the FDA. It’s on the fringe. And so people in that category, let’s say they have a horse which is good but just isn’t as good as the top horses, they’re going to test whatever they can to try and give that horse an advantage. That’s where creatine came in. It was tested in horseracing first. And all these other nutritional supplements, the cutting edge is in horseracing.

The cutting edge in online marketing is in gambling, online gambling, and porn. And the information marketers, the gurus, they are the ones who test the cutting edge strategies like tripwires, click funnels, and all sorts of things that people are using today. The corporations are starting to use them but they started first in other industries like gambling and porn and information marketing. So innovation always comes from the edges. We have to keep our eyes on the edges.

Now, here’s another thing for predicting the future. They talk about artificial intelligence and how technology is going to be replacing jobs in the years to come. In fact, there was a study out of Oxford that said that 47% of US jobs are likely to be replaced by technology in the next 20 years or so. That’s a very scary proposition. So let’s look at a model that we can use to try and anticipate what’s going to happen and in what order.

So in the economy we have manual tasks and we have cognitive tasks, and in each of those categories you have repetitive tasks and nonrepetitive tasks. So you have manual repetitive and cognitive repetitive, you have manual nonrepetitive and you have cognitive nonrepetitive. Well, the manual repetitive jobs are going to get replaced at some point in the future with robotics. Manual repetitive jobs are going to be replaced by robots. The cognitive repetitive tasks are going to get replaced by algorithms at some point. We don’t know if it’s going to happen next week, next month, a year from now, five years from now, but at some point the cognitive repetitive tasks are going to get replaced by algorithms.

So just with that model you can look at your own job, the job that you have in your company or in your business, and you can look at all the other job functions that are around you in your business or in the company that you work for and you can immediately see which tasks are likely to be replaced at some point by technology, whether it’s robotics or whether it’s algorithms. And you can write them down, make lists of each of those. Then, you can put them in the correct order because technology works its way up a ladder of complexity. So, over a period of time, technology solves increasingly complex problems. So take your manual repetitive tasks and your cognitive repetitive tasks and sort them by the simplest at the top going down increasingly complex. So now you have an order in which those tasks are likely to be replaced in the future. These are models that you can use to literally predict the future because you can see them coming and you can plan for them. When you plan for them, you’re increasing awareness, and when you increase awareness you’re going to be increasingly at the cutting edge of it yourself. In other words, you’re not going to get caught off guard.

The other thing that’s very important to keep in mind is that any presentation about innovation or book about innovation, any discussion about innovation really boils down to one concept and it’s budgeting failure. You have to be willing to budget failure. You have to be willing to take a risk. Jeff Bezos, the CEO of Amazon, that guy is brilliant, a personal hero of mine. He has some great quotes and one of them was that if you know it’s going to work it’s not an experiment. “If you know, it’s going to work, it’s not an experiment.” When we’re talking about budgeting failure, we’re talking about taking risks that might fail. You have to be willing to take those risks. You have to budget. You have to put money aside knowing that it might not work out. In fact, Jeff Bezos also said that if you have a 10% chance of getting 100X return, you would take that bet all day long. Mathematically, it’s a guaranteed winner. But you’re still going to lose 90% of the time. You’re still going to fail 90% of the time. Even though mathematically a 10% chance of getting 100X return is a no-brainer, you’re still going to fail 90% of the time because a 10% chance of success implies a 90% chance of failure. Innovation requires budgeting failure. You have to be willing to budget failure.

That introduces another model that you can use to see when it’s time to invest because you can look at your industry and sort all the companies by their gross margin. So you have the highest gross margin on one side and the lowest gross margin on the other. Well, innovation is going to start in the highest gross margin segment because they can afford to lose.

Look at Google, for example. Google has like a 95, 98% gross margin. There’s no incremental cost to what they sell. There’s a huge fixed cost in building the technology platform of their AdWords and AdSense platforms, but the incremental cost of one more sale is almost nothing. So their gross margin is very high. That’s why Google can afford to invest in all these cutting-edge technologies. And the thing is, the cost structure comes down over time, so allowing them to do those initial experiments and potentially fail and go through that trial-and-error process, you wind up getting used cases and success stories that you can use for much cheaper a year or two later.

So within your industry, look at who’s in the high-gross-margin segment and follow what they are doing and see as it comes down to closer wherever you are on that scale. When it gets close, that’s when you need to invest, and that way you can get the benefits for the least possible cost. You can predict the future. You can plan for the future. That’s why the gross margin of your business is so important. You need to protect your gross margin because that’s your lease on life. That’s your lease on innovation. That’s what gives you the ability to innovate. It’s very, very important to protect your gross margin and your business so that you can innovate as aggressively as possible, which will give you a competitive advantage over your competitors, over your peers in your industry.

Another thing I want to mention here—this is all with the idea of modeling the future. These models and frameworks are incredibly powerful. And if you pan out as a speaker—I specialize in technology trends and as a consultant, so I’m always using these models and these frameworks as a way to try to understand what’s happening—and if you pan out as far back as you can go, there’s one primary trend which is playing out in every industry, some ahead of others across our economy, and that is that we’re going from centralized structures to decentralized structures. And technology facilitates that. So as technology moves up the ladder of complexity, it allows a more and more decentralized functioning within that industry.

And a perfect example today is the media industry. So years ago, 20 years ago, 15 years ago even, we had just a small handful of large centralized media outlets, but then the Internet came along and the blogosphere took off and YouTube and videos like this and podcasting and so many other things, and all of a sudden now we have millions of individual players that are all contributing to our media environment. And the election that we had in 2016 in the United States was a perfect example of that because you ended up having a million different subgenres of media providers. They were all accusing each other of fake news. Everyone was saying the other was fake. You had the evangelical. You had the left-wing liberals. You had the intelligentsia. You had the alt-right. You had the Tea Party. You had the mainstream media. You had Fox News, which was in a category of its own. All of these different media environments, it’s a decentralized structure today. And what is that, really? It’s a form of anarchy. It’s a form of anarchy, and of course we have this negative connotation of the word “anarchy,” but the fact is that we have anarchy in our media environment today.

So how do you transfer that reality into your industry? For example, what does the banking sector look like with a similar type of anarchy? See, it’s still functional. Our media environment still functions fairly well, but there is anarchy at play. You have people with vastly divergent views with completely different understanding of the truth or reality or fact or any of that, and you have those traditional measures. They’ve all now been taken into their own genres, their own silos, with different meanings for everybody. That’s a form of anarchy. So what does the banking sector look like with that type of anarchy? What does the insurance sector look like? What does distribution look like? What does manufacturing look like? What does retail look like? This same trend of going from centralized structures to decentralized structures is going to play out in every different industry.

Now, again, going to the centralized versus decentralized, let’s take a look at open source. The open source revolution is just getting started. So for example, Linux is an open source platform. Apache is an open source platform. WordPress, Joomla, Drupal, all these platforms is countless examples of—and now of course Android is open source, and now Google has announced their TensorFlow, which is an artificial intelligence, also open source platform. Tesla has made all of their plans open source. So these are examples of—and many more things are going to become open source as time goes on. So imagine an Uber, the company Uber, without the company Uber. It’s just an online platform on the Internet where people can be either drivers or they need a ride and they connect with each other through this platform but there’s no central company taking a cut. Imagine an Airbnb without the company Airbnb. Imagine a Skype without the company Skype. There’s countless examples of things that are going to become increasingly open source. And of course, the cryptocurrency market with Bitcoin and blockchain, that also facilitates this trend from centralized to decentralized structures.

So again, keep these models in mind. Innovation comes from the edges, comes from adjacent markets. It generally comes from the least profitable market segment first. Who is your least profitable market segment? Innovation comes from the fringe. So keep an eye on the fringe and look past the crazy, because the fringe is characterized by crazy. So you have to look past that to see, “Where are the juicy nuggets? Where’s the traction? Where are people getting excited on the fringe?” and then anticipating that that’s going to come into the mainstream over a period of time. Looking at your job tasks, what’s repetitive? What’s nonrepetitive? When are they going to get replaced by technology and in what order? You can predict the future. Maintaining your gross margin and looking at businesses in your industry that have a higher gross margin than you Following their innovation to see how it’s propagating through your industry. And finally, keeping your eye on the ball, which is that one enormous trend of going from centralized to decentralized structures. Your industry is going to become increasingly decentralized as time goes on, so whoever in your industry has power today, they will have less power tomorrow. Their power is going to diminish as technology allows a more decentralized structure to prevail in that industry segment. These are models and frameworks that you can use to understand disruptive innovation, and indeed, predict the future.

Thanks so much for watching. My name is Patrick, reminding you once again to think bigger about your business, think bigger about your life.

Patrick Schwerdtfeger is a keynote speaker who has spoken at business conferences in North America, South America, Europe, Africa, the Middle East and Asia.