The five stages of design thinking, in order, are:

Empathise, define, ideate, prototype, test

Ideate, empathise, define, test, prototype

Empathise, define, ideate, prototype, test

Define, research, build, launch, review

Build, measure, learn, pivot, scale

Which of these best fits Clayton Christensen's sense of a DISRUPTIVE innovation?

A cheap, low-quality service that serves customers the market ignored, and improves until it takes the mainstream

A premium smartphone that outperforms every rival on camera quality

A cheap, low-quality service that serves customers the market ignored, and improves until it takes the mainstream

A well-established firm cutting its prices to defend market share

Any new product that quickly becomes very popular

Porter's Five Forces include all of the following EXCEPT:

Availability of venture capital

Innovation Frameworks, Business Models and Unit Economics

This chapter has two halves, and they are asked very differently. The frameworks — design thinking, the business model canvas, disruptive innovation, blue ocean, five forces — are recall questions, usually paired with the author who proposed them, and there are only about a dozen worth knowing. The unit economics — CAC, LTV, burn, runway, contribution margin, break-even — are one-line calculations, and they are the only part of Innovation & Entrepreneurship where you can derive an answer instead of remembering it. That makes the second half the more dependable marks, and it is where a candidate with a quantitative background should start. Both halves are also the vocabulary of the business news that the General Awareness section draws on, so nothing here is spent only on this section.

Kinds of Innovation

Four labels, each with a test
Kind	The test that identifies it
Incremental	The same product, better. Most innovation is this, and it is what established firms are good at.
Radical / breakthrough	A new technology creating a capability that did not exist. Rare, and expensive to attempt.
Disruptive	Starts worse on the measures existing customers value, serves an overlooked segment cheaply, then improves until it takes the mainstream. The term is Clayton Christensen’s, from The Innovator’s Dilemma (1997).
Frugal / jugaad	Doing more with fewer resources, under constraint — associated with India and written up in Jugaad Innovation (Radjou, Prabhu and Ahuja, 2012). Not the same as cheap imitation: the constraint drives a genuinely different design.

⚠️ "Disruptive" does not mean "very successful"

In ordinary use, disruptive means any product that shakes a market. In Christensen's sense — the one the exam uses — a disruptive innovation must begin as inferior on the attributes incumbents compete on, and win from below. A premium product that beats incumbents on their own terms is a sustaining innovation, however dramatic its success. Options exploit this difference constantly.

The Named Frameworks

Design thinking — five stages: empathise, define, ideate, prototype, test. Popularised through Stanford's d.school and the design firm IDEO. The order matters and is asked: empathise comes first, because the method's whole claim is that the problem should be understood from the user's side before a solution is proposed.
The Business Model Canvas — nine blocks, by Alexander Osterwalder and Yves Pigneur. Customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure. Learn the count (nine) and the two that are most often confused: a value proposition is what the customer gets, a revenue stream is what you get.
The Lean Startup — build, measure, learn, by Eric Ries. The loop, the MVP and "validated learning" all come from here, as does the instruction to treat a business plan as a set of hypotheses to be tested rather than a document to be executed.
Blue Ocean Strategy — W. Chan Kim and Renée Mauborgne. Rather than competing in a crowded market (a "red ocean"), create uncontested space where competition is irrelevant. The contrast with Porter is the point: Porter asks how to win the existing game, this asks how to change it.
Porter's Five Forces — Michael Porter. Competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers. Five, and the two "bargaining power" forces are the pair most often left out of a four-item distractor.

Revenue Models — How the Money Arrives

The models a question can name
Model	How it charges
Subscription	A recurring fee for continued access. Predictable revenue; the number to watch is churn.
Freemium	A free tier for everyone, paid features for a few. Distinct from a free trial, which expires — freemium's free tier does not.
Marketplace / commission	Takes a cut of transactions between two sides it brings together. Owns no inventory.
Aggregator	Brings suppliers under its own brand and sets the price and the standard. This is what separates it from a marketplace, where sellers keep their identity.
Advertising	The user is not the payer. Revenue scales with attention, not with the number of paying customers.
Razor and blades	Sell the device cheap, earn on the consumable that it needs. The lock-in is the model.

Unit Economics — the Calculable Half

Six formulas, each one line
Quantity	Formula
CAC — customer acquisition cost	Sales and marketing spend ÷ new customers acquired
LTV — lifetime value	Revenue per customer per period × gross margin × number of periods retained
Gross margin	(Revenue − cost of goods sold) ÷ revenue
Contribution per unit	Price − variable cost per unit
Break-even volume	Fixed costs ÷ contribution per unit
Runway	Cash in bank ÷ net monthly burn

Worked example (break-even). Fixed costs are ₹2,00,000 a month, the price is ₹500 and the variable cost is ₹300. Contribution per unit is ₹200, so break-even is 2,00,000 ÷ 200 = 1,000 units a month. Note what the answer is not: 2,00,000 ÷ 500 = 400 units, which is the number you get by dividing by price and ignoring that each sale also costs ₹300 to fulfil.
Worked example (runway). ₹1.2 crore in the bank and a net burn of ₹15 lakh a month gives 120 ÷ 15 = 8 months of runway. Founders raise when roughly six months remain, because a round takes months to close — so the number that matters is not the cash but the time it buys.
Worked example (LTV : CAC). A subscription costs a customer ₹200 a month at a 60% gross margin, and the average customer stays 20 months: LTV = 200 × 0.6 × 20 = ₹2,400. If CAC is ₹800, the ratio is 3.0. A ratio of 3 or more is the common rule of thumb for a healthy model, and one below 1 means the business loses money on every customer it wins — which is a growth engine running backwards.
Gross burn and net burn are different, and the distinction is asked. Gross burn is everything going out; net burn is outflow minus revenue coming in. Runway is calculated on net burn, so a company with revenue has a longer runway than its expenses alone suggest.

🎯 Why this half is the section's best marks

Everything else in Innovation & Entrepreneurship is recall, and recall either arrives or it does not. These six formulas turn a question into arithmetic you can do under pressure and check. Six formulas is an evening's work for a share of a 20-question section, which is the best exchange rate on offer anywhere in this paper.

Key takeaways

A disruptive innovation begins as inferior on what incumbents compete on and wins from below. A premium product that beats them on their own terms is sustaining, not disruptive.
Design thinking runs empathise → define → ideate → prototype → test, and empathise comes first on purpose.
The Business Model Canvas has nine blocks (Osterwalder and Pigneur). A value proposition is what the customer gets; a revenue stream is what you get.
A marketplace lets sellers keep their identity; an aggregator brings them under its own brand and sets the price and the standard.
Break-even volume is fixed costs divided by contribution per unit — price minus variable cost, never price alone.
Runway is cash divided by net monthly burn, and net burn is outflow minus revenue. Revenue lengthens the runway.
LTV : CAC of 3 or more is the usual mark of a healthy model; below 1 the business loses money on every customer it acquires.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Fixed costs are ₹2,00,000 per month, the selling price is ₹500 per unit and the variable cost is ₹300 per unit. The monthly break-even volume is:
1. 400 units
2. 1,000 units
3. 667 units
4. 2,000 units
Show answer
Answer: B — 1,000 units
Contribution per unit is 500 − 300 = ₹200, and break-even is fixed costs divided by contribution: 2,00,000 ÷ 200 = 1,000 units. Option A is 2,00,000 ÷ 500, which divides by price and forgets that each sale also costs ₹300 to fulfil — the standard error in this question type. Check the answer: 1,000 units bring in ₹5,00,000, cost ₹3,00,000 in variable costs and ₹2,00,000 in fixed costs, leaving exactly zero.
A startup has ₹1.2 crore in the bank, monthly expenses of ₹20 lakh and monthly revenue of ₹5 lakh. Its runway is:
1. 6 months
2. 8 months
3. 24 months
4. 4 months
Show answer
Answer: B — 8 months
Runway uses net burn, not gross. Net burn is 20 − 5 = ₹15 lakh a month, so ₹120 lakh ÷ ₹15 lakh = 8 months. Option A, 6 months, is 120 ÷ 20 — the answer that ignores revenue and uses gross burn, which is the distinction this question exists to test. Revenue lengthens a runway.
A subscription earns ₹200 per customer per month at a gross margin of 60%, and the average customer stays 20 months. Acquiring a customer costs ₹800. The LTV : CAC ratio is:
1. 5.0
2. 3.0
3. 0.33
4. 2.4
Show answer
Answer: B — 3.0
LTV = 200 × 0.6 × 20 = ₹2,400, and 2,400 ÷ 800 = 3.0. Option A, 5.0, comes from using the ₹200 revenue without applying the 60% margin (200 × 20 = 4,000; 4,000 ÷ 800 = 5) — margin is the step most often dropped, and it matters because serving a customer has a cost. Option C inverts the ratio. A ratio of 3 or more is the usual rule of thumb for a healthy model.
The five stages of design thinking, in order, are:
1. Ideate, empathise, define, test, prototype
2. Empathise, define, ideate, prototype, test
3. Define, research, build, launch, review
4. Build, measure, learn, pivot, scale
Show answer
Answer: B — Empathise, define, ideate, prototype, test
Empathise, define, ideate, prototype, test — popularised through Stanford's d.school and IDEO. Empathise is deliberately first: the method's claim is that the problem must be understood from the user's side before any solution is proposed, so an order beginning with ideation inverts the whole point. Option D is the Lean Startup loop (Eric Ries), which is a different framework and a common distractor here.
The Business Model Canvas, developed by Osterwalder and Pigneur, has how many building blocks?
1. Seven
2. Nine
3. Five
4. Twelve
Show answer
Answer: B — Nine
Nine: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure. Option C, five, is the count for Porter's Five Forces and for design thinking's stages — three frameworks with different counts is exactly why the number is worth fixing in memory rather than reconstructing.
Which of these best fits Clayton Christensen's sense of a DISRUPTIVE innovation?
1. A premium smartphone that outperforms every rival on camera quality
2. A cheap, low-quality service that serves customers the market ignored, and improves until it takes the mainstream
3. A well-established firm cutting its prices to defend market share
4. Any new product that quickly becomes very popular
Show answer
Answer: B — A cheap, low-quality service that serves customers the market ignored, and improves until it takes the mainstream
Disruption in Christensen's sense starts at the bottom: worse on the attributes incumbents compete on, cheap enough to serve a segment they overlook, and improving until it is good enough for everyone. Option A is a sustaining innovation — better on the existing measure — which is what established firms are good at and what disruption is defined against. Option D is the everyday use of the word, and it is the option that catches most candidates.
A platform lists many small hotels, brands every stay under its own name, and fixes the room standard and the price. This is:
1. A marketplace
2. An aggregator
3. A freemium model
4. A razor-and-blades model
Show answer
Answer: B — An aggregator
Setting the price and the standard, and selling under its own brand, is what makes it an aggregator. A marketplace does the opposite: sellers keep their own identity, set their own prices, and the platform takes a commission for bringing the two sides together. The distinction is a favourite question because both look like "a platform with many suppliers" from outside.
Porter's Five Forces include all of the following EXCEPT:
1. Threat of new entrants
2. Bargaining power of suppliers
3. Threat of substitutes
4. Availability of venture capital
Show answer
Answer: D — Availability of venture capital
The five are competitive rivalry, threat of new entrants, threat of substitutes, and the bargaining power of suppliers and of buyers. Access to capital is not one of them — the framework is about the structure of an industry and where its profit goes, not about how a particular firm is financed. Note that "bargaining power of buyers" is the one most often missing from a four-item list, so check for it before answering.