In Clayton Christensen’s latest article in HBR (Dec 2015) “What is Disruptive Innovation”, he reminds everyone, rather sternly (or is it just me?) what his definition of disruption is. As he is the father of the theory, we should give it due air time. He asserts that disruption is when a new entrant begins to take ground in a previously unserviced and low end part of the market.
That gradually, these entrants can start to improve the quality of their more inferior product to attract the mainstream customers currently serviced by the incumbents. In this way the new entrant has expanded the size of the market by bringing new users into it, in the early phase. So an example of this, Christensen gives, is how the Apple iphone disrupted laptops by providing a “first link” to the internet and thus appealed to those who couldn’t afford a computer. Uber on the other hand did no such thing and was not disruptive.
Uber is a “sustaining innovation” and thus when they entered the market, they went straight for mainstream consumers. The product was comparable quality from the beginning. Lets call these “competitors”.
A way to summarise this would be:
Christensen laments the overuse of the word disruption, and let’s face it – it is getting a thrashing. But is it important to make the distinction he does above, when nearly everyone would think of Uber as disruptive? It has certainly turned the Taxi industry upside down.
I think it helps our thinking to make the distinction but I want to take it a little further because the activities required to prevent impact from each are very different. That is, our strategy and reactions can be very different in each situation.
Virgin Australia has followed a disruptive path. It entered the market as low cost carrier (2000), Virgin Blue, (just as Southwest Airlines and Ryanair did in other markets) and initially brought more customers into the market. Instead of driving from Melbourne to Sydney, it was suddenly an option to fly affordably instead. Quality and service improved quickly and in 2003 Qantas launched Jetstar to protect itself from the price war. In 2011, Virgin Blue upgraded to Virgin Australia and put itself on the same level as Qantas.
In my previous blog I likened an incumbent to a Sumo and a new entrant to a Ninja. If we continue down this path, what would a Sumo do in the above two situations?
Reactions to a “Competitor”
What should our incumbent Sumo do when a “Competitor” comes along? A likely reaction is to compete aggressively to try to squash the immediate, clear and present danger.
The PC price wars of the nineties and noughties, with HP trying to fight off Dell, culminated in HP labelling its PC business as strategic and essentially cutting prices to the thinnest possible margins, about 1%. There are several other mitigation strategies that go beyond starting a price war,when it comes to new sophisticated competition. These include introducing more pricing complexity, loyalty tiers, bundling, and working to make the battleground non-price (eg. performance).
Now how reactions to a “Disruptor”
One option would be to lower price and stop adoption to the Disruptor, similar to above. This can work, but for obvious reasons is rarely done as it lowers prices and margins to current customers too, hard to avoid. Qantas fought a bloody price war with Virgin Blue estimated to cost billions of dollars with Qantas producing its worst results in its 90 year history in the 2013/2014 financial year.
A second common option is, in the theme of Consumer Marketing, to introduce a “Flanker Brand”. Whether it’s a brand or just a product, we can leave it to fight at the lower end of the market whilst we focus our attention on innovating the next product, business model, revenue model, service model or distribution model. (As Qantas did with Jetstar above). This can help to prevent mainstream market cannibalisation.
Clearly the issue here is twofold….
Firstly we need to be good at innovation and the innovations need to be ready when we need them and secondly we need to have noticed the disruption. Or perhaps more poignantly, not only do we need to have noticed the disruption but it must be acknowledged for the potential threat it represents. Neither of these, innovation nor disruption discovery happen without internal programs and conscious effort on the part of organisations. History would tell us that many companies struggle with this.
There is no doubt that there are a myriad of costs, investment and management time involved in finding and competing with disruptors which brings us to the catch cry of the moment, ”Lets disrupt ourselves, lets disrupt our company before someone else does”. There are some very good practices on how to go about increasing our chances of success in this, whilst acknowledging (1) most of the occasions this phrase is uttered there is no real intent to do any such thing and is token attribution to the God of business success and (2) there is no single blueprint for business success. But more on that in a future blog… As Clayton says, we still have a lot to learn and I think he may have been ahead of us for a very long time already.