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Juan MC Larrosa
WHAT EVERYONE NEEDS TO KNOW ABOUT DISRUPTION
Every start-up from every incubator claims to be disruptive nowadays, but the claim always falls apart under any close examination. Usually it’s one of these three reasons.
THERE ARE 2 TYPES OF DISRUPTION
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Often CEOs declare their product to be disruptive, but fail to define in what manner. There are two types of disruption, and each one has a different measure of success. It is possible for a product to be disruptive in both styles but, if that is the plan, then progress must be measured accordingly.
New Market Disruption occurs when a product addresses non-consumption in an existing category, i.e. it is available for customers in a way the incumbents aren’t.
It could be cheaper, available in more places, in more countries, in more languages, etc. For some reason there are customers who can’t use the existing products, but they will be able to use this new one.
You can only claim your company is disruptive through new markets when the majority of your customers are unable to use any of the incumbents in the market.
Ryanair, the low cost airline, created an entire new market of budget travellers, not by stealing customers from Lufthansa or KLM, but by offering routes no one else did at prices that competed with trains and bus routes.
Low End Disruption is when a product steals the cheapest and worst customers from the bottom of an existing market, usually by figuring out a business model that works with a lower-cost offering. This opportunity presents itself when the leaders of the market are producing products far above what the market wants or needs. It’s also important to note that cost refers to “cost of use”, which is not necessarily financial. For example, it’s cheaper to tweet than it is to blog.
The product is clearly lower quality but the switching customers don’t notice or care as they are over-served by the existing products.
You can only claim your company is low end disruptive when you have a working and profitable business model that is stealing low value customers from incumbents.
An example of this is the Flip digital camera which stole customers from the digital camera companies by being more affordable and easy to use. Bought for $590,000,000 by Cisco, Flip was the darling of the camera industry, the poster child of low-end disruption. What could go wrong, right?
It turned out there was an even worse video camera at an even lower price point that the public were happy to use: the free camera found in iPhones and Android phones. 2 years after its acquisition Flip got to experience low end disruption itself. It was shut down, and 550 employees were made redundant.
This happens quicker than you’d think, which brings us to the next point.
DISRUPTION CAN BE SWIFT
The seminal examples of disruption are things like Intel processors, steel mills and mainframe computers. This creates the impression that disruption takes years, even decades to fully impact an industry.
But that is not the case. In a world of online retail, app stores, and instant global availability market adoption takes minutes, not months. Whenever you see a claim of “fastest selling X in history” always remember that adoption is very quick these days and it’s accelerating. For example, Windows 3.1 sold 1 million copies in 2 months. Windows 8.0 sold 40 million copies in less than half the time.
Flip, as explained above, spent a mere 18 months at the top of the market before capitulating. Another example of is that of the satellite navigation companies Garmin and TomTom. In September 2007 they were worth a combined 38 billion dollars. A mere 12 months later, they weren’t even worth 8. What happened? The iPhone.
A 38 billion dollar industry loses 3/4 of its market cap in a year because someone decide to add a maps app to the home screen. Like I said, this happens quicker than you’d think.
If you’re claiming your product is disruptive and there aren’t barriers to adoption (e.g. technological/infrastructural barriers, existing long term contracts, language barriers, price barriers etc), then you should be expecting a massive adoption rate at a high speed. If you’re seeing slow adoption over time you can still have a successful billion dollar business, but it’s probably not a disruptive one.
LOW PRICE ALONE IS NOT DISRUPTIVE
Disruptive innovations stem from technological or business model advantages that can scale as the business move upmarket in search of more-demanding customers.
Often you’ll see a new business appear offering for pennies what others charge thousands for. The above example highlights this. While a roadside motel offers the same product as the Four Seasons, it will not disrupt it, because to attract the customers who visit the Four Seasons it will need better locations, better gardens, better staff, and better facilities. In short, it will need to adopt the identical cost structure of the Four Seasons, meaning it could no longer out-price them.
The web version of this can be seen every few months when a new stock photography site appears, selling imagery for $1 per picture and claiming it’s disrupting GettyImages. Again, to move upmarket and appeal to magazines and high end design houses, they need to start hiring more talented photographers and offering a wider range of imagery. Doing this would see them adopt the Getty Images cost structure, and therefore not disrupting them.
There is, however, an opportunity for new market disruption here, in that plenty of the market will pay for 600px images to use in blogs and newsletters, are less quality sensitive, and cannot justify high costs per article or newsletter.
A BUSINESS DOESN’T NEED TO DISRUPT
Not all successful businesses are disruptive ones. It’s entirely possible to just go toe to toe with an existing business and beat them at their own game. This can happen in lots of ways: better technology, design, product, route to market, price, etc. This is described in the graph above as “sustaining technology”, and is a well proven way to take.
If you are claiming your product is disruptive, keep note of 3 things. You have to decide what way it’s disruptive (so you can measure success), you don’t necessarily get a long time span to do your disruption, and if being cheap is your only angle you’re not disruptive.
This isn’t as easy as blindly screaming disruption every time someone launches “Spotify for Dentists”, but it’s worth considering nonetheless.
Inside Intercom
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