What is a disruption in business?
When it comes to business strategy, the term “disruption” refers to a process through which market entrants armed with non-conventional business models, and what at the outset seems to be poor-performing products come to challenge industry incumbents over time, eventually getting them out of business.
The process that leads to disruptions has been extensively researched and is supported by abundant evidence that explains the challenges that incumbents’ executives face when attacked by disruptors.
This article covers the disruption process in detail and provides a series of steps that can help executives and entrepreneurs increase the chances of creating disruptive products.
- Explaining the disruption process
- High-end versus Low-end Disruptions
- Product Disruptions versus Market Disruptions
- Disruptive strategy: 5 Ways to Create Product Disruptions
- The best books on disruptions.
Let’s go through these sections one by one.
Explaining the Disruption Process
In the mid-1990s, Harvard professor Clayton Christensen and his colleagues researched the reasons behind the failure of once successful companies and introduced the term Disruption to explain how new market entrants, equipped with what by the industry standards looked like low-performing, unattractive products, got to displace and beat the incumbents at their own game.
Christensen explains that in most markets competition over time converges around a common definition of who the target market is and that in response, companies specialize in serving the needs of those particular segments which they protect at all costs.
To retain market share, as customer needs
If a company stops improving its products, or if the pace of improvements is lower than the rate at which customers’ needs increase, the product will lose relevance within that segment.
We can see this behavior in pretty much any industry. From smartphone vendors making their devices increasingly smarter, packing more features into every new model, to makers of consumer goods such as detergents and personal care products continually re-inventing their formulas and adding more valuable features to customers.
They are all part of a race of continually increasing the perceived value of their products in the eyes of target customers.
However, because they are competing with other companies for the same customers and along the same dimensions of value (selling a better mousetrap), differentiation usually only provides temporary advantages.
Once a company joins that race, it has to run faster than the others, or it will be left behind. If the company stops improving its products, or if the pace of improvements is lower than the rate at which customers’ needs increase, the company’s products will lose relevance in that segment.
The gradual improvement of existing products over time is what Christensen calls Sustaining Innovations since they follow a linear trajectory that is to some extent predictable, the “better, cheaper, faster” approach that we are used to.
For companies in mature industries, especially in high-tech markets, sustaining innovation is usually the main form of growth, but it is not exclusive to high-tech or consumer products. Procter & Gamble, for example, has to continually improve its products – think of its laundry detergent Tide, improving its formula to keep it relevant with target customers and retain its market position.
The problem, however, is that by protecting their markets and focusing on serving the needs of their best customers, incumbents often get blindsided and can’t identify potential disruptions when they first show up.
How disruption is the result of a good business strategy
In our discussion about business strategy, we mentioned how defending a profitable market position involves critical decisions to create a distinctive, hence tailored, Value Chain, which is in almost all cases the result of clear tradeoffs and decisions about what to do and what not to do.
A distinctive value chain is key for a good positioning strategy. However, that strength almost always creates a weakness: as a value chain gets better at satisfying the needs of a given set of customers, it becomes less good at satisfying the needs of others.
That may seem like a logical outcome and a price that any company would happily pay in trying to serve a segment profitably, but according to Christensen, it is this specialization that puts companies in a position where they can be disrupted.
What happens, Christensen argues, is that as companies focus on serving the needs of their best customers, they leave other groups of people at the low-end of the market unsatisfied. These low-end customers usually fall into one of three categories:
- Customers who use the product reluctantly, maybe they don’t have another option, but they would be happy to use a different alternative that solves the same needs for them.
- People for whom the product delivers too much, but would be happy to pay less for a simpler solution, or
- People for whom the product is out of reach, either because they don’t have the skills or wealth to use it, or just because they can’t get access to it.
The disruption framework argues that because the business’ value chain specializes on serving the needs of its best customers, it doesn’t do a good job at serving the needs of low-end (hence non-best) consumers.
That opens a back door for upcomers, usually entrepreneurs, who enter the market by specializing in serving the needs of these very people with products that, although of lower quality and performance, are more affordable and reachable to them.
These low-end attackers focus on customers who are happy to pay less, to get less. Users that don’t need the fully-fledged solutions that incumbents offer, or people whose alternative is not using any product at all.
Christensen’s work explains that executives in incumbent companies see the attack at the low end of the market, but because it is not targeted at their best customers they don’t feel the entry as a threat, therefore they don’t fight back.
What happens, Christensen explains, is that over time these new entrants increase the performance of their products way faster than incumbents’ (since they have more room for improvement) and improve to a point where their products become a serious threat for incumbents.
By the time incumbents decide to react, they can’t defend their position. Their value chain is just not good enough to compete with the emergent business model and the momentum of the upcoming entrants, and they get kicked out of the market.
The same pattern repeats over and over again in many industries: new companies enter the market attacking low-end (less demanding) customers with solutions that seem lousy at the outset, but over time improve so fast that beat the incumbents out of the market.
Following a similar dynamic, film photography got disrupted by digital photography, Walmart and other discount retailers disrupted large department stores, and Canon’s portable photocopier disrupted Xerox’s centralized photocopy units.
What we have come to understand by now, through these experiences, is that disruptions happen all the time and will continue to happen more frequently because they result from the predictable behavior of incumbents (aka good practices)
High-end versus Low-end Disruptions
The disruption process follows a pattern that repeats in pretty much any industry: New companies enter the market attacking its “low-end” customers (i.e., its less demanding users) with low performing products, and over time those solutions improve so fast that they kill the incumbents.
When Amazon.com launched its online bookstore, it became the preferred choice for customers looking for out-of-print titles and books in obscure niches. The internet, with its inexpensive cost of inventory, provided a perfect platform for a business model that offered a large selection of low-demand titles, contrasting with the strategy of brick-and-mortar bookstores like Borders and Barnes & Noble, which focused on selling a limited number of high-demand titles.
Amazon’s value network was optimized since its inception to facilitate the search process, making recommendations based on previous purchases, and cutting out the middlemen between books and buyers.
The brick-and-mortar bookstores’ business model on the other hand, tried to maximize the velocity of their in-store inventory by only carrying the titles with the most demand, which their internal systems helped identify.
But Amazon’s platform improved its reach, efficiency, and popularity so fast that by the time Borders and Barnes & Noble realized that the future of book sales was online, they were already late to the party.
They had way too much to learn and to invest in.
Barnes & Noble, although still around, was left in the dust and hasn’t been able to catch up with the giant ever since, while Borders went out of business in 2011.
Although Christensen’s works focus mostly on low-end disruptions, through our research we could observe similar behavior in products that enter a market from “above.”
For example, FedEx first entered the parcel delivery space with an overnight offer (a novelty at the time), priced higher than regular mail. Corporate customers, for whom time is critical, were delighted to pay more to get important documents delivered the next day.
Similarly, when Amazon introduced its Kindle Reader, a solution of far superior performance to existing e-Readers, it was priced at $399 at launch, way above the existing solutions at the time.
Following the usual disruptive trajectory but in reverse, both FedEx and Amazon later introduced new, simpler solutions targeting more mainstream customers. FedEx introduced a two-day delivery option priced lower than its overnight offer, and Amazon launched a lower-cost Kindle device sold at $79.
There are some special cases where a product is a high-end solution for one group of customers and at the same time a low-end solution for another, with Apple’s iPhone being one of them.
When it first came out, the iPhone was a superior product compared to RIM’s BlackBerry and other smartphones, but an inferior solution for computer users who still needed computers for more demanding applications such as document editing and spreadsheets.
Over time, however, as the performance of the iPhone improved it got more traction with both groups: it leaped ahead of smartphone competitors by adding features that their more demanding users would value and functionality that mainstream computer users would find useful.
For a long time, Apple led the market with the addition of new features and options appealing to both consumer groups and competitors were forced to play catch-up.
Product Disruptions versus Market Disruptions
A third type of disruption can be found by targeting people who for some reason are not consuming the incumbents’ products, the so-called non-customers or non-consumers.
Because they could add new demand, non-consumers can be seen as a market on their own, and for that reason, many people refer to opportunities targeting non-consumers as new market opportunities or new market disruptions, like RIM did when it first launched its Blackberry smartphone which created an entirely mobile phone category for corporate users.
The reasons for non-consumption might be related to a lack of skills or wealth to use the incumbent solutions, or due to issues related to accessibility or convenience among other factors.
Non-consumers usually fall within three buckets: 1) People who have intentionally decided not to use the solutions that are currently available (they are aware of the products but don’t use them), 2) People who prefer a solution from another industry (an alternative), or 3) Those who have never been considered customers of the industry, but for whom the product, or a component of it, could be valuable.
Consider credit card processing service Square (NYSE: SQ), a company which became popular for enabling small businesses to accept credit card payments from mobile devices by inserting a small card reader into the audio jack of any smartphone or tablet.
Before Square, credit card payments were exclusively made through networks like Verifone and others that charged businesses high processing fees. These fees were too high for some small businesses, with some of them operating at margins so low that couldn’t afford to accept cards at all.
Square created a new market around the existing credit card processing market by pulling a lot of non-consumers into their business. The first group of non-consumers they were appealing to were small businesses and independent professionals who found the fees charged by the incumbents excessive and had intentionally decided not to accept credit card payments.
For these consumers, Square offered a very attractive value proposition compared to their alternative of not accepting credit cards.
A second group of non-consumers that found Square attractive were individuals needing to send money to other people. Those, in particular, were never considered target customers of incumbent credit card processing services, but they turned out to be a great market for Square.
Over time, as Square was getting traction and becoming more and more popular, they started to pull consumers of the incumbents’ products into their vortex, eroding the customer base of existing players. The company later expanded into person-to-person payments and other financial applications, leveraging its already increasing user base.
Market disruption opportunities are not easy to find and may require some lateral thinking, but those who can seize them can open the doors to massive value for customers and for the company itself.
Disruptive strategy: Five ways to create product disruptions
With our knowledge about disruptions, we reverse-engineered Christensen’s framework and came up with a few ways to create successful disruptions. Here is a list of the five most important:
- Avoid targeting the incumbents’ best customers, at least at the beginning.
- Price disruptions lower than the equivalent solution.
- Create asymmetric value chains.
- Spin-off disruptive efforts.
- Shape the industry early.
These are fairly self-explanatory so let’s briefly dive into each one.
Avoid targeting the incumbents’ best customers, at least at the beginning:
Successful disruptions usually enter the market targeting customers that are not the core source of income for powerful incumbents. There lies the key to their success.
Because they only target customers at the “outskirts” of a market, disruptors can operate under the radar for a while without incumbents feeling the pinch.
Innovators can deliberately exploit this blind spot, by competing only against inefficiencies and non-consumption when they first enter the market, as we explained in the Innovation Strategy section.
If you enter the market with a product that’s just a linear improvement with respect to incumbent solutions (for example, entering the gaming industry with a better console), you will be by default targeting the gross of someone else’s market and those incumbents will have a motivation to fight back if they see that you have the potential to do some damage.
If innovators violate this rule by entering a market with a product that’s just a linear improvement with respect to incumbent solutions (for example, entering the gaming industry with a better console), they will be, by default, attacking someone else’s core market forcing incumbents to fight back and defend their market.
That would be a suicide mission for the innovators, since the incumbents usually have the muscle and the motivation to retaliate aggressively against new threats, and they are in a better position to defend their market position.
The last thing you want is aggressive competition from incumbents while you are in the early stages of a new business.
This can help explain how Tesla now faces serious competition from conventional vehicle makers who have to defend their markets and are consequently launching their own electric vehicles. Our prediction is that Tesla will have a hard time trying to stay afloat unless they manage to be acquired by a player with a stronger balance sheet.
Price disruptions lower than the equivalent solution:
Disruptions usually introduce an innovative price-value tradeoff that makes sense for an initial group of customers, but in general new products must be priced “relatively” lower than an equivalent solution in order to get disruptive traction.
This means that the price must be lower than getting those benefits elsewhere.
For example, when FedEx entered the market with overnight delivery, it was more expensive than conventional parcel delivery services, but its price was lower than taking a flight to deliver the packages, which was the equivalent alternative to get the same delivery speed (overnight).
So when coming up with your ideas for new products think about the different solutions that would need to be combined to deliver a similar experience, and price your product below that.
Create asymmetric Value Chains:
An obvious part of the success of any disruption is making the underlying solution hard to be copied by incumbents. That means that the more “asymmetric” your value chain is, the more difficult it would be for incumbents to replicate your value proposition.
Value chains require particular coordination between a company and its partners and vendors, something that is not easy to replicate overnight, posing a real barrier to competition.
Asymmetry in a value chain is achieved by strengthening areas where your competitors are weak and avoiding competition on factors where they are strong.
When creating new products, you must implement processes that prioritize improvement on those asymmetries. In other words, you must continually improve on factors that are hard for competitors to replicate using their value chain, and improve features that are important to their least attractive customers (which are by definition the target of your disruptions).
What you want is to create and expand strategic asymmetries that makes it hard for others to catch up on once your solution starts getting traction.
Spin off disruptive efforts (if an incumbent):
If you are running an established company, emerging opportunities will rarely look like good investments when they first show up. They are usually too small or too far out on the horizon for you to pay attention.
So one way to make your disruptive efforts more effective is by creating small separate entities that are specifically created to pursue those opportunities. In Clayton Christensen’s own words, these spinoffs “must fit the size of the opportunity.”
Spinoff companies must be created so that they have almost full autonomy to make decisions and move fast in the new space. It is favorable to have a relatively flat structure without a complex chain of command or too highly-defined job descriptions, but they must reward experimentation and hypothesis testing.
Managers in charge should have experience dealing with new businesses and grappling with the issues of emerging markets.
Shape the industry early:
Once you see signs of a market that could get traction, you must try to look forward into the future and see how your team can start shaping the way the industry will be regulated.
Startups usually ignore the importance of good stakeholder and government relations until they need it, but by then it is usually too late.
For that reason, you must build your support networks BEFORE you need them, and that’s why you must always be ahead of the regulators, “helping them” shape the industry through education and continual engagement.
Uber and Lyft are both well-known for lobbying government and Congress about how ride-sharing should be regulated.
As an innovator, you have to look ahead of the regulators, and “help” them shape the industry, through education and continual engagement. See our section on Stakeholders Management for more information about this topic.
Bonus factor: Get Lucky
Not many people are willing to say it, but behind the success of many high-growth companies, good old luck has played a major role. Luck in this context means that some businesses arrive at just the right time and under the right conditions to thrive.
The success of Facebook as a social network would have been different if the company was launched two years earlier, or two years after it was actually launched. You might say the same of many other tech startups or “unicorns” that have made it big in the last few years.
How to get lucky? Keep working hard, keep working smart.
Clayton Christensen’s Books
Among the books we extracted ideas from, you will find familiar titles:
- The Innovators Dilemma: This is the book that introduced the whole disruption idea and elevated Christensen to the guru status he still holds nowadays. It is probably one of the most important business books of the last three decades, along with Michael Porter’s Competitive Strategy.
- The Innovator’s Solution: This is Christensen’s sequel in his disruption series, which introduced a framework to pursue the creation of product disruptions. In our opinion, this is probably the best innovation book ever written.
- What’s Next: A less-popular, but
veryinsightful view on Christensen’s disruption theories, where he and his co-authors dig deeper into the process that leads to disruptions and provide a framework to identify products and services with disruptive potential.
- Competing Against Luck: This is the book where Christensen introduces his ideas about the “Jobs to be Done” framework.
Christensen’s books are not your typical books for executives. In fact, they are quite complex. So much that we had to go through them several times, especially “What’s Next?”, until we could grasp his fundamental ideas and draw the connections with the work of other authors and researchers including Michael Porter.
In a way, Christensen’ ideas are an extension of Michael Porter’s work, where he (Christensen) tries to incorporate the implications of “time” into strategic analysis.
That is, while Porter’s frameworks characterize an industry like a static picture, where if you have a competitive advantage you keep competitors away forever, Christensen’s research painted a whole new dynamic which explains the process of replacing old industry incumbents with new ones.
Trying to connect Christensen’s ideas with Michael Porter’s in a single framework was one of the most overwhelming challenges we faced while developing our framework. Both bodies of work are comprehensive, and both must take into account many exceptions.
Just trying to bring those ideas down to a simple model that considers those exceptions took a bit more than a year.
But in the end, we are proud of the result. Strategy for Executives, which is now free to download here, is a self-contained strategy framework that ties together the most important strategy ideas taught during the last 40 years, complemented with a massive update of those ideas to make them relevant in today’s hyper-competitive reality.
The research was led by Sun Wu, a seasoned Fortune 500 executive with more than 15 years of real-life experience, complemented by a thorough revision of more than 300 books and research papers, and over 500 hours of videos, interviews and formal training.
The result is a combination of fundamental concepts and a concise map of the strategic choices that modern executives have to make to thrive in today’s highly competitive markets.
Every concept in the book is explained from scratch so that plain and simple, this is the only strategy book that you and your teams will ever need.
Our recommendation is that instead of trying to reinvent the wheel by going through all these different frameworks and ideas, some of them outdated, that you read Strategy for Executives which incorporates all of these ideas in a single framework. In the end, the book is free to download, so there’s no reason not to have it.