In Zero to One Peter Thiel decried Silicon Valley’s obsession with disruption, declaring “disruption has transmogrified itself into a self-congratulatory buzzword for anything new and trendy”. He’s not alone. And yet we can’t help be fascinated by the increasing number of genuinely disruptive business models. According to CB Insights, there are 113 private companies currently valued at more than $1B (unicorns), including well known examples such as Uber ($45B), AirBnB ($10B) and DropBox ($9.5B). To put this into perspective, Uber has about the same market capitalisation as Wesfarmers, one of Australia’s top companies (#7 on the ASX by market cap).
Fascinating as these stories are, they do little to help executives and Boards evaluate the risks and opportunities for disruptive business models. What will help are models or frameworks which explain the phenomenon.
‘Disruptive innovation’ has its earliest roots in Schumpeter’s model of ‘creative destruction’. Schumpeter argued that the path of economic development is shaped by major revolutionary technological and product market shifts. He dismissed price and other competitive actions as relatively unimportant in the long run.
During the 80’s and 90’s technological change was seen as a cycle which begins with a technological discontinuity: breakthroughs which advance the state of the art by an order of magnitude. When this happens the newer technologies begin to displace the older technologies; and the older technologies fight a rear-guard action making a desperate final push to hold back the tide by improving their existing technologies. This leads to an era of ferment: the competitive battle between ‘what is’ and ‘what could be’.
At the same time, we begin to see design competition as other players offer competing designs which largely embody the fundamental breakthrough. Out of this competitive battle for the ‘new’ emerges a ‘dominant design’: a basic architecture which becomes the industry standard. And then from this point the industry shifts back into an era of incremental change which continues until the next disruptive technological discontinuity.
Those of you old enough may remember the battle between Betamax and VHS as a video recorder. Although Betamax was often reported as ‘technically superior’ VHS became the dominant design, followed by continuous improvement in VHS quality until it was displaced by DVD’s.
But how is this relevant in today’s period of massive disruption? In fact, this is exactly what is playing out now. Except that the technological discontinuity is not a single technology, but the confluence of three transformative technologies: cloud; social; and mobile. The cloud allows companies to create and scale at a rate and cost never seen before; social provides the platform for accelerating network effects; and mobile allows virtually unlimited access. This has given rise to the ‘platform company’: a company that connects producers and consumers via a digital network. The obvious examples of platform companies are Apple, Amazon, YouTube and Facebook.
The emergence of these platform companies mean that many of Michael Porter’s traditional barriers to entry in various sectors have been destroyed. For example, capital barriers in many sectors no longer exist. Don’t believe me? Pivotal Labs recently made this very point:
· Uber: the world’s largest taxi company owns no vehicles
· Alibaba: the world’s most valuable retailer has no inventory
· AirBnB: the world’s largest accommodation provider owns no real estate
Another major barrier to entry that has been destroyed is access to infrastructure and know-how. With open source software anyone can access a vast repertoire of software know-how that previously only major companies could afford to build. Someone recently observed: it’s never been easier to start a company.
What can you do to ‘protect’ yourself from the risk of disruption? Here are three initial ideas to explore your business model risks:
- In 2011 Silicon Valley great Marc Andreessen declared: ‘Software is eating the world’. Take a leaf from Jack Welch’s playbook: introduce the concept of dyb (destroy your business). What would your play be if you were setting out to attack your market with a software centric business model? Matthew May recently described a similar approach: The Gremlin Strategy
- Do you feel you are already being disrupted? Are you in denial, angry? Get past it quickly. The customer is your barometer. If the customers are migrating to an ‘alternative’ offering, something real is going on, even if you can’t understand why. You need to get your head around the ‘new’ and examine opportunities this new technology/software might offer your business model.
- Be very clear about your point of differentiation. There are three dimensions of differentiation: attributes; relationship; and brand. Which of these give you the best opportunity to maintain a point of differentiation? Create customer stickiness; establish barriers to entry that are not easily broken down with software.
Let me leave you with a final thought. There is an ancient dictum in economics that things are driven by what happens at the margin, not at the core. What are you doing to remain open to the possibilities occurring at the margin? This is a central thesis in Clayton Christensen’s theory of disruptive innovation which we will explore in my next blog.
[If you enjoyed this blog you might like to check out my previous piece: Free is not a business model]
 Wesfarmers employs more than 200,000 people; Uber about 2,000 (subject to the outfall of a recent court case which found an Uber driver was an employee)