‘Step away from the edge’ might be good advice for the young, but it could be fatal advice for businesses. Economics has long held 'things are driven by what happens at the margin, not at the core'. This is a central principle in Clayton Christensen’s theory of disruptive innovation . He argues that most well managed companies are generally good at developing and commercialising ‘sustaining technologies’ – technologies which deliver the ‘next generation of performance’ for their existing customers – but are lost when confronted by what he labelled ‘disruptive’ technologies.
Sustaining technologies build on the capabilities and culture of the incumbents, and appeal to their existing customer base. But the disruptive technologies typically emerge either in a niche market segment which is not initially interesting to the incumbents, or its initial performance attributes are not valued by the existing customer base. This presents what Christensen originally labelled the Innovators’ Dilemma. Do I go into a market which currently looks pretty uninteresting – too small, product doesn’t match my current customers’ needs – or do I continue to invest in sustaining technologies which I know my market will love.
On the face of it, this appears a ‘no brainer’. But the niche market allows the new entrant to rapidly improve performance and cost, so that pretty quickly it appeals to broader market. When this happens, they typically offer a material cost advantage or create a new market which is much bigger than originally imagined. The trajectory of these two paths is illustrated below.
Walmart was ignored by the major discount retailers of the day – who targeted the major metropolitan markets – when he began by targeting the underserved rural market in the US with his promise of ‘everyday low prices’. By the time they realised he was a competitive threat his business model had evolved to one they couldn’t match. Famously, Borders agreed to hand over its online business to Amazon under the theory that online book sales were non-strategic and unimportant .
What distinguishes a ‘disruptive technology’? I like Michael Porter’s two part test:
- does it invalidate traditional advantages?
- Can incumbents embrace the new technology without major negative consequences for their current business?
For example, in the steel industry mini-mills were able to build plants at 1/3rd the capital cost of integrated steel mills. This invalidated the integrated mills ‘scale advantage’, and they could not embrace the new technology without damaging their traditional business. Similarly, Uber has destroyed the traditional advantage of the highly regulated taxi industry in a way which the taxi industry cannot copy without damaging the value of its highly prized taxi plates ('medallions' in the US).
The disruption that occurs today is often startling simply because of the rate at which these new businesses can scale. A recent HBR Blog identified two critical accelerators. Firstly, many of these disruptors are essentially product design teams iterating fast to find ‘product-market’ fit; and secondly, they typically rent all aspects of operational scale, eliminating operational inertia and minimising capital.
So, what can you do about the risk of disruption? Here are three suggestions:
- Be very clear about your own business model: how you create value; how value is consumed. AirBnB and Uber have created models by allowing anyone with an asset – a car or a bed – to use that asset to create value. Traditional barriers to entry – trust and regulation – have been overcome.
- Expand your ‘search patterns’. Breakthroughs usually involve the migration of a technology from one application domain into a new domain, or the combination of a series of linked innovations and adaptations. Platform models have evolved due to the confluence of mobile, cloud and social networks. Develop a structured scanning process which takes you beyond your traditional domains.
- Explore how you can employ the ‘accelerators’ above: fast iteration; and unleashing yourself from the inertia of assets and operations. Does open source innovation offer you a platform to ‘unleash’ your organisation from the constraints of its traditional knowledge base?
But the strategic challenge was expressed by Mintzberg well before today’s accelerated disruption:
The real challenge in crafting strategy lies in detecting the subtle discontinuities that may undermine a business in the future … ( but) most of the time organisations should get on with executing the strategies they already have … distinguished craftsmen become distinguished because they master the details
Good luck getting that balance right!
This is the Part 3 of a four part series on Business Models. The earlier blogs were:
- Free is not a business model ... an introduction to business models
- Understanding the disruption engine ... introduces the cycle of technological change
Part 4 (to follow) will discuss the two tests for any business model: the numbers and the narrative
1. Despite some recent press, this remains a powerful theory which is continuing to evolve.
2. Andreessen, Marc. (2011). Why software is eating the world, The Wall Street Journal.