In the Dutch Internet Magazine, Emerce, Sander Duivenstein wrote an article in which he very clearly explained How disruption works. The article was called Hoe werkt disruptie? In this post I will try explain based on this article How disruption works in my own “translation”.
How disruption works in a company?
The response to the first cracks in a business model, is often one of hubris and denial: it was always working so why this suddenly should change? But before you know it’s too late and the company collapsed unwanted but irrevocably because of disruption in their market.
New, alarming management literature as Exponential Organizations: Why new organisaties are at times better, faster, cheaper than yours (and what to do about it) advises organizations to invest in disruptive innovation. Or, as Gary Hamel says,
“The single biggest reason companies fail is that they about investing in what is as Opposed to what might be.”
The last thirty years we were building the phase of the digital infrastructure and business models. Now it’s time to harvest. The only thing that seems necessary is to escape the principle that was as follows described by Clay Shirky:
‘Institutions will try to preserve the problem to which they are the solution’.
This is not easy for established companies that focus primarily on innovative maintenance (sustaining innovations) and innovation on efficiency. Efficiency innovations means for example to lower transportation costs or use Internet for a more efficient self service like banks do. Sustaining innovation means changing the model slightly for similar products.
Probably most companies never come to disruptive innovation, because they are, rightly or not, afraid to undermine their own position. The best example is Kodak who invented the first digital camera in 1975 but because of Kodak management’s inability to see digital photography as a disruptive technology they went bankrupt (source forbes.com).
The bridge that the establishment hastily tries to establish by disruption to regain customers, often already collapsed very fast. Once the market is hit by disruptive innovation, the establishment is usually too late, as evidenced by numerous practical examples.
Disruption is a predictable pattern in sectors where startup companies use new technology to provide cheaper and inferior alternatives to products from established players in the market (think for example about Toyota that a few decades ago started the battle with the Detroit car industry). Currently a group start-ups in various sectors hopes to ‘disrupt’ the strongest representatives to attack.
How disruption works? Do we have to defend our position or do we need to disruption ourselves?
Ex-Microsoft CEO Steven Sinofsky, nowadays Board Partner at the famous venture capital firm Andreessen Horowitz, designed a framework to answer these questions in which he distinguishes four phases of disruption:
The diagram explained:
Disruption (of established companies). The Disruptor introduces a new service with a different approach but knowing that it will not fulfill all needs of the whole existing market. But it is an clear improvement comparable with existing products or market. For the established companies the new product or service is not relevant for their existing clients (also known as denying).
The Disruptor quickly extends the value proposition of the new service based on feedback from Early adopters. The established companies compares the new services with own services and recognize some the new service is better at some levels (also known as validate).
The Disruptor increases the number of clients including slow movers (vs Early adopters in Evolution stage). They are learning fast and solving challenges with new technology and business models. The established companies are adapting their services but in way not to disturb their existing clients. They start competing but often don’t see the real value.
The Disruptor completely re-invented the service or product. New companies can take profit of what the Disruptor proved. The established companies are too late to react on the new market.
This is exactly how companies like Airbnb, Uber, Bitcoin, Tesla and Amazon currently acting. At first these players focus an existing industry in by introducing a cheaper and better alternative that appeals to an ever growing market. They build a platform where everyone can join and everyone can use.
Airbnb for example provides a platform where people can bring in their own homes for temporary rental (bed and breakfast). Around Airbnb now a completely new (local) economy is created where cleaning and restaurants with pleasure participate. Do you rent an apartment here? We will make sure that it is left clean after your stay. And -by the way- are the best places to eat at a reduced rate.
Through all these initiatives, the acceptance of the platform is growing and, thanks to the network effect it can be accelerated. “At once” there are new billion dollar companies that put existing sectors completely upside down.
Existing companies should directly start working with new technologies to renew itself and to full fill the standards of disruptive innovations. To survive there is no escape. It is change or disappear. It’s digital Darwinism.