Disruption is a highly favored word in the startup world. Perhaps it seems that no new business can be launched without harboring aspirations of being “disruptive”. But, innovation by itself is not disruption. Several new businesses have achieved incredible success, without necessarily being disruptive for the current players. When ATMs were introduced, the machines themselves and companies manufacturing and deploying ATMs, did not disrupt banking. Instead, ATMs created unparalleled value for banks and banking customers and an entire eco-system supporting banks.
What is disruption?
Clayton Christensen elucidated the theory of disruption as an entrant introducing a product which is cheaper (and often inferior), which reels in a whole new segment of users in its wake. Maruti 800 did this in India. Often tricky, as Nano learnt, when it missed an opportunity to attract two-wheeler and first time car buyers, despite being an impressive sourcing and manufacturing innovation.
This theory worked well for industrial technology or computer chips, but not for disruption that was wrought by iPhone on incumbents such as Nokia. iPhone in fact was a superior product. It also changed the rules of the game by becoming a platform or marketplace and bringing superior customer value through 3rd party products via its App Store. Prof Rogers of Columbia posits that disruption in the digital world is achieved through: Superior Value Proposition and Value Networks that create subsequent barriers to entry.
Examples of disruption
Tomes have been written about the death spiral of mobile phone manufacturers such as Nokia. Equally comprehensive was the disruption of the analog photo film industry and Kodak. While Kodak filed for bankruptcy, interestingly the No. 2 – Fuji Films, managed to survive the industry dislocation by digital cameras. One pre-smartphone era manufacturer, Samsung, continues to thrive in the smartphone age. Takeaway on disruption: there are strategies for incumbents to respond to disruptive competitors.
Other storied examples: Netflix vs.Blockbuster and Google vs. Yahoo. Both these were full-scale disruptions. However, not all disruptions are comprehensive. Airbnb has changed the face of hospitality. But it’s never likely to lead to shutting-down of large hotel chains such as Marriott or Hilton. It has deep impact in the leisure travel segment, while leaving the business travel segment largely intact with incumbent hotels. Similarly, Amazon has carved out a huge business in ecommerce, leading to closure of multiple brick and mortar stores. But Walmart continues to thrive, and it has also built a large online business. Amazon on the other hand recently acquired Whole Foods, a traditional retailer.
How incumbents respond and trends
Igor Ansoff’s matrix is a useful strategy tool for a defensive response by incumbents. Businesses hit hard by intensive competition find new use cases for their (product development) or identify new customer segments. A few examples:
Marvel comics was a declining business with some iconic characters such as Ironman, Thor and Avenger. In view of evolving customer behavior (reducing comic readership), Marvel responded by leveraging its brands and transforming into a movie studio powerhouse.
When Dollar Shave Club started making inroads into high margin razor blades business with its innovative subscription and mail order model, Unilever snapped it up to counter P&G/ Gillette. Acquisition of the disruptors is often a preferred strategy of cash-rich companies.
Transition from the analog world to digital age is bringing intense and often asymmetric competition in industries such as automobiles (Uber, autonomous vehicles); education (MOOCs); financial services (P2P lending, blockchain); and others. Impetus for this comes from various digital technologies and the ability to use data as a strategic asset. It’s also feasible to now have asset-light models such as multi-sided marketplaces (e.g. Amazon, Facebook) which enable unprecedented speed and scale.
About Pallav Sinha
Pallav Sinha has over 29 years of experience and has worked with organizations like Fullerton Securities & Wealth Advisors Ltd. (a Temasek subsidiary), Fullerton Financial Holdings (FFH) – a bank holding of Temasek, Singapore, Standard Chartered Bank, Citibank, Tata TD Waterhouse, JM Morgan Stanley Retail Services, American Express & HTA. Pallav holds a Master of Business Administration (MBA) from Faculty of Management Studies – University of Delhi.