A recent article in the New Yorker by Jill Lepore that was then expanded upon by Kevin Roose in New York Magazine, has really struck a nerve in the world of business innovation. The line of “spirited” dialogue is taking place around the now common phrase of “disruption” and whether it should be considered a useful goal or perhaps even a reason for being.
For some background on this topic, let’s go back to 1995, when Harvard Faculty Member Clayton Christensen offered a very useful conceptual model for what the amazing progress around electronics miniaturization and packaging was doing to incumbent industries. Clayton’s thesis was that established players in a given market tend to add features and capabilities well beyond the end customers’ needs, usually in an “arms race” style competition that results in an offering that is more expensive and more capable than what the market really wants. This tenuous situation is then “disrupted” by a new entrant that is willing to meet the minimum price and performance levels of the ‘true’ consumer. Because the high-end players are addicted to the high prices and the margins of their business models, they are dismissive of this new entrant. If that entrant is on track, however, they will grow exponentially, and soon overtake the high-end players (i.e., disruption).
This situation was very evident in industries like computer modems (holy cow – remember dial up?), disk drives and “luggable” computers. The progress in semiconductor engineering, for example, drove a logarithmic level of performance and cost improvement in each generation, and the end consumer was the winner. Companies that did not refine their business models to target the real needs of consumers, on the other hand, were introduced first hand to the concept of creative destruction.
Recently, as hardware platforms have become increasingly stable, we have had several revolutions in software development and performance, culminating in the current wave of app-based customization built on open source systems. Much like hardware before it, software on inexpensive hardware platforms is driving waves of creative destruction (disruption) for companies like HP and Cisco. To be clear, the attacks on these firms’ core business models are nearly inevitable and also relentless, and will result in serious power shifts. Large companies and business units will be sold, recombined with others or ridden into the sunset.
So to sum up, disruption is both real and alive and well. It is not, however, a primary effect, but rather the natural outcome of aggressive technical learning curves applied to the end customer’s needs. The naturally occurring behavior of incumbents is a result of their interpretation through a lens informed by feature bloat and competition – which results in a mighty fall indeed.
Three key points:
- Disruption is an effect that has somehow become used as a cause for business formation. Funding a business case on faith simply because it is “disruptive” is like using any second order effect for targeting – not a good idea.
- The consumer remains the anchor for products and services. The collaborative business models we are seeing are in response to “walled garden” situations, where the incumbents have long since stopped opening themselves up to the idea that a higher value, lower cost alternative could replace their service. Uber is the classic example of this principle.
- It takes a large difference in offerings to overcome the “switching costs” from the incumbent’s model. No one is going to ride in a private citizen’s car, or sleep on a sofa for a 10% reduction in cost. To drive formation of the new value market, the new retail price needs to be below the incumbent’s unit costs.
I’d love your feedback on how you see disruption – as a primary or secondary effect. Please drop me a line, or send me a tweet.
