“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change” – Charles Darwin
The Woodlands is a master planned community located 45km north of Houston, Texas (Wikipedia, n.d.). I was fortunate enough to live there between 2007 and 2010. It was a great place to live overall, but one notable exception to that rule was the lack of taxi services. It seemed that there was just a handful of local taxis serving a population of over 90,000. Given that for much of the year the climate in Texas is not conducive to walking, this meant that any night out required somebody being designated as the driver in order to get home safely. I have returned to the Woodlands many times since 2010, and I’ve been struck by how much things have changed. Perhaps the most notable change is the plentiful availability of ridesharing using apps like Uber. Now, it is possible to go out in the Woodlands for drinks or dinner without having to take your car. The arrival of Uber and its competitors changed a lot.
Like Airbnb (described in an earlier blog post), Uber hasn’t created anything of significance that has physical or tangible form. Uber was able to change things by exploiting the confluence of supply and demand – just as successful companies have done for many years. Demand came from users who wanted greater convenience and consistency, and, in the case of the Woodlands, simply wanted availability of rides on demand. This user base also happened to be digitally aware and comfortable with mobile device apps. They didn’t necessarily want ridesharing, just easier access to rides. Importantly, and I’ll explain later why this is important, they didn’t necessarily want a lower cost service. On the supply side was a basket of technologies which Uber blended together: the availability of mobile devices; a reliable mobile network; GPS; mapping software; fintech. The availability of these technologies together with APIs, which themselves allowed the creation of apps, enabled the sharing economy, whereby owners can leverage the value of assets that would otherwise sit idle and this allowed Uber to use new platforms to create a new business model to capture value while not only using the assets (vehicles) but also use their owners (drivers). Uber changed a lot, but was it disruptive? That seems to depend on who you ask, and we will return to this question later in the post.
A previous post (Clegg, 2020) showed a slightly modified version of a matrix created by Gary Pisano (Pisano, 2015) which is reproduced below.
Pisano notes that disruptive innovation “requires a new business model but not necessarily a technological breakthrough” and that “for that reason, it … disrupts the business models of other companies”. That fits with Uber, which didn’t really develop any new technology, just a business model that used existing technologies in a different way. Pisano also uses Android as an example of disruption, “not because of any large technical difference but because of its business model: Android is given away free; the operating systems of Apple and Microsoft are not”.
Pisano also quotes Clayton Christensen, who gave us the textbook definition of disruptive innovation in his book “The Inventor’s Dilemma”. According to its definition by Christensen, disruptive innovation entails providing something with a lower performance specification than the incumbent technology, but which is cheaper, simpler or easier to use (Christensen, 1997). In short, as technologies improve, they tend to do so faster than the rate of increase of the requirements of customers. After a while, performance exceeds even the maximum specification required by the most demanding customer. Once multiple competing products exceed what we can call the “specification ceiling”, the market is effectively commoditised and the value seen by the customer does not account for any performance over and above the specification ceiling. In other words, there is no competitive advantage to be gained by further improving performance. It seems that the management and especially the “stage-gate” product development systems employed by incumbents, and especially by larger incumbents, force them to continually and gradually improve their existing product and service offerings – the same offering, only slightly better, even if it means that they exceed the specification ceiling. This potentially opens the door to more disruptive solutions that may have lesser performance in absolute terms, but which still meet the maximum requirements of the market. And then, ideally, the new disruptive offering will offer the ability to introduce new features or attributes that will allow it to overtake the incumbent’s performance in the medium term. The image below illustrates this.
So, when you are thinking about how to compete, think about defining a lower specification than the existing market offering (but one which is simpler, or cheaper, or easier to use) and how that may play out, instead of simply assuming that a higher specification is needed. It sounds like a counterintuitive approach but consider the airline industry. You might think that being a better performer in dimensions like on-time-arrival, comfort and even safety would allow an airline to charge a premium. In fact, research by London Business School shows that “customers subjectively perceive most of these dimensions as points-of-parity. They award little credit to a safer airline because they wouldn’t consider flying with an unsafe airline in the first place. It’s important to the customer, but not in their choice of brand” (Morris, 2019). The market was effectively commoditised. Airlines including Ryanair and EasyJet in Europe, and Southwest and JetBlue in the United States, revolutionized air travel by reducing the specification of what they were offering in order to enter the market disruptively. The value of what they were offering was lower than the established competition, but they still succeeded. Why? Of course, they competed on price. The lower specification did them little harm in terms of customer preference, but the lower price they could offer as a result worked wonders for them. They were successful because they deliberately came up with a lower specification to differentiate themselves. It can be a very powerful strategy in a commoditised market.
Another great example of disruption as envisaged by Christensen is Airbnb. Like Uber, it required the evolution of an ecosystem to enable its innovation. Airbnb began by allowing people to rent spare rooms – an experience that would have been both cheaper and less attractive (unlike Uber) than a hotel stay. Airbnb has subsequently moved up market by offering whole houses and condos and has supplemented its services with restaurant bookings and excursions.
Does disruptive innovation require a lower standard of performance? The work of Christensen, described above, would suggest that this is the case and indeed most textbooks will argue that innovation has to initially reduce performance in order to be disruptive. Measured by this standard, Uber was not disruptive, because although its services may have been cheaper, it didn’t exploit a lower-end opportunity – it initially performed at least as well as the taxi services it sought to replace, perhaps better as it appealed to users wanting easier access to rides. Uber not being disruptive is a little counterintuitive. Christensen does provide us with a loophole, though. Along with Michael Raynor, he expands his value network to a third dimension in “The Innovator’s Solution” (Christensen & Raynor, The Innovator’s Solution, 2003). They offer the possibility of escape from the two-dimensional performance versus time curve, by defining what they call “nonconsumption” – in other words potential customers who will be able to use a simpler, lower cost version of the existing offering. The business can grow scale in what was previously a “nonconsuming” market and then use that scale to go back and attack the more conventional market. And the great thing is that as the business moves into the conventional market, it tends to pull customers away from the incumbents, starting with the lowest value customers and temporarily improving their margins. I’ve seen this happen, and by the time the incumbent realises what’s happening, it’s too late.
Think again about the example of the low-cost airlines described above. Did they enter the market by taking customers from the established incumbent airlines, or did they create new customers who previously could not afford to fly, and use the revenue from them to give them the scale they needed to compete? Or both?
Returning to my experience in the Woodlands, I saw Uber replace nonconsumption and create a market by successfully leveraging the availability of an ecosystem in the suburb – specifically the availability of mobile internet services – to provide ride services where no reliable taxi service was available. It was the local availability of the ecosystem, not just the technology, and the lack of local taxi services that enabled this local disruption. Uber was at least disruptive (by the textbook definition) on a local level.
Taking replacement of non-consumption to the extreme, an approach that benefits all parties in emerging markets is so-called innovation at the base of the pyramid (Prahalad & Hart, 2002). Here, companies deliberately provide products and services which are accessible to billions of people who would not otherwise have been able to afford them. This is effectively an extreme form of disruption. Examples abound where companies have established themselves with low-specification and low-cost offerings in these markets, learned how to operate with extreme efficiency, and then disrupted large, existing mainstream companies. A number of these have been fintechs, and one example is Mambu. Mambu was set up as a cloud-based bank to provide affordable services, but it has leveraged its learnings from operating at the base of the pyramid to provide cost effective cloud based banking globally. From such apparently humble beginnings, Mambu’s customer list now includes names like ABN AMRO and Santander (Cooper, 2014).
Despite his loophole, is Christensen’s definition still too narrow? Could you exclude Uber from being a disruptor simply because their offering was not inferior to existing competitors? In his book Digital Darwinism, Tom Goodwin argues that you can’t (Goodwin, 2018). He argues that “it is much better to focus on doing extra and more, than to be paranoid about companies undercutting you and being cheaper. We need the spirit of disruption to be about optimism and creation, not paranoia and defence”. He goes on to suggest that disruption involves a “paradigm leap” to a completely new solution. This is more like the top right of Pisano’s matrix, but is it wrong to call it disruption? I don’t think it matters, as long as you understand what you mean, as long as you understand when it’s a business model that is disruptive and when it’s a technology. I think both Christensen’s and Goodwin’s definitions have a lot to offer us. I like Goodwin’s thinking because it means that disruptors can be bolder and more creative than Christensen’s more narrow definition while still benefiting all parties. But I don’t want to abandon Christensen’s definition either. It makes us think, and in particular, Christensen makes us think about the awesome superpower of simplicity which should never be far from our thoughts and should usually be our primary option.
Something else Goodwin proposes, which I also really like, is the idea of “self-disruption”. Put simply, this is disrupting (and replacing) your own business before somebody else does. Goodwin gives us a couple of examples of this, one good and one not so good. In his distinction, he notes that one of the goals of self-disruption should be to replace the existing business model. Goodwin’s best example of self-disruption is Netflix, and none of us should really be surprised by that. They systematically and completely replaced their original business model with a new and very different one. And a rather poor and half-hearted example quoted by Goodwin is the creation of Go by British Airways. Unlike their low-cost competitors, British Airways didn’t really want to be a low-cost airline – as acknowledged by Alex Cruz in the Morris reference. They had no desire to replace their existing business model and set up a Go as a low-cost arm because they felt they had to somehow compete with the new entrants. They misunderstood what the market disruption was all about. Try looking at your own business through the lens of a potential disruptive competitor, try to think what they would do to replace you. Is it better to let them do it or to try to do it yourself?
I’ll return to Goodwin’s book for one last thought. He talks about how the success of the iPod was not dependent on the device as much as it was on the ecosystem that enabled it. That same dependence on the ecosystem could be levelled at Uber, Airbnb or Blockbuster – just to pick a handful of the companies I’ve talked about above. The ecosystem includes technological platforms and systems that are evolving around us, but it can also reflect our prejudices, feelings and values. I’ll illustrate this by talking briefly about Apple Pay, something I personally resisted using for some time. I preferred to insert myself into the transaction by entering a pin at the point of sale, right up to March 2020. Now, I routinely use Apple Pay. Why? Because the shop, and in particular the credit card terminal, suddenly appeared a lot more hazardous as a result of COVID-19. Touching the keys on the terminal became at worst a potential source of infection, and at best an inconvenience involving hand sanitiser. Concerns about health replaced concerns about security. I didn’t start to use Apple Pay because of its technology, I started to use it because of a significant change in the environment. I’ll talk a lot more about the impact of environment and ecosystems in a future post.
Think of a new company that has appeared in the last decade, disrupted the market and wiped out or significantly displaced competition. What did they do that was different? Did they develop new technology, or just combine stuff that was already around? Are they dependent on other technologies, or on ecosystems, to act as a platform for them? Can they control these platforms or ecosystems, and does it matter? Did they reinvent business models? Was their offering superior, or inferior, to their competitors, or did it create an entirely new market? Were they disruptive, and if so how?
I’m keen to see your examples and hear your thoughts, feel free to add them into the comments box below. Thanks!
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks” – Warren Buffett
- Disruptive innovation generally requires a new business model.
- Disruption doesn’t necessarily need a technological breakthrough.
- Disruptive innovations may have lesser performance in absolute terms than their predecessors, while still meeting the requirements of the market.
- Disruption can also replace nonconsumption, either in conventional or emerging markets.
- Disruptors can be bolder and more creative than Christensen’s more narrow textbook definition while still benefiting all parties…
- …but Christensen makes us think about the awesome superpower of simplicity.
- Larger and more established companies are vulnerable to disruption simply because of how they are set up…
- …but don’t forget about self-disruption, you don’t have to wait for someone else to destroy your business.
References and Further Reading
Christensen, C. (1997). The Innovator’s Dilemma. Boston: Harvard Business Review Press.
Christensen, C., & Raynor, M. (2003). The Innovator’s Solution. Boston: Harvard Business School Press.
Clegg, J. (2020, October 6). Retrieved from johnmclegg.com: https://www.johnmclegg.com/blog/innovation/innovation-whats-that/
Cooper, J. (2014). New consumers: Innovating at the base of the pyramid. The Banker, January.
Goodwin, T. (2018). Digital Darwinism. London: Kogan Page.
Morris, R. (2019, March 28). Flying through disruption. Retrieved from www.london.edu: https://www.london.edu/think/flying-through-disruption
Pisano, G. (2015). You Need An Innovation Strategy. Harvard Business Review, June.
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