What Makes a Company Disruptive?
After last week’s blog what is your four minute mile?, I got the ideal brief from a client: “We are interested in buying a business, what is the disruption potential? I need an answer by Monday.” So this last weekend, I have looked at the different questions that are required to answer this question and the models generated will be the basis of the next 3 weeks’ blogs:
- Is your company capable of disruptive growth?
- Are your people capable of disruption?
- What steps do you need to make to be disruptive?
Some leaders that I speak with believe there is no way to guide the disruption journey, because disruption is just random and unpredictable. If disruption is indeed a black box, the best that companies can do is let a thousand flowers bloom, in the hope that one of them sprouts into a substantial growth business. That is like setting a thousand monkeys into a recording studio and hoping that they will produce Springsteen. If you were lucky enough to have it happen once, you surely wouldn’t expect it to be repeatable.
Research over the past two decades has shown that many successful strategies for new growth actually adhere to a specific pattern and that strategies based on disruption principles have a disproportionate chance of commercial success. Remember, disruptive strategies involve products, services or approaches that transform existing markets or create new ones by trading off raw performance in the name of simplicity, convenience, affordability or accessibility.
While disruptive developments come from a range of industries, entrepreneurs and established companies that have created disruptive growth have generally adhered to three principles:
1.Start by targeting non-consumption
At first glance these customer groups don’t look particularly appealing. But disruptors are able to see the hidden beauty in undesirable or invisible markets. For instance computer companies in the 1970’s focused their engineering prowess on the enterprise market. Until Apple targeted the lone designer or home market.
2.Good enough can be great
Many innovators seek to leapfrog over existing solutions, essentially hoping to win by playing the innovation game better. Disruptors win by playing the innovation game differently. Disruptions are all about tradeoffs. They aren’t bad along these dimensions, they are good enough. But they more than make up for that – in the eyes of customers – by offering better performance along a different dimension. Netflix is a case in point. As is the rise of the digital camera.
3. Do what competitors wont
Successful disruptors almost never seek a head-on collision with established competitors. They will often lead with an ‘emergent’ strategy. If you follow a strategy that also looks attractive to market leaders you can bet they will be quick to respond, and as incumbents, they often have advantages that are difficult to trump. Customer Relationship Management (CRM) behemoth Salesforce.com is a case in point.
- It started with non consumption
- It targeted a customer its competitor considered undesirable
- It used a different distribution channel
Determine Your Strategic Intent
Stagnant – Toys R Us (the once dominant niche player in a multi billion $ category)
There are reasons why a once great retailer remained stagnant and is in fact filing for bankruptcy. Firstly in the early part of the 2000’s it outsourced its customer fulfillment to Amazon, as they did not believe in the Internet. This started getting people buying toys on the Internet from an Amazon world and not a Toys R Us world. And they did not innovate or disrupt. And if you don’t you die. Toys R Us could have created the National Lego championship. But they just chose to sell toys. Competitors like Wal-Mart can do this cheaper (and you can pick up your groceries)
Emergent – Zara
Created growth by mastering the ability to provide “fast fashion”. While most retailers hold goods in inventory for a long period of time, Zara designed its supply chain to ensure that it receives new items in its stores just about every week. New consumers were enticed because they on a frequent basis are pretty sure that they are going to find something new. So even if Zara is not ‘better’, this failure matters less because the item quickly disappears.
Innovation – Nike Town
We all Nike’s mantra of “Just Do it”. To give their existing customers a better experience, they amplified their retail formats to bring this mantra to life. Now it is not just about ‘buying shoes’ but the stores give every budding LeBron the chance to emulate their hero.
Disruption – Amazon
Amazon disrupted the fundamental profit model in book retailing. Historically, the way book retailing worked was that a company would buy a book, keep it in inventory, pay its supplier, and sell it to a consumer who came into the store. The typical time lag from purchase to cash was about 168 days. Amazon’s business model is organized so that the company pays even before the company gets the books from its supplier, and therefore before it has to pay that supplier as well. It is reaching new customers as well. Traditional book retailers, constrained by space could only stock the ‘hits’. An Amazon customer who may have a passion for Himalayan artistry can now seek and purchase to her hearts content. Half of Amazon sales come from book titles that other retailers cannot stock. Amazon has now taken this nous and is on a journey to disrupt the world.
The Disrupt-O-Meter helps companies quickly assess whether a proposed approach fits the basic disruptive pattern. It shows the nine areas of analysis, the rationale for each area, the answers (ranging from least to most disruptive) and the strategic choices that a disruptor could make to increase an idea’s disruptive potential.
The tool obviously oversimplifies the analysis of an idea, and it wont work perfectly for every disruption. But it does help to provide a quick check as to whether a team is following a disruptive approach.
Ten years ago, two of the hottest technology companies were Vonage and Skype. Both companies offered telephony services over the Internet, but they were following radically different approaches. Vonage offered a service that mimicked traditional phone service, with users plugging a device into their high speed Internet connection to make and receive phone calls at rock bottom prices. Skype’s solution, on the other hand, was based on Messenger set ups. After downloading free software that allowed them to make and receive calls via their computer, users could call other Skype users free and call non-Skype users for low rates.
Anyone who has tracked this industry knows that Vonage struggled and Skype surged. Skype’s solution fit the disruptive potential, purchasing Skype for $2.6 billion. Although Vonage grew rapidly, the company found it hard to establish a winning business model.
But whether you are in a large company looking at a portfolio of different strategies, or a smaller company with multiple ways to execute a single strategy, you need to be able to compare strategies quickly in order to decide where to focus. One simple way to do this is to create a “map” comparing strategies across multiple dimensions.