According to Clayton Christensen, the Harvard Business School professor who popularised the term, disruption occurs when a new product opens a previously underserved market category (new market disruption) or offers a dramatically cheaper and/or easier value proposition (low-end disruption). Disruption does not refer to products that are cheaper, faster and better. Instead, disruption describes products and services that serve new categories of customers that then grow so big as to change the rules of the game.
For example, the iPhone was disruptive because it offered smartphones to a whole new category of people who had previously never considered buying a smartphone, ordinary consumers like you and me. Pre-2007, Blackberries et al. were for business and tech geeks, not normal consumers. Apple’s genius was to offer a far easier device that fundamentally re-defined what a phone was to an underserved population segment, the normal consumer.
The key insight here is that in the beginning the incumbents don’t care about being disrupted because they are not losing profitable customers. They are losing customers who they can’t serve anyway or didn’t believe existed. For example, many of the consumers who bought iPhones wouldn’t have bought Blackberries. For a long time, many people had a Blackberry for business and an iPhone for personal use. However, these disruptive technologies can become so popular so quickly that they cause the entire market to shift rendering the incumbent irrelevant i.e. people don’t want 2 phones and since the iPhone was more relevant to more people it ended up winning.
A key point is that as the disruptor grows, it causes existing consumers to shift their preferences i.e. they prefer the advantages the disruptor provides. For example, the iPhone keyboard was initially not as fast as the Blackberry physical keyboard and there were business functions the Blackberry could perform better e.g. encryption. But for most consumers, this was not as important as the many advantages the iPhone offered e.g. touch screen, apps etc. Eventually, even business people preferred to use iPhones and the battle was lost. The disruptive iPhone caused the market to shift in ways Blackberry had not anticipated; Blackberry did not expect the massive shift to consumer smartphones and suffered as a result.
Why didn’t Blackberry see this shift coming? A final, and crucial insight about disruption is that the traditional incumbent cannot fight the disruptor because they lack the means to do so. Specifically, they will lack the strategy, technology and people to fight back. Blackberry couldn’t build a serious iPhone competitor even when it actually wanted to (5 years too late). The problem is that the incumbent is trapped in their old way of doing things and this prevents them from changing fast enough. It is the incumbent’s inability to transform fast enough that causes them to die.
How fast does the incumbent need to transform itself? As I showed in a previous post, the problem is that the incumbent, especially the senior leaders who lead (manage) the incumbent, fail to take the disruptor seriously enough soon enough. They wait too long to respond and by the time they really understand what is going on it’s too late. It’s too late because the disruptor is now growing faster than the incumbent can fight back. At a certain point, Apple and Android were growing so fast that Blackberry (and Nokia and Microsoft) had no chance of catching up. Specifically, it seems like 5 years is the magic number, by the end of year 5 the disruptor will be moving at an innovation velocity that the incumbent cannot match. By 2013, it was clear that Apple and Android had won.
Based on the above insight, we can create a simple disruption equation to understand who will win, the disruptor or the incumbent. Specifically, can the disruptor gain market share faster than the incumbent can transform itself to fight back? If this is true, the disruptor will win e.g. Apple. However, if the incumbent can change fast enough, it can fight back against the disruptor and protect itself e.g. Microsoft protecting its Office product against Google Docs. Therefore, the entire contest comes down to 2 specific rates of change; the rate at which a disruptor gains market share vs. the rate at which an incumbent can transform themselves to fight the disruptor. This is what I call The Disruptor Equation.
vs the rate at which the Incumbent transforms themselves to fight the disruption.
:) Disruptor growth rate > Incumbent transformation rate :(
The Disruptor wins because they will grow faster than the incumbent can change
:( Disruptor growth rate < Incumbent transformation rate :)
The Incumbent wins because they can regain market share faster than the incumbent can steal it
PS. Bonus example for those who are keen:
A beautiful example of disruption is Airbnb, the platform that allows anyone to transform their home into a hotel. At first, it only served Gen Y travellers; an underserved customer category who couldn’t afford hotels and wanted a more local experience. Airbnb was disruptive because it served a new customer category. The company grew rapidly and then started to target traditional business travellers and is increasingly attacking traditional hotel markets. Today it is worth more than USD $30 billion, more than most hotel groups in the world. None of the billion dollar hotel groups in the world have been able to create a serious competitive response to Airbnb because they are stuck in their old models of charging you $15 USD for wifi and $30 USD for breakfast. There is a quote to describe disruptors: "first they ignore you, then they laugh at you, then they fight you and then you win." Airbnb has won the 21st Century travel market… for now.