What other factors create disruption

So what has throwing a 1 when others are throwing 6s got to do with you? We’ll as we talk further about disruptive innovation, we see the role luck has to do with success and failure.

In our previous post, we looked at the 4 key factors that Prof. Clayton Christensen, suggests creates “disruptive innovation”.

  1. incumbents are engaged in value enhancing innovation
  2. these innovations overshoot customer demand
  3. incumbents could have responded to low value disruptors
  4. incumbents fail

Seems to be a nice neat group of causes and last week I talked about the disrupted mobile phone industry and I’m sure we can all think of other businesses like have been disrupted in the same or similar ways.

So obviously this theory does appear to work. So you would expect that I would move onto how to describe the strategies businesses can take to avoid disruption.  I will do this, but let’s pause here and think, is there anything else going on?

Disruption theory seems to work well in phones.  Except it doesn’t explain why Apple remains the most successful mobile phone company, surely it should have been disrupted too? Maybe there are other things rather than these four stages we need to think about. I’ll describe the Apple defence later in another post.

Are these four steps the beginning and end of disruption, and do all four steps need to occur in all disruptions?

After Christensen published his research and gained a global reputation talking about Disruption Theory a new group of younger researches went back and reviewed in detail Christensen’s initial work and said, well, what he wrote wasn’t quite so thoughtful, as not every disruption went through all four phases.  Of the companies that Christensen wrote about, one research group found only 9% of companies who Christensen studied went through all four phases.

 

how much of disruption does theory explain
ANDREW A. KING AND BALJIR BAATARTOGTOKH How useful is the theory of innovation? Sloan Mgmt Review fall 2015

While I think Christensen has an interesting and useful theory and it is a good way to begin looking at the threat of disruption, one should not, obviously now, put too much emphasis on having all four steps taking place to be disrupted.

There were some problems in Christensen’s work, for example the companies Christensen surveyed tended to be business-to-business type companies. Few were consumer focused companies, and so this has had an impact on selecting just these four factors. Business-to-business typically focuses clearly on cost as a critical determinant of performance… while consumers tend to be wowed as much by brand power as price.

So, last week we covered each of Christensen’s contributors to disruption, and now we know maybe only one or two could contribute to a companies demise. So, in our defence, we may not need to protect ourselves from these four to create our disruption proof defence strategy.

So lets look beyond these four criteria, and see what other contributors assist disruption?

While Christensen and his detractors have tried to simplify an approach to disruption, in real life, though, things are more complicated.  Ignoring Christensen’s four stages would be unwise, but we must also widen our gaze to see what else could impact your business.

New critiques of Christensen’s work has shown that he missed out several factors that have influenced disruptors and disrupted in his survey. Let me list some so that we can flesh out how companies have fallen victim to disruptors.

Legacy industries- by this I mean some companies were destroyed because of existing conditions in their make up or industry that companies just couldn’t or wouldn’t change. These include for example which specific country they were  working in, and the employment laws that applied. Several companies that Christensen and his collaborators say were “disrupted” by new innovations were already severely weakened by legacy costs in the form of investments and contracts made because they were baed in the USA and disruptors were not. For example US car manufacturers had been hobbled by negotiating with US unions and the resultant higher wages, better benefits, higher retirement funding and inability to layoff staff that came with being based in the US.  These legacy relationships in automobiles meant the break even cost of US car manufacturers was significantly higher than Japanese and Korean disruptors. Almost immediately the disruptors could offer lower pricing and the legacy car makers had no ability to match- even if they wanted to they would have had to sell below cost and then go bankrupt, Chrysler was famously bailed out by the US Government because of this. Maybe for cars this is legacy base and legacy contracts could be a more important influencer than other causes of disruption?

Changing Scale Economies, by this I mean where changing business or economic conditions increased the economic advantages of scale and thereby limited the number of businesses that could profitably serve the market. In the book selling world, the growth of supermarkets influenced Borders and Barnes & Noble by enabling them to create large economies of scale by following chain supermarket business model (same stores everywhere selling the same things at lower prices) to disrupt a book retaining industry dominated then by small unique independent bookstores. The large size of Borders and Barnes&Noble purchasing and fast sales approach (discounting best sellers independents made most money on) meant they could negotiate a lower price for books with publishers hungry for more and faster sales. Their success from lower costs and higher margins, than independent stores could match,  enabled them to have larger stores in better locations attracting more customers and more discount of best sellers to attract even more customers to browse and maybe buy other much higher margin books.

Subsequently these disruptors who used scale economies to win were in turn destroyed by a new business model facilitated by the tremendous growth of e-commerce and widespread use of the internet enabling even greater scale economies. Borders and Barnes & Noble were disrupted by Amazon.com – a company which avoided the high cost of central city bricks and mortar investment, offered very low cost books and often had no physical stock by ordering from publishers only after a customer had ordered online. The even greater scale of  Amazon’s business run out of huge warehouses enabled them to create a high volume fast and efficient delivery system.

And looking back to legacy as a cause, surely the legacy of having thousands of bricks and mortar stores prevented Borders and Barnes&Nobel from really taking on the internet delivery game.

Government influence; Christensen doesn’t mention that Japanese and Korean car manufacturers were well supported in their export focus by their Governments. And US car companies were not helped by the US Government (well only to avoid bankruptcy). Going back to bookstores and eCommerce, Amazon circumvented US State sales taxes over the internet to offer lower prices. Borders had to collect these taxes and charge higher prices. In mobile phones, Apple was initially prevented from entering the Chinese market leaving this just to Samsung, until Xiaomi (darling of the Chinese Government) took the low end of the market while Apple negotiated to eventually enter and take the top end of the market.

Bad management/Bad luck-  sometimes people make silly mistakes, or just have plain bad luck, when others roll sixes, they roll ones.  I would have hated to be a Borders manager fighting Amazon. As a specialist built around knowing which books to buy and stock, Borders was disrupted by computer geeks who built a predictive system based on orders and a supply side that didn’t even need to hold a book- just have it delivered quickly from publisher to buyers home. Also, Borders shareholders demand to keep their healthy dividend and profit growth despite the upstart competition from eCommerce pressurised Borders management too. Whereas Amazon shareholders were happy to keep investing for the future and let Amazon sell below cost. Borders had both bad luck and bad management in trying to set up their own internet bookstore as their technology was worse than Amazon and Amazon by then was offering everything for sale not just books… and still wasn’t required by its shareholders to make a profit.

So other than the original four key causes of disruption, I’ve shown that there are several others causes that can significantly impact on how you approach disruptive innovation.  I think the basic theory remains useful as long as you realise that there are extraneous causes not just price and feature considerations.  Next I’d like to show you how destructive disruptive innovation can be is you are the one disrupted.