Innovation that challenges well established industry business models promises opportunity for some and instills fear in others. We are drawn to stories of entrepreneurs who came up with brilliant ideas that disrupted the existing “rules of the game” by which industry players compete with one another. But of course, we wouldn’t want it to be the scenario for our company. We do not want to happen to us what Uber, Netflix and others caused in their industry.
Many executives of established companies wonder whether his or her business is going to be seriously affected by companies like Uber and Netflix who have challenged and changed the dynamics of their industries and whether he or she can do something about it.
A recent report by the Economist showed that 60% of company executives view disruption as a threat rather than an opportunity. This helps explain why most established firms react rather than drive disruptive innovation. The concept of disruptive innovation is easy to understand but the key questions that we would like to address are:
- Are we vulnerable to disruption?
- Why do we fail to identify disruptive innovation?
- How do we identify opportunities for disruptive innovation?
Are we vulnerable to disruption?
Let’s start with two examples, Netflix and Dollar Shave.
Netflix first disrupted the movie rental business when it started offering a DVD mail order subscription service and then moved to a different business model by adding streaming services. Both models exist in parallel today and have displaced traditional brick and mortar video rental such as Blockbuster.
Dollar Shave is an interesting example of disruption where the core product, a razor blade largely remained the same. Founded in 2011 by Michael Dubin and Mark Levine, the startup attracted a lot of attention when Mr. Dubin featured in a comedic ad posted on Youtube that went viral. The disruption came from introducing a completely different consumer experience and value capture model compared to established brands such as Gilette. Offering razor blades through a subscription service made it easier for consumers to never be out of blades and at a much lower cost than the leading brands. Dollar Shave managed to capture 8% of the market in only a few years before it was acquired by Unilever in 2016.
Netflix and Dollar Shave addressed a rising demand for more convenience, leveraged developments in technology and solved a consumer problem: the frustration of paying more than is needed. They didn’t so much innovate the core product (entertainment content, razor blades) but changed most of the other elements of the existing business model.
To identify whether you are vulnerable to disruption, systematically explore drivers of change and recognize their potential impact on different elements of your business model.
Perhaps you are already doing this and sense that parts of your business model may be at risk. All too often, however, even when businesses identify potential threats they fail to act.
Why do we fail to act on disruptive innovation?
Why didn’t Blockbuster and Gilette come up with their versions of Netflix and Dollar Shave? If they saw the threats they faced, why didn’t they act, and what can we learn from their failures?
Victim of your own success
Established businesses in a particular market or industry are successful because they provide products and services that meet the needs of their customers, successfully solves a problem, and delivers value in a way that allows the business to be profitable. Over time, other companies then adopt similar models and win a share of the market, and while several distinctive competitive strategies exist at first they often converge until the entire industry more or less uses the same playbook to compete with one another.
Over the years their success strengthens a set of widely shared beliefs that are rarely challenged by anyone that works within the company or industry. These beliefs gradually take hold and are mostly implicit, i.e. they are not written down as company guidelines but widely shared and adopted nonetheless.
“If it works don’t fix it” makes sense unless what you believe obscures the changes that have taken place and blinds you to new opportunities and threats that are the result of this new situation. The needs of customers may have evolved, new technologies and solutions have become available, regulation has changed etc. Together these can create discontinuities, which can potentially change the structure of an industry.
But many large established companies suffer from inertia, the inability to change even when it is obvious the world has moved on. They go through phases of awareness and denial, and wait until change has become unavoidable to take action. If management blinds itself to the consequences of change or fails to be aware of the assumptions it makes about the nature of success, it risks having its company left behind by its customers, competition or both.
Challenging your orthodoxies
Established businesses often do have disruptive ideas but the same beliefs that helped them be successful in the past now prevent them from pursuing these new opportunities in the future.
Kodak did invent the first digital camera in the early 70s but did not benefit from it. Included in Kodak’s internal set of beliefs could have been a) people wouldn’t be interested in lower than analog quality photograpy b) a camera is a dedicated device and c) people want their photos printed to share with others.
As CCDs and other (non-Kodak) components became better, smaller and cheaper, it was possible to incorporate cameras in phones. Quality was low at first, but Kodak failed to recognize that the ecosystem of photograpy had changed (social media, storage, display, telecoms) and digital photography took off.
Their beliefs about what the customer wanted, what the product should be and how people wanted to use it were never challenged and when it became apparant that these beliefs were no longer valid it was too late.
How do we identify opportunities for disruptive innovation
The reason that disruptive innovation often comes from startups or new entrants in an industry is simply because they a) see the changes ahead of others b) accept these changes as opportunity rather than a threat, and c) do not share the beliefs of the established companies. The absence of the incumbents’ blind spots allows startups to think more freely about how to serve customers in new and different ways that better meet their needs. Uber didn’t have to think in terms of operating owned assets, Netflix didn’t have to think in terms of operating retail locations and Dollar Shave didn’t share Gillette’s beliefs about how to sell a razor blade successfully.
Identifying disruptive innovation hinges on examining your company and industry orthodoxies regularly. Not all of them are necessarily bad but with change happening fast it is important to make orthodoxies explicit and challenge them periodically. When orthodoxies are no longer valid, i.e. they do no longer lead to success and therefore can be challenged, the challenges can point to new and emerging opportunities. While it is not guaranteed every idea will lead to disruptive innovation you will increase the probability in finding one.