Decoding digital disruption

The theory of digital disruption can identify and explain the cause of disruption by a wide variety of challengers and in different industr...

The theory of digital disruption can identify and explain the cause of disruption by a wide variety of challengers and in different industries. But just because a challenger poses a genuine disruptive threat does not mean that others in the industry are doomed. Incumbents may have some choices in how they respond. And the nature of the disrupter itself its value proposition and its roi value matrix can predict much of how the disruption will play out.

Three important variables that complete the theory of business model disruption are customer trajectory, disruptive scope, and multiple incumbents.

Customer Trajectory


The first variable to consider in any case of business model disruption is the customer trajectory. Which customers will provide the initial basis for the challenger’s market entry, and are they already customers of the incumbent?

Business model disrupters can enter the market through one of two trajectories:

  • Outside-in: The disrupter starts by selling to buyers that are not currently served by the incumbent (that are “outside” the incumbent’s market), and over time, the disrupter works its way in until it starts to steal customers directly from the incumbent’s own market.

  • Inside-out: From the beginning, the disrupter starts by selling to some subsegment of the incumbent’s current customers. This initial subsegment may be small (sometimes the most affluent or the most eager to try new things), but over time, it grows as the successful disrupter expands outward to claim more and more of the incumbent’s customers.

Christensen’s new market theory of disruption is based solely on cases that follow the outside-in customer trajectory. Indeed, one of the fundamental keys to his theory is that by starting outside the incumbent’s customer base, the disrupter makes it very hard for the incumbent to respond.

However, many cases of business disruption today take the opposite customer trajectory: inside-out. All three of the cases we just saw were inside-out cases. The iPhone did not start by selling to buyers who were not previously in the market for a mobile phone. Rather, it began with a small subsegment of the type of customers who would certainly have owned a Nokia previously. At first, Nokia could reason that Apple was stealing a profitable but small part of the market and that Nokia could aim to hold on to the much larger majority of customers who were so far unwilling to pay the higher monthly fees for a smartphone. But over time, the iPhone’s customer base expanded outward to attract more and more of these customers. Similarly, Netflix did not start by appealing to customers who had never used video rental services like Blockbuster. Instead, its appeal was specifically to those who had pointing to their frustration with late fees and promising a better customer experience. And Warby Parker obviously had no option but to go after customers served by the incumbents like Luxottica. If you didn’t already own or need prescription glasses, you were unlikely to sign up for Warby Parker. The company’s rise may have started with some of the more price-sensitive customers from the current customer base (those who would give online ordering a try primarily for the $95 price tag), but it then expanded outward as it proved itself capable of delivering a true high-fashion brand as well as a superior customer experience.

The second important variable in cases of business model disruption is the likely scope of the disruption. There is sometimes an assumption that whenever disruption occurs, the incumbent’s business, product, or service will be replaced 100 percent by the disruptive challenger. Out with the old, in with the new. In some cases, this does happen. When Henry Ford’s mass-produced automobile arrived, it was only a matter of years before the horse and buggy had basically vanished as a means of transportation. (Kevin Kelly has argued persuasively that no technology ever disappears from use entirely and, indeed, you can still enjoy a carriage ride around New York’s Central Park as an expensive tourist treat.)

But in many cases of business disruption, the scope is not 100 percent. Even after being disrupted, the incumbent’s product or business model hangs on, confined to a diminished portion of the market but still a notable player in the industry.

A recent example of this can be seen in bookselling, with the arrival of e-books. Thanks to Amazon’s development of the Kindle e-book format and electronic readers, consumers discovered they had a new choice for reading. The e-book and its online bookstore offered many compelling advantages: a lower price per book, a vast selection of choices, nearly instant purchase and download, and the ability to carry hundreds of books in your purse or bag at the weight of a paperback. The threat to booksellers was clear: there is no need for a customer to walk into their local bookstore to download an e-book.

In the first few years after the launch of the Kindle, e-books enjoyed steady growth in market share. Many in the publishing industry looked at that growth curve, projected it outward, and nervously predicted that in a few short years, e-books would comprise the majority of book sales and publishers would no longer be able to afford to produce print editions. But then something unexpected happened. After a spurt of rapid growth, e-book sales leveled off. Various reports, confirmed to me by insiders in the industry, say that the plateau was about 30 percent of book sales by revenue. This was still enough to spark major disruption and shifts in the balance of power in the industry. (Borders, one of the largest retail booksellers in the United States, filed for bankruptcy in 2011.) Yet printed books, while diminished, certainly did not disappear into obsolescence.

Although this surprised many observers, it was no fluke. In fact, I believe that by looking at the behavior of book buyers, it would have been quite easy to predict the scope of this particular disruption.

One important lens for predicting disruptive scope is the product’s different use cases. Customers buy books on a variety of occasions, and they read books in a variety of settings. In some use cases for reading, it is quite clear that the e-book provides a far superior customer value proposition for example, when you are going on a trip and would like to have a variety of reading options but don’t want to be weighed down by a bag of books. In other reading use cases, however, a printed book may be better for example, if you want to take notes in the margin or read on the beach in direct sunlight (cases where e-book software and screens have continued to lag the paper medium). We can also look at use cases for book purchase. When the customer is seeking to try a new book while lying in bed, there is no match for the benefit of being able to download a sample chapter in seconds to their e-reader (and purchase the rest if they quickly decide they like it). But what about gift giving? No one I have ever asked has thought that an e-book was an acceptable substitute for a printed book when giving a gift. This is not a small point: a large portion of book sales takes place around holidays and other gift-giving occasions. If only a few use cases favor the old value proposition, we might expect consumers to sacrifice those benefits to shift entirely to a new value proposition. But in cases like books, where the customer can easily alternate purchases of the old product and the new one, it is predictable that we will wind up with a split market with some sales shifting to the disrupter’s offer and others remaining with the incumbent.

In addition to use cases, the scope of disruption of a new business model can be influenced by customer segments. Sometimes the disrupter’s value proposition is highly preferable for some types of customers but not for others with different needs. In the Warby Parker case, we may see that certain eyeglasses wearers are likely to shift to its sales model, whereas others (those that buy luxury brands and specialty lenses or those that have better access to retail options) will stay with an incumbent like Luxottica.

Lastly, network effects can play an important role in determining the scope of disruption. (This is particularly true for platform businesses). If a disrupter’s product or service increases in value as more customers use it (think of a platform like Airbnb, which relies on ample hosts and renters), this will initially be a hurdle to the new business. But it also means that if the disrupter manages to achieve a certain critical mass of adopters, its continued growth is nearly assured, and it will more likely end up with a very large share of the market.

Multiple Incumbents


The third variable to consider is multiple incumbents. A single disruptive business model can actually disrupt more than one incumbent. By multiple incumbents, I don’t mean similar companies in the same industry (e.g., the iPhone disrupting Motorola along with Nokia) but entirely different industries or classes of companies that are each challenged by the same new disruptive business model. The iPhone posed a disruptive threat not just to mobile phone companies (like Nokia) but also to desktop software companies (as Microsoft discovered that Windows was no longer the world’s dominant operating system) and online advertising companies (as Google had to move rapidly to stay relevant as computing moved to the small screen).

Another interesting case of disrupting multiple incumbents can be seen in the meteoric rise of online messaging apps, such as WhatsApp, WeChat, LINE, and Viber (each of which has grown initially in somewhat different global markets). Their full range of features may vary, but at their core, each service has attracted hundreds of millions of customers with the ability to send mobile messages for free over Internet connections rather than being charged per message by the mobile phone’s service provider.

Obviously, one incumbent industry that is being disrupted by this business model is telecommunications companies like Vodafone and América Móvil. For years, text messages had been a large source of revenue for these companies. By one estimate, services like WhatsApp cost the phone companies over $30 billion in texting fees in a single year.

But telecommunications is not the only incumbent industry threatened by the free messaging apps. When Facebook chose to buy the largest one, WhatsApp, for 10 percent of its own stock (a $22 billion price), it was not because WhatsApp promised to generate huge new revenues for the social network. It was purely a defensive strategy against a new app that was on track to attract 1 billion customers of its own. If consumers spent more and more of their mobile screen time in apps like this one, they would spend less time in the world of Facebook-driven socializing.

There may be another, even less likely industry that is being disrupted in part by WhatsApp. A long article by Courtney Rubin in the New York Times detailed the rise of mobile social networking (via text messaging, Instagram, Facebook, and Grindr) in the social life of multiple American college towns. Rubin’s ethnographic reporting uncovered a broad shift, described by both students and owners of college bars. Each described how students are spending less time and less money in the bars and coordinating more of their socializing through mobile networking, with alcohol purchased in stores and consumed in residences. College bars have always made their money charging for drinks. But the value they provided to customers was mostly the opportunity for serendipitous encounters and socializing. Now students find they can get that through their phones and are showing up to the bars sometimes only for a last drink before closing time (hardly enough to keep a bar in business). Many college bars are struggling, and some that have operated for decades are closing down. Yet another incumbent industry has been disrupted by the rise of mobile messaging.

Now that we’ve examined the theory of business model disruption, how it expands on previous theories, and some of the key variables in its application, let’s put it to work with two strategic planning tools. These tools will allow businesses to gauge whether a threat they’re facing is disruptive to their business and, if so, to assess its likely course and then select among six possible incumbent responses.

Tool: The Disruptive Business Model Map


The first tool is the Disruptive Business Model Map. This strategy mapping tool is designed to help you assess whether or not a new challenger poses a disruptive threat to an incumbent industry or business.

If your business is the incumbent, you can use the map as a threat assessor to judge whether a challenger poses a traditional competitive threat that you can respond to with traditional countermeasures or whether it is a genuine disrupter. You can also use the map if your business is a start-up or an innovator within an enterprise. As you develop new ventures, the map will help you to identify the industries where you may pose a disruptive threat and those that may be less affected or more able to respond to your challenge.

It includes eight blocks, each of which you will fill out in making an assessment of a potentially disruptive threat. Let’s look at each block and the question you must answer to fill it in.

Digital Disruption

Step 1: Challenger


The first step of the Business Model Disruption Map is to answer this question: What is the potentially disruptive business?

The challenger you identify here may be a new competitor to your own established business. It may be your own start-up, attempting to disrupt an existing industry. Or it may be a potential new venture or initiative within your organization whose disruptive potential you are seeking to judge.

Note that we are not yet labeling this challenger as “the disrupter.” The point of the map is to apply business model disruption theory to analyze the challenger, incumbent, and customer to determine if there really is a threat of disruption. In my experience running this scenario with numerous executives both to analyze existing threats and to test the market for a proposed new venture many challengers who have been dubbed disruptive do not in the end pass the test.

In describing the challenger, you need to include its key offering: What are its unique products and services? What is it bringing to the market that does not exist yet? If your challenger were Netflix, you would include not just the name of the company but also a description of the monthly subscription service model that it is offering for movie rentals.

Step 2: Incumbent


The second question of the Business Model Disruption Map is, Who is the incumbent?

You may choose either a category of related businesses (e.g., video rental retail chains) or a leading example of the category (e.g., Blockbuster) in order to make the analysis more concrete as you compare the business models of the challenger and the incumbent.

The other key point here is that, as we have seen, a challenger may pose a disruptive threat to more than one incumbent. Especially if you are the challenger, you should try to identify multiple incumbents who may be threatened by your new business model. Whenever you do identify more than one possible incumbent, you should complete the map multiple times once per incumbent. You may well find that your new business model poses a disruptive threat to one incumbent industry but that another incumbent can accommodate the success of your model or can co-opt and imitate it.

Step 3: Customer


The third question of the Business Model Disruption Map is, Who is the target customer?

This is the customer being served by the challenger. In some cases, it may be a direct customer of the incumbent, but it also could be another key business constituency (e.g., a challenger could disrupt an incumbent by stealing away all its employees). It is critical to state who the challenger’s target is before you move on to the next stage to consider the value proposition being offered to that target customer.

Once again, it is possible that a challenger could aim to usurp the incumbent’s relationship with more than one type of customer. In this case, you should also complete the map multiple times once per customer type.

Step 4: Value Proposition


The next question of the Business Model Disruption Map is, What is the value offered by the challenger to the target customer?

It is very important to answer this question from the point of view of the customer: What benefits do they stand to gain?

Remember, the aim here is not to describe the product or service offered by the challenger (that should have been done in step 1). Nor it is to describe how the challenger will get customers to pay it (the revenue model will come in step 6, as part of the value network). The focus here is exclusively on the benefit to the customer: What value could they gain from the challenger’s offer?

You can refer back to the list of value proposition generatives earlier on this blog to consider some of the many ways that digital business models provide value for customers.

Step 5: Value Proposition Differential


After you have described the challenger’s value proposition, the next question is, How does the challenger’s value proposition differ from that of the incumbent?

The point here is to identify those elements of the challenger’s value proposition that are unique and different this is the value proposition differential.

There is certain to be some overlap between the values offered by incumbent and challenger (e.g., Craigslist and newspapers both offer users the same core benefit of being able to advertise personal items for sale to a large local audience looking for them). You do not need to include those commonalities here.

For some challengers, such as Craigslist, the differences in value proposition may all be positive that is, they are ways that the challenger offers additional customer value. In other cases, the value proposition differential may include benefits but also deficits, which you should indicate as such for example, for e-books as a challenger to print, you might indicate “less easy to read in direct sunlight.”

Step 6: Value Network


The next question of the Business Model Disruption Map concerns the value network: What enables the challenger to create, deliver, and earn value from its offering to the customer?

You can refer back to the list of value network components earlier on this blog as you map out the value network that makes the challenger’s offering possible. Your goal is to identify everything people, partners, assets, and processes that enables the challenger to offer its value proposition.

If the challenger is new and unproven, this step should help to identify unanswered questions about its business model and whether it will actually be able to deliver the value proposition it is promising to the market.

Step 7: Value Network Differential


After you have described the challenger’s value network, the next question is, How does the challenger’s value network differ from that of the incumbent?

Again, there may be some points of overlap between the challenger and the incumbent. If so, you can leave these out. The point here is to identify those elements of the challenger’s value network that are unique and different.

Does the challenger’s offering rely on a unique enterprise data management asset or on specific skills that the incumbent currently lacks? Does it come to market via different channels than the incumbent uses? Does the challenger have a different pricing model or a different cost structure (e.g., less overhead costs for retail space or staff) than the incumbent? Is the challenger launching with a focus on a different market segment?

The set of all these differences between the challenger and the incumbent is the value network differential.

Step 8: Two-Part Test


You are now ready to answer the ultimate question of the Business Model Disruption Map: Does the challenger pose a disruptive threat to the incumbent?

As described by the business model disruption theory, this question is answered by a two-part test.

First, you need to assess how significant the differential in value is to the customer. Is the challenger’s value proposition only slightly better than the incumbent’s? Or does it radically displace the value of the incumbent? In some cases, this could be because the challenger offers a comparable product or service but with much better terms (think of Craigslist’s free version of classified ads). In other cases, the challenger may solve the same customer problems as the incumbent but also meet other customer needs at the same time (think of the iPhone, which was both a great cell phone and much more). In still other cases, the challenger may provide an offering that simply makes the incumbent’s offer much less relevant to the customer (as mobile social networking apps have made college bar rituals less relevant to American students).

The first question of the disruption test, then, is this: Does the challenger’s value proposition dramatically displace the value proposition provided by the incumbent? If the answer is no, then the challenger does not pose a disruptive threat to the incumbent. The challenger may be a great innovator with a terrific new value proposition for customers. But if that offer grows to threaten too much of the incumbent’s business, the incumbent should be able to respond by matching, or remaining closely competitive with, the challenger’s value to the customer. If the answer to the first test is yes, then you can move to the second test of disruption.

Here you need to assess the barriers that are posed by the differences in value networks between incumbent and challenger. Could the incumbent bridge these gaps, if it wished, so that it could deliver the same value to customers that the challenger does? For example, could the incumbent strike deals with channel partners similar to those employed by the challenger? Could the incumbent eliminate any difference in its fixed costs or compensate for them otherwise? Is it possible for the incumbent to overcome the network effects that the challenger may have already built up to its own benefit? Any major difference in value network could be the hurdle that prevents the incumbent from responding effectively.

The second question of the disruption test is this: Do any of the differences in value networks create a barrier that will prevent the incumbent from imitating the challenger? If the answer is no, then the challenger does not pose a disruptive threat to the incumbent. It may be a dire asymmetric competitor, but there is no fundamental obstacle to the incumbent responding by matching its strategy. The incumbent may have to sacrifice some of its current profit margins in the process, just as it would in a price war with a traditional competitor. But the challenger is not truly disruptive. On the other hand, if the answer is yes, then the challenger has passed both tests of business model disruption. The value it offers to the customer will dramatically outstrip or undermine the value delivered by the incumbent, and the incumbent will face intrinsic structural barriers that prevent it from responding directly. Business disruption happens when an existing industry faces a challenger that offers far greater value to the customer in a way that existing firms cannot compete with directly. The challenger is a disruptive threat.

But is all hope lost? In the face of a real disruptive threat, can the incumbent expect complete and rapid extinction (like the horse carriage industry facing automobiles), or is there an opportunity for the incumbent to respond or at least hold on to some of its glory?

That is where the next tool comes in.

Tool: The Disruptive Response Planner


If you have determined that you are, in fact, looking at a true disruptive challenger to an incumbent business, you are now ready to apply the second tool.

The Disruptive Response Planner is designed to help you map out how a disruptive challenge will likely play out and identify your best options for response.

The first three steps help you to assess the threat from the disrupter in terms of three dimensions: customer trajectory, disruptive scope, and other incumbents that may be affected. You can then use these insights in the last step to choose among six possible incumbent responses to a disruptive challenger.


Step 1: Customer Trajectory


The first step in predicting the possible impact of a new disruptive business model is to understand its customer trajectory: What customers are likely to adopt the disrupter’s offer first, and how will its market spread from there if it is successful?

OUTSIDE-IN OR INSIDE-OUT?


As we have seen, there are two types of customer trajectories for disruptive business models: outside-in and inside-out. It is critical to start by judging which of these paths your disrupter is likely to take in entering the market.

Outside-in disrupters begin by selling to noncustomers of the incumbent and then work their way inward to encroach on the incumbent’s own customers. As described by Christensen, outside-in disrupters don’t appeal at first to the incumbent’s customers because of their lesser features, but they do appeal to customers who could not afford or access the traditional incumbent’s services. As the disrupter improves, it begins to attract the incumbent’s customers as well. Christensen’s theory has shown how industries with barriers that exclude many potential customers higher education, health care, financial services are ripe for disruption. As he and Derek van Bever write: “If only the skilled and the rich have access to a product or a service, you can reasonably assume the existence of a market-creating opportunity.”

Inside-out disrupters follow a different path. They begin by selling to a segment of the incumbent’s current customers and then work their way outward to take more of its market. We have seen many examples of these: iPhone versus Nokia (started by selling to existing mobile phone users) and Netflix versus Blockbuster (explicitly marketed to existing movie renters as a better alternative). Rather than starting out as inferior to the incumbent’s offer but “good enough” for buyers who could not afford the incumbent, these disrupters offer much better value from the beginning. These are business model innovations that would quickly draw a competitive response from the incumbent except that they rely on a value network that the incumbent finds impossible to imitate.

WHO IS FIRST?


Once you know if the disruption will be outside-in or inside-out, you will want to identify which specific types of customers will likely be first to adopt the disrupter’s product or service.

For inside-out disruptions, you should ask these questions: Who among your current customers would be most attracted to the disruptive offer? Are there any hurdles to their early adoption (e.g., reliability is not yet proven)? Are there some current customers for whom those hurdles matter less (e.g., they are eager to try out new products or are less concerned about established brands)?

For outside-in disruptions, you should ask these questions: Who is currently most motivated but unable to afford or access your products or services? Which of these hurdles (price or access) is the bigger barrier for them? Which hurdle does the disrupter’s offer help them more to surmount?

WHO IS NEXT, AND WHAT WILL TRIGGER THEM?


Once you identify the likely first customers for a disrupter’s offer, you need to identify who will be attracted to the offer next. For inside-out disrupters, that is likely another subgroup of your customers. For instance, if Warby Parker starts by appealing to the supporters of social causes, will its next customers be tech-savvy eyeglasses wearers? For outside-in disrupters, the key question here is this: When will the disrupter “tip” from selling to noncustomers and start to reach your own customers?

You also need to think about what will trigger these second-wave customers to come on board. These triggers can often be other customers’ behaviors; wait-and-see customers, for example, may become interested as they see others using a product, or they may be persuaded by word of mouth. The trigger may be some further innovation by the disrupter, such as dropping prices further or improving features or both. Or the trigger may simply be visibility as press coverage, marketing, or geographical distribution brings the disrupter’s offer to the attention of the next wave of new customers.

IMPLICATIONS


Knowing the likely customer trajectory has important implications. As the incumbent, you need to know which of your current customers to keep an eye on first to see if they defect. You must also know if the challenger doesn’t need any of your customers to get started (an outside-in disrupter). In that case, you should develop a strategy to compete for these same “outside” customers, where the disrupter may grow first before moving into your own market.

Step 2: Disruptive Scope


The next step in assessing the threat from a disruptive business model is to consider its likely scope. This describes how much of the market (how many customers) are likely to wind up switching to the disrupter once it is well established. Disruptive scope can be predicted by looking at three factors: use case, customer segments, and network effects.

USE CASE


You should first identify various use cases where customers purchase and use your product or service. Make two lists: In what situations do customers purchase your offering? In what situations do they utilize it? (There should be overlap in the lists but also some differences.) Then, for each use case on both lists, consider the disrupter’s value proposition. In which cases is the disrupter clearly preferable for the customer? In which cases is there an advantage for your offer?

As we saw in the case of e-books versus print books, a disrupter may have a clear advantage for some use cases (e.g., boarding a plane with a variety of reading material) but be at a disadvantage in other use cases (e.g., giving a gift to a friend). You should also consider whether there are costs to multihoming. How difficult is it for a customer to buy from your business for some use cases and from the disrupter for others? For readers, it is not that difficult to buy printed books as gifts while keeping an e-reader stocked for their own travel.

CUSTOMER SEGMENTS


Next you should subdivide the customers for which you and the disrupter are competing. Rather than seeing them as one monolithic group, try to divide these customers into segments based on their shared needs. What drives them to use this product category? What are their relevant needs? (This may sometimes correspond to some of your use cases.) Then, for each segment, consider whether the disrupter is extremely attractive in comparison to your business.

Recall Zipcar? This on-demand car rental service seemed to pose a disruptive challenge to traditional car rental companies when it launched. Zipcar members pay a small monthly fee to have access to any of the Zipcars parked in their metropolitan area. They simply look on their phone app, walk up to a nearby car, and type an entry code into the keypad lock on the car door. This self-service model appears much more convenient than the customer service experience of picking up a car at a traditional rental agency. But Zipcar never supplanted the traditional rental model for most customers. It turns out that certain types of consumers (e.g., those in dense cities with regular needs for short-term car rentals) were ideally suited to the membership model. But other consumers (e.g., those in rural areas or those with more infrequent rental needs) did not benefit as much from that model. While expanding to four countries and nearly a million members, Zipcar has stayed focused on college campuses and major cities.

NETWORK EFFECTS


The third factor to consider in predicting a disrupter’s scope is network effects. Many services, especially platform businesses, become more valuable with each new customer that participates. As more customers bought iPhones, it became easier for Apple to attract more developers to create apps for the platform. As more developers built apps, the advantages of the iPhone versus an incumbent like Nokia grew as well. If you look at a cryptocurrency like Bitcoin, there is certainly the possibility that it could disrupt various incumbents that provide traditional financial services (credit card payments, savings accounts, foreign exchange). But the biggest hurdle to a currency like Bitcoin is that currencies are extremely dependent on network effects. As long as few merchants accept Bitcoin and few other customers are using it, the benefits to a new user are mostly hypothetical. On the other hand, incumbents watching Bitcoin need to realize that enough momentum in user adoption could quickly lead to a snowballing effect (much like users flocking to a fast-growing social network such as Instagram or Snapchat) that transforms it quickly from a curiosity to a major disruptive force.

IMPLICATIONS


Now that you have examined use cases, customer segments, and network effects, you should be able to make an informed prediction of the likely scope of impact of a new disrupter. Broadly, we can think of three likely outcomes of a disruptive business model. One is a niche case, where the disrupter is attractive to only a very specific portion of the market. Other disrupters may wind up splitting the market, with the disrupter’s and the incumbent’s business models each taking large shares. And in cases of a landslide, the disrupter quickly takes over the entire market, pushing the incumbent into obscurity.

Step 3: Other Incumbents


We saw earlier how a single new business model can disrupt multiple incumbent industries. When assessing a disrupter to your business, it is easy to focus on its impact on only one industry (your own). But to understand the competitive dynamics at work, it is critical to expand your reference frame to consider other incumbent businesses and how they will be impacted and respond to the disrupter.

VALUE TRAIN


The first place to look for additional businesses that may be disrupted is in your own value train.

Start by asking which product or service the disrupter most resembles. For example, the product most like e-books would be printed books. You can then look at a value train of everyone involved in delivering that product or service from the originator (authors), to producers (book publishers), to distributors (book printers, distribution companies, and retail and e-tail booksellers) until the value reaches the final consumer. Then ask which of these different types of companies may be disrupted if the new business model is successful? For e-books, the answer would likely be retail booksellers, printers, and distributors; authors and publishing houses are most likely able to adapt to the new business model.

SUBSTITUTION


Another way of identifying additional incumbents is to think of products or services for which the customer may substitute the disrupter’s offering. Ask yourself two questions: If a customer starts spending more money on the disrupter’s product or service, where else might they spend less money? If the customer starts spending more time on the disrupter, where might they spend less time?

Considering the early iPhone, you can easily see that if customers spend money on an iPhone, they are less likely to spend money on a phone by another handset maker like Nokia. (Digging deeper, you might determine that if they spend more money on iPhone apps, they are likely to spend less on other entertainment.) If you ask where avid iPhone users spend their time, you might realize that they spend less time conducting Web searches on their desktops (a hugely profitable business for Google) and more time on mobile Web searches (much less profitable).

One other question about substitutes is worth asking: If the disrupter’s current product continues to become much better in terms of performance and quality, for what other products or services might it start to become a substitute? Looking at the initial iPhone, it is possible to imagine that if it continues to get faster, more powerful, and a bit bigger, it does indeed pose a threat as a substitute for laptop computers, televisions, and other categories.

LADDERING


The last way to identify more incumbents who may be impacted by a disrupter is to look at both immediate and higher-order customer needs.

You start by asking these questions: What problem or need does the disrupter solve or meet for its customers? Who else tries to solve that problem? For example, looking at messaging apps like WhatsApp, you can see that customers use them to meet their need for expedient text messaging with friends (especially friends in different countries). That need was previously met by telecommunications providers, which, as we saw, lost billions of dollars in texting fees due to this disruption.

Next you can attempt to unearth higher-order customer needs through a process known as laddering. In this market research technique, you ask a customer a series of “Why?” questions to get at the reasons behind their immediate motivations. For example, if you ask college students why they use WhatsApp, they might say “to message easily with my friends.” If you ask why they use it for that, they might say “to be able to make plans and swap photos.” If you ask why that matters, they might say “so we can meet up and find out wherever the cool get-togethers are happening.” This might lead you to realize that mobile messaging apps are meeting the need for convening social interactions, which was formerly met by visiting the college bar. This kind of laddering can reveal products or services that are made less necessary for customers by the disrupter, even though the disrupter doesn’t appear to be competing directly.

IMPLICATIONS


By looking at value trains, different means of substitution, and different levels of customer needs, you may have identified multiple incumbents types of companies that will be disruptively challenged by the same new disrupter. As an incumbent, it is always valuable to know who else may be threatened by the same disrupter that is threatening you. In planning your own response, it is important to see how these other incumbents are responding or consider how their responses might parallel yours. You may also find that these “enemies of my enemy” could serve as allies in response to the disruptive threat. As described above, Google saw that it was threatened just as much by the rapid rise of the iPhone as were cell-phone handset makers. As we will see, this led to Google’s choice of response to the disruptive threat.

Step 4: Six Incumbent Responses to Disruption


The final step of the Disruptive Response Planner is to plan your response as an incumbent. To do so, you will use what you have learned regarding the trajectory, scope, and other incumbents of the disrupter you are facing to help you choose which strategic responses are most promising for your circumstances.

As an incumbent, you have six possible responses when faced with a disruptive challenger:

THREE STRATEGIES TO BECOME THE DISRUPTER


  • Acquire the disrupter
  • Launch an independent disrupter
  • Split the disrupter’s business model

THREE STRATEGIES TO MITIGATE LOSSES FROM THE DISRUPTER


  • Refocus on your defensible customers
  • Diversify your portfolio
  • Plan for a fast exit

These six strategies are not exclusive; you can combine them (and, in fact, some of them work best together). The first three responses seek to occupy the same ground as the disrupter. The last three responses seek to reduce its impact on your core business. Depending on your own circumstances, only one or a few of these incumbent responses may be workable, so it is best to be familiar with each of them.

Let’s look at each response and see where and how you might best apply it.

ACQUIRE THE DISRUPTER


The most direct response for an incumbent faced with a disruptive challenger is to simply acquire the challenger. This is how Facebook dealt with the challenge of WhatsApp. When Google’s Maps product faced a potential disrupter in Waze, it bought the company. When the car rental giant Avis saw that Zipcar had invented a disruptive business model, Avis also bought its challenger. If you are considering buying your disrupter, knowing who the other incumbents are will help you predict who else might compete with you to drive up the price.

If you do acquire your disrupter, you should continue to run it as an independent division. That’s what Facebook, Google, and Avis did in all the above cases. That means the disrupter you own will continue to steal customers from your core business (and possibly at a lower profit margin). But if you don’t take measures to keep the acquired disrupter independent, you will inevitably put the interests of your core business above the goal of serving your customers. And that will create an opportunity for someone else to launch a similar business and steal away your disappointed customers.

Acquiring the disrupter is not always possible. A start-up with sufficient venture capital may refuse to sell, as was the case with Facebook’s failed $3 billion bid for messaging app Snapchat. Or the disrupter may be part of a bigger company than the incumbent. Amazon’s e-books posed a clear disruptive threat to retail booksellers like Barnes & Noble, but the retailers were much smaller than Amazon (for whom e-books was just a part of its business).

Often, acquiring the disrupter is overlooked or rejected in the early stages, when acquisition is still an option. In 2000, shortly after Netflix launched its subscription DVD model, the start-up’s CEO, Reed Hastings, flew to Dallas to meet with Blockbuster’s CEO, John Antioco. Hastings proposed the video giant and the newcomer form a partnership, with Netflix handling online distribution and Blockbuster the retail channel. Hastings was laughed out of the office.25 Blockbuster didn’t get a second chance. Acquisition does not always need to be 100 percent (a partnership with Netflix would have proved a godsend for Blockbuster), but it does require swallowing your pride and recognizing the disrupter’s advantages before it scales so big as to no longer need your help.

LAUNCH AN INDEPENDENT DISRUPTER


The second incumbent response is to launch a new business of its own that imitates the business model of the disrupter. Instead of purchasing the disrupter outright, the incumbent leverages its scale and resources to try to beat the disrupter at its own game. This is the response Christensen proposes: “Develop a disruption of your own before it’s too late to reap the rewards of participation in new, high-growth markets.”

In order to launch your own disrupter, however, you, the incumbent must be willing to cannibalize your own core business. After all, you are trying to re-create the very business model that is disruptively attacking your traditional business. Charles Schwab implemented this strategy when it saw the growth of online brokerages like Joe Ricketts’s TD Ameritrade, launching its own online service that competed with its full-service offerings.

This strategy again requires you to keep the new disruptive initiative walled off in an independent part of your company. You should run it on its own P&L, with no responsibility to save or support your core business. Although the independent unit should have access to some of the main company’s resources, it should maintain a small and lean organization so that it can evolve quickly rather than becoming a sclerotic version of the nimble disrupter it is trying to beat.

You may even launch an independent disrupter preemptively as you see a possible new business model based on emerging trends and technology. Saint-Gobain, a leading global retailer of construction materials, looked at the trends in e-commerce and recognized the opportunity for an online store in its industry. Rather than waiting for a start-up to capture this opportunity, Saint-Gobain launched Outiz, an online-only retailer in the French market. Outiz has been tasked with competing directly with the parent company’s own brick-and-mortar retail brands.

Launching an independent disrupter is not easy, but it is plausible if the differences in value networks are your company’s organizational culture, cost structure, revenue model, and customer segments. You can potentially overcome these kinds of barriers by insulating the self-launched disrupter from the rest of your business.

SPLIT THE DISRUPTER’S BUSINESS MODEL


What if the incumbent lacks some core capabilities like intellectual property, brand reputation, essential skills, or the right partners that are needed to re-create the disrupter? In that case, simply insulating a new initiative from the rest of the organization is not sufficient. But the incumbent may still be able to re-create the disrupter’s business model by splitting the job with other businesses.

This may be a good strategy if your prior analysis uncovered multiple incumbents and their value networks are complementary to your own. This was the strategy used by Google when it launched the Android operating system in response to Apple’s iPhone, which was threatening its advertising business. Google already had a core mobile operating system from its 2005 acquisition of Android Inc. It also had the key software assets required for an iPhone-like device: Google Search, Google Maps, YouTube video, and the Chrome Web browser. But Google knew it lacked the skills and assets required to design and manufacture hardware to compete with Apple, so it licensed its operating system and mobile software to diverse companies Samsung, Sony, HTC, and others with the capabilities to build great smartphone hardware. By splitting the iPhone’s business model with these firms, Google was able to bring Android phones to market with a value proposition that rivaled that of the iPhone.

The key to splitting a disrupter’s business model is to find other businesses that complement your own value network and partner with them to bridge the gaps that are preventing you from launching your own disrupter. Ideally, those partners are also threatened by the same disrupter, so they will be motivated to collaborate.

REFOCUS ON YOUR DEFENSIBLE CUSTOMERS


Incumbents don’t have to react just by becoming the disrupter; they can also act defensively in shoring up their own core business. That is the focus of the next two incumbent responses. These strategies can often be deployed in combination with the previous ones.

The first of these defensive strategies is to refocus the incumbent’s core business on those customers it has the best chance of retaining. You should use this strategy whenever you have identified a likely split market or niche market for your disrupter.

It is essential that you not engage in wishful thinking and simply continue to invest in your traditional business as if its future will look the same as its recent past. Refocusing should appeal to the customers that you think are most likely to stay with you despite the disrupter. Remember, they won’t stay with you out of loyalty; they will stay because your business model still offers more value to them. Look back at your scope analysis and the customer segments and use cases that favored your product. Look also at the customer trajectory you predicted: Who will likely depart for the disrupter first, and who may follow? Then plan to shift your core business to focus on them, even while that business is likely shrinking.

When book retailer Barnes & Noble found its business disrupted by online book delivery, it refocused its business model on high-margin products like children’s books and coffee-table books because the customers buying these still valued the ability to browse the products in a store environment.

In refocusing your core business, you should aim your marketing, messaging, and continued product innovations at these most defensible customers. If your strategy involves cutbacks, focus on reducing the operations serving those customers that you are likely to lose and on continuing to deliver value to those you are likely to retain.

DIVERSIFY YOUR PORTFOLIO


The next way that incumbents can mitigate the disruption of their core business is by diversifying their portfolio of products, services, and business units. They can accomplish this by repurposing the firm’s unique skills and assets in new areas and by acquiring smaller firms in the areas into which they want to extend.

When digital photography was going mainstream and disrupting the business of photographic film, the top two incumbent businesses were Kodak and Fujifilm. While Kodak slid into a long decline that ended in bankruptcy, Fujifilm managed to adapt and survive. “Both Fujifilm and Kodak knew the digital age was surging towards us. The question was, what to do about it,” said Fujifilm’s CEO, Shigetaka Komori. “Fujifilm was able to overcome by diversifying.” Under Komori’s leadership, the firm spent years applying its technical expertise in chemicals, developed in producing film, in diverse areas such as flat-panel electronic screens, drug delivery, and skin care. By the time Kodak filed for bankruptcy, Fujifilm’s film business was only 1 percent of its revenue, but health care and flat-panel displays were 12 percent and 10 percent, respectively.

Diversification allows you to leverage the strengths in your value network in new business areas, and although these areas may not initially be as profitable as your core business, they can create new opportunities for growth and make your firm less susceptible to total disruption.

PLAN FOR A FAST EXIT


The last strategy for an incumbent response to disruption is the least desirable one. When a disruptive challenger poses an irresistible threat to an incumbent’s entire market and there is no feasible way to launch a disruption of its own, the incumbent needs to plan for a fast exit. This is the case when the disruptive scope is a landslide because all customers and use cases are vulnerable or because strong network effects lead to a winner-take-all scenario.

In planning to exit a market, you should assess all your firm’s assets, especially intangible assets (patents, brand names, etc.) that can be sold. You may also choose to spin off the indefensible part of your business from other divisions that can survive on their own rather than letting the vulnerable part bring down your entire enterprise. In most cases, you can pursue one or a combination of the first five incumbent responses, but sometimes an orderly liquidation of assets is the necessary call.

Beyond Disruption

The fact of disruption is inescapable. The very strategies that comprise the digital transformation playbook for traditional enterprises are also the source of their biggest disruptive threats. And yet disruption is both more and less than it seems.

Disruption is more diverse than our prevailing theory has held. Disruption is driven by more than just lower prices and accessibility for new customers; it can be triggered by any dramatically greater value proposition for the customer. Disruption can happen not just on the familiar trajectory of outside-in but from inside an existing market outward as well.

But disruption is also less than we sometimes imagine it to be. First and foremost, not every innovation (no matter how breathtaking) is necessarily a disrupter of an existing industry. Disruption is rarely total; most disrupters attract a significant part of an incumbent’s market without taking 100 percent. Disruption is also less than irresistible. Even though it may pose an existential threat to an incumbent’s business model, there are strategies the incumbent can use to adapt, diversify, and continue its enterprise by adding new value for customers.

More than anything else, responding to disruption requires that a business be willing to question its own assumptions and focus on the unique mission of how it serves customers.

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