Friday, March 15, 2013

Surviving Disruptive Innovations


Was Borders a victim of Disruptive Innovation? (courtesy of Wikimedia Commons

Tower Records. Borders. Kodak. Maybe even Research In Motion (RIM)?

The list of casualties to disruptive innovations grow longer each day. By clinging to the status quo and failing to recognise the threats of disruptive consumer behaviours, technologies, or business models, these companies have sounded their own death knell.

(To understand what disruptive innovations are, read my recent review of The Innovator's Dilemma)

To escape their inevitable fate, the prescription has often been for incumbents to develop their own disruptions before it's too late to reap the rewards of being a part of new, high growth markets. However, is it really that simple to "out-disrupt" your disrupters?

In a recent article in Harvard Business Review, Maxwell Wessel and Clayton Christensen proposed a three-step process to out maneuvre impending disrupters:

1) Identify the strengths of your disrupter's business model;

2) Identify your own relative advantages; and

3) Evaluate the conditions that would help or hinder the disrupter from co-opting your current advantages in the future.

From the above, one could determine what is known as the extendable core. These aspects of a disrupter's business model allows it to maintain performance advantages as it creeps upmarket in search of more and more customers. They tell us what customers a disrupter may or may not attract.

To discern how disrupters may upset incumbents - and how they could be held at bay - we should ask ourselves two questions:

1) What jobs do customers want this product/service to perform? 

Interviews, surveys, focus groups and behavioural observations could be conducted to uncover current customer interactions and patterns. Spend a day or two walking through your business. Assume the guise of your customer and determine what goes through his/her mind during the process of consumption. This often requires fairly in-depth and accurate research.

2) What would I have to change for my current advantages to evaporate?

Consider Wessel and Christensen's Five Barriers to Disruption and how they fit into your business:

1) The momentum barrier - prevailing behaviours by customers which make it difficult to overturn the status quo;

2) The tech-implementation barrier - how difficult it is for new comers to implement a particular technology which is already available;

3) The ecosystem barrier - current relationships, supply chains and integrated systems which would require a change in the business environment to overcome;

4) The new-technologies barrier - technology needed to change the competitive landscape that is yet to exist; and

5) The business model barrier - where the disrupter would have to invest in assets and infrastructure that mirror your cost structure.

Once the above two questions are probed in fairly detail, you should then determine where you should focus future efforts in growth and innovation to turn the tides in your favour. These are areas where disrupters are unable to capitalise on and lack the advantages available to existing players.

Survivors and Casualties of Disruption

To illustrate the above, let us look at some local examples.

First, the movie business. The introduction of DVDs and streaming video services did not eliminate cinema halls as patrons valued the "big screen", superior sound systems and social advantages which theatres conferred. Here, momentum and business model barriers gave existing operators an advantage. Riding on this observation, cinema operators expanded their theatres to multiplexes, invested in state-of-the-art digital technology, and improved their seats.

In Singapore, major supermarkets like Fairprice provide another positive example. To compete against online grocers, they focused on providing better quality perishables, more convenient locations (eg co-locating with petrol kiosks), and longer operating hours.

Unlike the US or other countries, e-commerce couldn't really take off for groceries due to the momentum (shopping is a pleasurable way to escape our cramped apartment homes), and ecosystem (delivery of large packages to homes are difficult while transport is cheap and convenient) barriers.

On the flip side, music CDs could not survive the onslaught of digital streaming music as the cost and convenience benefits of the latter far outweighed the former. With everybody carrying a smartphone (or two), it doesn't make sense for one to lug around a separate device for music. Here, disrupters had advantages in new-technologies (superior delivery), business model (lower costs), and ecosystem (ready market of suppliers).

The demise of major book stores MPH, Borders and Page One were accelerated by online book retailers and the availability of e-books that can be read from tablets, smartphones and e-book readers (like the Kindle). Our excellent public libraries also made it less necessary for avid readers to purchase books.

While there are still dedicated groups of people who love physical book stores (like yours truly), the momentum and business model barriers of this business are fast eroding. To survive disruptions, book stores may want to organise activities such as book clubs, reading groups, storytelling sessions and thematic events to build communities. Hopefully, these affiliated actions could help reposition the book store from just a place to buy books to a sanctuary for the literary senses.

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