26. January 2020
Michal Dallos (8 articles)

What is Disruption?

Many companies, in particular startups, are very fast in claiming a ‘game changing disruption’. They promise a fundamental ‘disruption’ of the market, based on their ‘disruptive technology’, on ‘digitalization’ or an ‘agile approach’. Established companies, even market leaders, try to reinvent themselves in order to ‘lead by disruption’. Everyone is talking about disruption!

Is the loose use of the term ‘disruption’ turning it into a buzzword? Yes, and that is why we should clarify some fundamental questions: What is a disruption? Can a disruption be predicted? Is every fundamental change in the market caused by a disruption?

Defining ‘Disruption’

Disruption is a particular business model that changes the performance metrics along which the company competes with competitors.

 This definition is inspired by the definition developed by Erwin Danneels.

Three Characteristics of Disruption

1. There are only disruptive business models, no disruptive technologies

From the economics point of view, disruption happens one level above technology, on the level of the business model. Very often the applied technology is not advanced at all. Disruption is achieved by a novel combination of known, out-of-shelf components in a new, unique, and clever way.

2. New value proposition targeting a low margin market gap

Established market players concentrate on constant product improvements in order to satisfy their customers and maintain their advantage over competitors. For a new market player, it is easier not to compete with the market leader directly, but provide a similar, and possibly simpler, product (“low-end disruption”) to a new audience (“new market disruption”)—consequently with lower margin. To the targeted customer segment, the product is entirely new, and hence contains a superior value proposition. The concepts of “low-end disruption” and “new market disruption” have been introduced by Clayton M. Christensen. In practice a unique new value proposition may also play a significant role.

3. New market creation

By developing a substantial number of consumers in an otherwise empty business segment, the disruptor creates a lower-end new market segment. The new value proposition may become so attractive that the mainstream consumers start to turn away from the market leaders’ products, in favor of the disruptor’s product. Consequently, disruption is a process (not an event), that poses a potentially mortal threat to the market leaders.

Examples 1: streaming services vs. DVD rentals / cinemas

Instant availability of services is an example for a new value proposition in the age of digital technologies: film streaming services are not only cheaper than DVD rentals or cinema tickets but also available everywhere and anytime the customer desires. As a consequence, DVD rentals cease to exist and movie theaters focus on providing premium quality experience.

Example 2: high-speed trains vs. flights

The high-speed train has become a disruptor to short- and some medium-distance flights of 2-3 hours of duration. The improved value proposition concern not only costs and the direct travel time, bus also the overall journey experience by avoiding security checks and providing a center to center transportation. Examples include the connections Frankfurt – Cologne, Madrid – Barcelona, and Paris – London, as well as and many domestic connections in China where the advent of the high-speed train technology coincides with the popularization of air travel.

How to Predict or Identify Disruption?

To predict a disruption in the market is difficult, if not impossible. The reason is that the threat of a disruption appears from a market newcomer, rather than form existing market players.

In order to identify a disruptive business model, monitoring competitors is not sufficient. To monitor the entire complementary low-margin and new market segments for a potential disruptor is a task too unspecific to succeed. Many corporations therefore seek the proximity of startups by engaging in startup ecosystems and investing into startups in order to ‘keep the enemy close’. Furthermore, a future trend analysis is of great help.

The development of a disruption may be long in duration and high in cost. However, once deployed, it penetrates the market much faster than any sustainable innovation. Consequently, market leaders need to observe closely the activities of various new players and integrate the most promising innovations into their own business model. Buy, don’t make a disruption.

Example of prediction failure: digital cameras

One of the first digital cameras was developed by a small team in Kodak, once the largest film company in the world. Kodak not only did not recognize its disruptive potential, but allowed the developers to leave the company and to finish their work in a small company called Apple. The results were one of the first affordable digital cameras Apple QuickTake 100 in 1994 and Kodak bankruptcy in 2012.

Is every fundamental change in the market caused by a disruption?

No: a fundamental change in the market, just like the replacement of the market leader or even his bankruptcy, are not necessarily a disruption. Sustainable innovation, product upgrades, or company mergers may lead to significant changes in the competitors’ landscape: the battle for the profitable customer segment can lead to casualties or even demises of companies.

Disruption innovation framework in practice

The disruptive innovation framework was originally explored by Clayton M. Christensen. In practice, however, his criteria are not universally applicable. Some disruptions lack the low-end / new-market characteristics: the success of personal computers over mechanical typewriters or that of IPAD versus personal computers are only two clear examples.

Furthermore, the new disruptive power of various companies is sometimes not directed to the customer’s segment, but to other aspects of the business model. In this sense electric cars are not disrupting the automotive industry, but disrupting the supporting infrastructure of gas stations. Another example is UBER or other gig economy companies: they are not necessarily disrupting customer base, but may disrupt the service provider segment (key resource in business canvas framework; in case of Uber, the drivers). Gig economy companies empower a broad segment of previous customers to become providers of services, in the roles of ad-hoc drivers, deliverers, or e-scooter juicer.

Despite the reductionism of the definition, ‘disruptive innovation’ is an excellent framework to give valid insights into the mechanism of the rise and downfall of some companies and to put the use of the term ‘disruption’ on a more solid foundation.