Thursday, July 9, 2015
How to Avoid Being Displaced by Market Disruptions
Disruptive Innovation theory holds that disruptive innovations result from a new industry entrant finding a way to better serve the industry leader’s least profitable customers. After the new entrant has captured the least profitable customers from the industry leader it begins to pursue the next level of customers that are underserved by the industry leader. This process continues until the new market entrant displaces the industry leader.
This is well researched and there is a large body of evidence to support this theory of market disruptions. It does not, however, explain disruptions that seem to take place at the top of the customer value chain.
For example the disruption of the nylon tire business by the steel belted radial tire was not due to unprofitable customers being underserved by the industry leader (DuPont). Rather it was the need for a superior tire that was sought by the most profitable customers.
For newspapers, the first segment of business to be lost was classified advertising. This group of advertisers found that the advanced search capabilities of the Internet helped match buyers and sellers with greater efficacy than the print model. This segment of business was one of the most profitable revenue streams for the newspaper industry.
Consider now the taxicab industry. New market entrants such as Uber and Lyft are attracting the core customers of that industry. The new market entrants provide speedier service, convenient pay methods, ability to choose vehicle type and other advantages not offered by taxis.
Finally, the hospitality industry is being challenged by the like of Airbnb. This service allows individuals to stay at private residences, condos and apartments instead of hotels. Airbnb provides individuals with the ability to customize their travel accommodations according to their needs. The process is highly efficient and provides exceptional value. Here too, the customer attracted is the most desired by the hotel industry.
In all of the cases above it appears that the disruptive innovation theories regarding underserved low profit customers might not be valid in certain instances.
What is certain with the underserved low profit customer is that there is a need for a “good enough” product that doesn’t have all of the “bells and whistles” or the pricing of the products the industry leader is selling to its most profitable customers.
In the case of the more profitable customers, it is likely that the market leading companies are aware of the new market approaches but are not able to respond due to the nature of their structure. It might be that the financial focus and current capital structure won’t allow changing market approaches without heavy financial loss. This encourages managers to focus on improving existing technologies to keep their profitable customers. This strategy can fail since the new technology is superior and using pricing and guarantees on the older technologies won’t stop consumer adoption.
In some instances the industry leaders just choose to keep the current business structure with some modifications to fend off the new market entrants. In the newspaper business this proved disastrous.
For the taxicab industry, it is a combination of financial structure and government regulations that are preventing a competitive response to Uber and Lyft.
For the hotel industry there may be a sense that the old model will survive entrants like Airbnb coupled with the financial investment in the current model that may prevent a successful defense of market share by the industry leaders.
Interestingly, a strategy suggested by Clayton Christensen works for protecting the lower and higher profit customer segments. Clay suggests that the market leader should invest in or develop a company to compete in the new technology arena.
This approach allows the industry leader to manage the output of the current technology while developing the potential of the new technology. For industries like newspapers and hotels it allows the ability for the current business model to continue to serve its loyal customers while developing a new model for changing customers needs.
For industries like taxicabs it provides a realistic way to develop a new market and sidestep regulations and bureaucracies that impede accommodating needed market changes.