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.
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