Disruptive Innovation (DI) creates an economic minefield in a current market. Its impact means long-term havoc for a competitor, taking them by surprise. Disruptive Innovation steals away a smaller subsegment of the current market that seems like a small casualty but has the potential to grow at an exponential rate.
DI occurs when innovation in the form of a concept, service, or product bursts into the market creating or stealing a market segment of consumers. This is where disruptive innovation gets its name; it disrupts the natural flow of the current market.
DI takes many forms, from the creation of a new product entering the market on a red carpet. To a company evolving a product so much they neglect a subgroup of consumers who just want the basics for the basic price. DI erects itself by accident, demonstrated by the creation of Viagra. Viagra, designed originally for treating high blood pressure, morphed into a vastly different drug than intended.
The agitators of DI take different forms, but historically speaking most DI is brought out by smaller companies and start-ups with their greenness being a strategy play. They typically have less skin in the game, so there is less risk. They cater to flexibility easier than larger corporations. Companies have spent years culminating their business model strengths around a market that unfortunately is disrupted. This is why it’s so hard to manage DI, the incumbent isn’t built with enough flexibility the disrupted market requires.
An established company has created a business model that has a proven track record of success. It’s much harder to accommodate DI. Or the company isn’t sure the disruption will be worth it to change its model. Unfortunately, both flaws are direct catalysts for DI to grow. Because there is only a growth potential there is no guarantee, which makes DI so hard to predict, counter, and invest in.
It’s a risky 50/50 situation where the end results aren’t tangible till they’re more formulated. Competitors don’t know there’s a problem till it’s knocking at their door, stealing away revenue and diminishing their market value. While a company may envision itself as Goliath and its disruptor, David, those roles can quickly be reversed. As the disruptors gain traction and steady growth, they will eventually procure the high-end customers of the incumbent company. This type of innovation, like a ninja, sneaks up on a competitor with such force. If a product is archaic enough it eventually leads to bankruptcy.
So a DI has entered the chat.
What does the competitor or the incumbent company do and when do they need to fall on their sword?
Vimma explores the four options the incumbent has to counter the attack:
The first way to keep afloat when DI has reared its’ innovative noggin, is to build and offer what the DI is offering. In layman’s terms, if you can’t beat them, join them. But be better and faster. If imitation is the sincerest form of flattery, then adaptation is the sincerest form of success against DI.
While this is one of the ‘safer’ routes, it doesn’t make it easy by any stretch of the imagination and requires aggression. To see the light at the end of the tunnel, a company needs to create a cold and calculated attack led by fortified leadership and execution of precise nature.
Another key factor of this strategy is a long-term game plan. As the disruptor grows with success their power follows. It’s important to have a formulated plan to know the next steps and plan for all future steps. Going hand in hand with the long-term plan is to deviate from the current model, creating new metrics and reshaping the process. DI is a sign that times are changing and it’s vital to move with the dynamic current, not against it.
The second strategy, if the build is not in the card, is to buy. Nip the problem in the bud, and acquire the company that is disrupting your business model. Put your money where your mouth is.
However, this is easier said than done. Going back to what makes DI so risky, the disruption isn’t a problem till it is. Meaning, it’s harder to validate in the beginning.
Will this be a minor inconvenience to your business model that can be overlooked or will it grow to a major fumble?
It’s harder to judge the problem if you don’t have the full picture. By the time the full picture is readily available, what was a small cheap company, has now become Goliath, with a bigger price tag. So hypothetically, even if the incumbent took the risk and bought out the company when it was still David, they are left with more hurdles.
While this solution does create more obstructions and potentially puts the incumbent in a position with an expensive answer, it is a solution to the disruption itself.
Companies must make the choice to buy relatively quickly or it can be detrimental to their success. Pepsi is a great example of how buying is beneficial while Yahoo demonstrates an example of how failing to buy the DI ends poorly.
An example of a company that bit the bullet and bought out the disruptive innovation company is Pepsi. While Pepsi is considered a big contender when it comes to soda they were not immune to competitors. When SodaStream, an innovative way to make soda at home entered the market, they were quick to act. Pepsi purchased SodaStream for a pretty penny of 3.2 billion dollars back in 2018, protecting their dynasty. Yahoo, on the other hand, unfortunately, missed the mark and didn’t understand the scope of DI. The Yahoo CEO, Jim Lanzone, haggled over prices to purchase Google and Facebook. Lanzone had the opportunity to buy Google for $3 billion and Facebook for $1. 1 billion. But due to haggling over the prices, Lanzone lost both deals. Unfortunately leading to their obsolete demise.
When’s the last time you heard anyone give a yahoo email address? Besides your technologically challenged great aunt.
Yahoo can credit not appropriately acting to DI in their market, as their demise and fall from greatness.
If build and buy aren’t feasible strategies to counteract DI, the third route to go down is a partnership. A partnership is the most common strategy incumbents divert to when their market has been invaded. Partnership while on paper appears to be the most effective and cost-efficient. However, in theory, it is a weak attempt to band-aid the problem. The partnership allows the incumbent to delay reacting. It’s a more conservative approach to the problem.
Like any solution, there are pros and cons each way you look at it.
The positive side of the partnership strategy is that it's relatively easier than the previous methods. It follows a faster pace than building and buying and most importantly it requires less capital. The partnership creates a perfect storm where the market is monitored from afar and analyzed before acting. This is where the idea of partnership being the most conservative and pragmatic strategy comes into play. It allows an incumbent to test out of the waters and put out feelers before fully diving feet first into the disrupted market.
On the other hand, creating a partnership with the problem instead of solving it only delays the inevitable. If the incumbent partners with the disruptors it will have the opposite effect as intended. Instead of helping the incumbent, the partnership fuels the success of the disruptor. Making it more harmful than a helpful solution.
If the incumbent partners with a major company that isn’t the disruptor but offers an innovative solution similar to the disruptor, it’s harder to create a synergetic harmony between the two. Especially if you add that it's in a disrupted market. Combining two companies with losing value propositions together and expecting them to succeed doesn’t sound like a confident strategy.
Finally, the last strategy to combat DI is to pivot completely from the disrupted market. This is a last resort effort before throwing in the towel and accepting David has made it full circle to Goliath. This strategy involves the incumbent undergoing major transformations to their business model as well as the business itself. Pivoting is a devastating blow to the ego. It’s mentally frustrating and challenging and requires a revamping of the business completely. Pivoting is as risky as it is painful, and is the last-ditch effort to avoid bankruptcy.
There are two main ways to pivot in a disrupted market correctly.
Both routes are useful because the incumbent already has established credibility, but they do not make it easier to accept the defeat and a blow to the ego.
Paypal is a great example of a company that successfully partnered with an adjacent market after the market was disrupted by innovations. PayPal combined two of the strategies above, pivot and partner. At one time Paypal’s main focal point was strictly e-commerce. They merged with the financial service provider, X.com. This partnership led to Paypal’s long-running success. Present day, PayPal is the major service provider for online payments with eBay, an e-commerce company that assists in the online sales of all types of goods. This partnership protected PayPal and catapulted them into victory.
As long as people are innovating and creating new solutions, DI will be a present feature of the environment. DI is important to our society because it demonstrates growth and change and how they affect a current market. It’s important for companies to remain vigilant of surrounding competitors, and to keep an eye out for potential disruptors. Once a market has been disrupted it’s important to be rational and react accordingly because you never know who could be your next Goliath.