Disruption: the disruption of markets

If you take a look at the Fortune 500 list - the list of the five hundred most profitable American companies - from a recent year, you will come across names such as Netflix, Amazon, Google, Wal-Mart and of course Apple. Companies that we all know are extremely successful and that we, consciously or unconsciously, suspect are indestructible. How could a company like Google ever disappear? Or Apple?

If you then take a look at the Fortune 500 list from the fifties, you will notice that this is just another twelve percent of the companies from that list appears on today's list. There are two possible explanations for this. In other words, the list from the 1950s consisted of shaky companies that might have made a lot of profit, but were actually killed. Or - and this seems to be the most reliable explanation - the companies as they are on the list today have largely disappeared from the list in a few decades. So we are probably talking about the Amazon, Googles and Apples of this world. How is that possible?

In this blog we explain what disruption means, how you can recognize it as an entrepreneur and how a market leader can protect itself against it.

Disruptive innovation: from innovation to disruption

Disruptive innovation - or simply disruptive innovation - is a business concept that was introduced by the top American consultant Clayton Christensen in the late 1990s. In his famous standard work The Innovator's Dilemma from 1997 he describes this phenomenon for the first time, which in the long term leads to market leaders more often than not losing out and being overtaken by newcomers.

In order to understand how disruption works, it is important to start with the concept of innovation. Innovations take place continuously in almost all markets. They are often used by large, determining players in that market (think of cable company UPC that introduces digital television), because such players have the budget and staff to research, manufacture and test innovations. Such an innovation offers possibilities that did not exist before. Consider the very first iPhone, with which Apple - already successful with the general public including the Mac computers - merged the MP3 player, PDA and GSM into one new device.

Innovations are regulated if they have support new trends in. The iPhone is catching on and creating a trend in the field of mobile telephony. Other companies are going to design smartphones and compete with the market leader - in this example Apple. Once such a trend has emerged, it forms a breeding ground for a market that is susceptible to disruption.

Markets are disrupted

Such a disruption is possible because the market leader generally continues to focus on innovating the introduced product. The new iPhone is getting better, more advanced, more beautiful - and therefore more expensive. Introducing a radically different iPhone would be illogical. Why would you launch a completely different product if your previous product was successful? You continue to innovate your successful product, but above all stick to the success that has arisen.

However, something else is happening beneath the surface: new players are following the same trend. That can be done in different ways. One way is to make the innovative product suitable for the bottom of the market. A broad segment of potential customers who do not have access to your product because it is too expensive or too elitist. Christensen noticed time and again that disruption is taking place in these market segments. The underexposed underside of the market is slowly but surely being served by players who manage to make products, resulting from trends resulting from innovations in the market, accessible to that market segment.

A second way is to respond quickly and cleverly to new developments in a market, while the market leader is not agile enough for that. The arrival of Netflix is a good example of this. Market leader Blockbuster, after all, had many years of opportunity to set up a good online service, but stubbornly insisted on renting tapes and DVDs through expensive retail properties. A new, fresh company disrupts the market by responding in one fell swoop to the new consumer need: convenience and speed. No more having to go to that store. South Park mocked it in the episode "A Nightmare on FaceTime".

The decline of the market leader

In both cases, something interesting happens: the market leader loses out in the long term. Whether this is due to a lack of maneuverability (a new company responds better to new needs than the market leader) or by making the product more accessible (the market leader continues to only appeal to the elitist target group), the result is the same. The market is disrupted because the market leader is eventually thrown off his throne by a newcomer. This does not necessarily mean that a market leader goes bankrupt, but that he must give up his lead in a certain market segment (forever).

Clayton Christensen makes it himself example of the development of the personal computer when he explains disruptive innovation. The first mainframe computers were complex devices that filled a room and required lengthy training for the person who had to be able to operate the device. During the development from that first generation of computers to the final PC, and later the laptop and even smartphone, there has been a continuous stream of disruptions. If there had been no disruption, IBM should have been the most important smartphone maker. Instead, it mainly produces IT solutions and computer chips.

Consistency with other theories

Disruption should not be confused with the law of the inhibiting lead. This theory, designed in the thirties of the twentieth century, predicts that an innovator will always be outdated in the long run because people tend to rely on slowly aging profit models, products or systems. Conversely, there is the law of the stimulating backlog: a newcomer does not have to solve the teething problems of his predecessors and can learn from other people's mistakes. That way, a backlog can be made up quickly and it becomes easier to become the market leader.

What distinguishes these theories from Christensen's theory of disruptive innovation is the fact that disruption can occur even though the market leader does not necessarily do something wrong. Disruption is not necessarily the result of a market leader who does not innovate, or miss out on opportunities, or simply lies asleep. Disruption can occur while the market leader pursues an excellent policy.

Christensen has moreover been attacked on the latter statement more than once. An often heard contradiction is that a market leader who loses his place by definition well has done something wrong (namely: not responding too late or to a changing market). Proponents of this view are of the opinion that it is essential to be able to identify disruptions and, if possible, to predict

Recognize disruptions

Most trends that arise in the 21st century stem from innovations that respond to everyday, small problems. Outdated business administration theories will tell you that the best ideas include solutions to immense problems. However, that time is far behind us. The best innovations in modern times solve problems that we have learned to live with for a long time.

We have accepted for decades that taxi rides are expensive and that you order one by calling the taxi company. Uber has been demonstrating for some years that this acceptance, however, contained a problem that needed to be resolved: ordering a taxi through an app that was quickly on the spot, not having to negotiate the price and being able to see in advance who you were in the car steps.

Small irritations can therefore mean a perfect breeding ground for major innovations. Airbnb is a second example. At locations where expensive hotel rooms are constantly fully booked, Airbnb offers affordable alternatives. Laws that were previously thought to be cast in concrete ("spending the night in Manhattan is simply expensive") are being broken through disruptive innovations.

The characteristic of a market that is ripe for disruption is therefore a market in which certain obstacles or restrictions are 'just like that'. Perishable goods are simply not suitable for home delivery - and there was Picnic. Nights on vacation cost money - and there was Couchsurfing. Unlike decades ago, it is no longer about major problems - such as having to be able to wash your clothes or being able to store food - but about minor, dormant irritations.

Disruption can be recognized by a falling trend line.

The first falling trend line

A second way to recognize (imminent) disruption is the so-called first descending trend line. As long as a market leader offers the best products or services in his market, he will see his turnover grow every year. As soon as that turnover decreases for the first time (for a somewhat longer period), that is a clear signal that there can be disruption. Either competitors have simply started making better products (see BlackBerry), or the market is slowly disrupting (disruption).

Large companies will often try to appease things. It is a small dip, it will be fine, the figures will improve automatically. But that fall comes from somewhere; if viewing figures of live television are decreasing annually, that is not something that automatically updates. It is a signal that the market is slowly changing and that on demandplayers are disrupting the market. As a television provider you will have to respond to this by rigorously changing your proposition. In this example, such a provider will have to look beyond the limits of its own product. On any device, any time being able to watch is contrary to the concept of live television, but around 2010 it turned out to be the much needed innovation to be able to play a significant role in the modern television system.

Fighting against or following disruption?

What can you as an entrepreneur ultimately do with the theories about disruption? Is it something you constantly have to try to arm yourself against, or can you use it to grow yourself?

Critics of the disruption theory have tried several times to show that the predictions of that theory do not (always) come true. Different market segments have been analyzed based on the claims of the disruptive innovation theory. Large differences were found for each market segment and only a few practical examples correspond to Christensen's ideas one on one.

Yet Christensen's theory is anything but useless for the average entrepreneur. If Christensen tries to make something clear to us, it is always unwise to rest on your laurels or only to make your products or services more advanced. If there is already something you can do as an entrepreneur not to fall victim to disruption, then it is keeping your eyes open and continuing to recognize new opportunities in your market. And perhaps that is the core problem at the heart of the disruption theory: once that innovation has been implemented, and the trend is born, how open is the innovator to the next innovation? Is he still looking for the product that makes his previous product superfluous? Is he still willing to solve the minor irritations and imperfections of his own find?

Fighting against disruption all too often implies that you dismiss such questions with cries such as: "Yes, but that's just the way it is". We talked en masse about hotel stays in large cities. And we still call it en masse, but now about the bizarre system with which the prices of airline tickets are determined. That a flight ticket changes prices almost every minute and that you as a consumer have no idea what that is about? That's just the way it is. Don't be surprised if that isn't the case in a very short time - and see how the major airlines are too unwieldy to adjust their policy quickly.

And then the fact that you only have a few hundred kilometers with an electric car. And it can hardly charge anywhere. That is true, right? But it is something that Tesla must fix, because ... but that is a completely different story.