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 encounter names such as Netflix, Amazon, Google, Wal-Mart and of course Apple. Companies that we all know are extremely successful and that we suspect, consciously or unconsciously, to be 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 only about twelve percent of the companies from that list are on the list today. There are two possible explanations for this. In other words, the list from the fifties secretly consisted of shaky companies that may have made a lot of profit, but were actually doomed. In other words – and this seems to be the most reliable explanation – the companies as they are in the list today will also have largely disappeared from the list in a few decades. So we're probably talking about the Amazons, 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 arm itself against it.

disruptive innovation: from innovation to disruption

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

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

Innovations, if they have support, are arranged new trends in. The iPhone catches on and sets a trend in 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 provides a breeding ground for a market that is prone to disruption.

Markets are disrupted

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

Beneath the surface, however, something else is happening: new players are catching on to the same trend. That can be done in different ways. One way is to make the innovative product suitable for the lower end of the market. A broad segment of potential customers who cannot access your product because it is too expensive or too elitist. Christensen noted time and again that disruption is taking place in these market segments. The underexposed lower end of the market is slowly but surely served by players who succeed in making products, resulting from trends as a result of innovations in the market, available to that market segment.

A second way is to respond quickly and smartly to new developments in a market, while the market leader is not agile enough for this. The arrival of Netflix is a good example of this. Market leader Blockbuster has had every opportunity for years to set up a good online service, but has stubbornly stuck to renting out 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 going to that store. South Park made fun of it in the episode "A Nightmare on FaceTime".

The loss 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 agility (a new company responds better to new needs than the market leader) or by making the product more accessible (the market leader only continues to appeal to the elite target group), the result is the same. The market is disrupted because the market leader is eventually overthrown by a newcomer. This does not necessarily mean that a market leader will go bankrupt, but it does mean that it must (for good) relinquish its lead in a certain market segment.

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 operate the device. During the development from the 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 would have been the leading smartphone maker by now. Instead, it mainly produces IT solutions and computer chips.

Connection with other theories

Disruption should not be confused with the law of the inhibiting lead. This theory, designed in the 1930s, predicts that an innovator will eventually become obsolete because of a tendency to rely on slowly aging profit models, products or systems. Conversely, there is the law of incentive lag: a newcomer does not have to solve the teething problems of his predecessors and can learn from other people's mistakes. This means that a backlog can be quickly made up and it is easier to ultimately 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 is not necessarily doing something wrong. Disruption is not necessarily the result of a market leader not innovating, or ignoring opportunities, or simply sleeping. Disruption can arise while the market leader has excellent policy.

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

Recognizing and Recognizing Disruptions

Most trends emerging in the 21st century stem from innovations that address everyday, minor problems. Outdated business theories will tell you that the best ideas involve solutions to immense problems. However, that time is far behind us. The best innovations in modern times solving problems that we have long learned to live with.

We have accepted for decades that taxi rides are expensive and that you order one by calling the taxi company. For several years now, Uber has shown that this acceptance harbored a problem that needed to be solved: ordering a taxi via an app that is quickly on site, not having to negotiate the price and being able to see in advance who you are going to. car gets off.

Small irritations can therefore be the perfect breeding ground for major innovations. Airbnb is a second example. In locations where expensive hotel rooms are continuously 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 nevertheless being broken through disruptive innovations.

The hallmark of a market that is ripe for disruption is therefore a market in which certain barriers or restrictions 'just happen'. Perishable goods are simply not suitable for home delivery – and there was Picnic. Overnight stays on vacation cost money – and there was Couchsurfing. Unlike decades ago, these are no longer about major problems – such as having to be able to wash your clothes or store food – but about small, dormant irritations.

Disruption can be recognized by a declining trendline.

The first declining trendline

A second way to recognize (impending) disruption is the so-called first downward trend line. As long as a market leader offers the best products or services in its market, it will see its turnover grow every year. As soon as that turnover decreases for the first time (for a longer period of time), that is a clear signal that there may be disruption. Either competitors have simply started making better products (see BlackBerry), or the market is slowly becoming disrupted (disruption).

Big companies will often try to calm things down. It's a small dip, it'll be okay, the numbers will pick up on their own. But that drop comes from somewhere; if viewing figures of live television are declining every year, that is not something that automatically picks up. 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 boundaries of its own product. On any device, anytime being able to watch goes against 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 joining in on disruption?

What can you, as an entrepreneur, ultimately do with the theories surrounding disruption? Is it something you have to constantly 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. Major differences were found per market segment and only a few practical examples correspond one-on-one with Christensen's ideas.

Yet Christensen's theory is anything but useless for the average entrepreneur. If Christensen is trying to tell us anything, it's that it's always unwise to rest on your laurels or just focus on making your products or services more sophisticated. If there is anything you can do as an entrepreneur to avoid becoming a victim of disruption, it is to keep your eyes open and continue 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 has been 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 fix the minor annoyances and imperfections of his own find?

Fighting disruption all too often involves brushing aside such questions with catchphrases like, “Yeah, but that's the way it is”. We cried en masse about hotel stays in big cities. And we still shout it en masse, but now about the bizarre system by which the prices of airline tickets are determined. That a plane ticket changes price almost per minute and you as a consumer have no idea why? That's how it is. Don't be surprised if that isn't the case at all in the near future - and see how the major airlines are too unwieldy to adjust their policies quickly.

And then there's the fact that you only have a few hundred kilometers of range with an electric car. And you can charge it almost anywhere. That's the way it is, right? But it is something Tesla has to fix, because… but that's a completely different story.