Disrupt Or Be Disrupted

In business, the term “disruptive innovation” has become a buzzword, with everyone from startups to large corporations trying to disrupt markets. But what does it really mean to disrupt a market, and why is it so important?

The rapid development of technology and globalization, which allows new business models to be developed at an ever-increasing pace while costing significantly less, is the major reason for disruption.

Who Wants Disruption?

Customers want disruptive products because innovative products improve the customer’s life by providing higher levels of value. Disruptive products are typically cheaper, more convenient, and easier to use than the incumbents in a market. Innovative products offer new ways for customers to achieve desired outcomes and the innovative solutions are usually dramatically better than existing solutions.

Think about how Uber disrupted the taxi industry. Uber was a cheaper, more convenient, and easier to use alternative to traditional taxis. It offered a new way of getting around that was dramatically different from the status quo. Uber delivers a much higher level of value for the customer.

Disruptive innovation is about creating a new product that is so compelling that the customer switches from the product they currently use to the innovative product. Disruption occurs by introducing a new product that competes directly against an existing product and the new innovative product delivers a higher level of value to the customer.

Why Is Disruption Important?

In today’s business environment, it’s more important than ever to be disruptive. With the rise of the internet and digital technologies, businesses must constantly innovate to stay relevant. Disruptive innovation is the key to survival in a digital world.

Consider how Netflix disrupted the movie rental industry. Netflix was founded in 1997, at a time when people were still renting movies from Blockbuster’s brick and mortar stores . Blockbuster had a dominant market share, but Netflix disrupted Blockbuster’s business model with a new way of renting movies. Netflix offered a monthly subscription service that allowed customers to rent movies without leaving their homes.

Netflix also had a great marketing hook point, “No Late Fees”, that positioned Blockbuster as a villain because of their onerous late charge policy. Blockbuster agreed to settle a class-action lawsuit in 2001 over its policy of assessing late fees that have often cost more than the original movie rental price.

Netflix’s disruptive innovation was so successful that it quickly dominated the market, and by 2013, Blockbuster was forced to declare bankruptcy. Netflix is one of the most valuable media companies in the world, reaching a market capitalization of over $87 billion in June 2022. For more on this story watch What Happened To Blockbuster.

The Ambidextrous Organization

There is no question that large companies have struggled to respond to emerging threats from new ventures that disrupt an industry. One of the dysfunctional beliefs of business is that corporations become victims of disruption because they do not see innovations coming. The reality is that disrupted firms like Blockbuster, Kodak, and Nokia saw the market disruption coming and they had the technology assets to compete and win in the disrupted markets. For more about this story watch What Happened To Nokia and Rim. Or for more information about what is an Ambidextrous Organization.

Innovation Is Typically The Domain Of Entrepreneurs

Entrepreneurs commonly innovate without a hierarchical management structure. They thrive in an uncertain, chaotic environment that allows for unbound invention, learning, and pivoting. Founders commonly utilize an external network of skilled professionals cultivated by the founders to develop new products and services. They harness asymmetric information and network advantages to develop new products unbridled by existing management hierarchies and rules.

Slow Death Of Innovation

As a company grows it reaches a size that requires significant management structures to scale. At this stage, its success is less about innovation and more about management systems and processes. Managers who are good at scaling understand that accountability, reliability, and predictability are important for delivering short-term results. They build highly structured management hierarchies to accommodate the company’s growth. As the company deploys its management systems, the entrepreneurial culture is commonly displaced, and innovation slows or dies completely.

The impact of management bureaucracy on innovation is often imperceptible until the market becomes commoditized by competitors and revenue growth slows. Without ongoing innovation, a company becomes highly susceptible to disruption. To learn more about about Creative Destruction.

Long-Term Success Requires A Balancing Act

The long-term success of an organization necessitates the balancing of management competence to achieve short-term financial gains with the capacity to rapidly seize new possibilities. This balancing act requires a company to be an ambidextrous organization successfully exploring new innovations and delivering profitability through core product management.

Crucial breakdowns occur in the company’s operations if there is not an effective management structure, and if there is not enough innovation, products become outdated and vulnerable to competition.

Great companies execute and explore new opportunities at the same time. Companies like Apple, Google, Amazon, and NVIDIA constantly find new ways to become relevant and essential to their customers. They are simultaneously delivering the value propositions of existing products while deploying new innovative products.

This approach enables a company to have a portfolio of businesses at distinct stages of maturity. The key is to separate exploration efforts from the core business, enabling both to execute appropriate strategic ambitions.

Disney’s Disruption Through Technology Adoption – Short Case Study

A major innovator in the media space is The Walt Disney Company. In 2019, Disney launched its streaming service, Disney+, which offers a platform for users to watch movies and TV shows online.

Launching Disney+

Disney+ has quickly become one of the most popular streaming services. In just over a year, Disney+ amassed over 137 million subscribers (April 2022).

What sets Disney+ apart from other streaming services is its vast content library. Disney+ offers movies and TV shows from Walt Disney Studios, Pixar, Marvel, Star Wars, National Geographic, and more. Disney+ is a perfect example of how a large incumbent can disrupt the market with a new product.

The Need For Disruption

The need for businesses to disrupt their industries is more important than ever. In order to survive and thrive, businesses must constantly innovate and offer new products that are more compelling than the existing market options.

Disruption isn’t easy, but it’s essential for long-term success. As Bob Iger, former Disney CEO says, “Status quo is a losing strategy.” If you’re not disrupting your industry, someone else will.

The Nielsen February 2020 Total Audience Report identified the most important reason that consumers subscribe to additional paid video streaming services is to expand the content that they have available.

Disney’s Content Acquisition Strategy

Iger led the high-profile acquisitions of Marvel, Pixar, and Star Wars to build the Disney content library. These acquisitions were key to the success of Disney+, and they have positioned Disney as a major player in the streaming wars.

Disney’s Technology Acquisition Strategy

Iger also acquired lesser-known Bamtech, a cutting-edge streaming technology company. The acquisition of Bamtech was a major bet on the future of streaming, and it has paid off handsomely.

Bamtech was established in 2015 as a spin-off of the digital media arm of Major League Baseball, focused on providing streaming video technology. It was majority-owned by MLB Advanced Media, with minority stakes held by the NHL and other investors.

In 2016, Disney acquired a minority stake in Bamtech for $1 billion. Disney increased its stake in Bamtech to a 75% controlling stake in 2017 for over $1.5 billion.

Disney created two subscription streaming services using Bamtech technology. One focused on sports content (ESPN+), and the other focused on family entertainment content (Disney+).

Multiple Capabilities Required For Success

Thanks to Iger’s vision and leadership, Disney is now one of the most powerful media companies in the world. The disruptive strategy required both content acquisition and technology acquisition. The Disney+ strategic ambition could not be realized without both capabilities.

Should You Be A Pioneer Or A Disruptor?

Pioneers are companies that launch products that create new markets and Disruptors compete directly against market incumbents.

A study shared in Super Founders, published in 2021, showed that over 65% of billion-dollar start-ups created products in existing markets. They were focused on gaining market share from incumbents rather than establishing a new market.

Super Founders author, Ali Tamaseb, studied 30,000 data points on the number of competitors, market size, the founder’s age, his or her university’s ranking, quality of investors, and fundraising time to understand what drives the success of billion-dollar start-ups. He used a data-driven approach to understand what really differentiates billion-dollar start-ups.

Companies can be successful using either a Pioneer or Disruptor strategy. It is important to utilize proper management practices aligned with the strategy selected for product innovation.

Managers often use Schumpeter’s Creative Destruction and Christiansen’s Disruptive Innovation to inform their decisions.

Two Popular Economic Models Of Disruption

Schumpeter’s Creative Destruction and Christiansen’s Disruptive Innovation describe the two most commonly discussed economic models of disruption. These models are used by entrepreneurs and existing business managers to guide their management decisions.

Schumpeter’s Creative Destruction

Schumpeter’s model, first proposed in the 1940s, describes how innovation destroys incumbent businesses and eventually leads to the rise of new businesses. Schumpeter believed that the process of “creative destruction” is essential for economic growth.

In recent years, we’ve seen many examples of Schumpeter’s model at work. Innovations like the internet and mobile devices have disrupted traditional businesses like newspapers and retail stores. And businesses like NVIDIA and ACV Auctions have emerged to take advantage of innovative technologies and business models.

The process of creative destruction can be painful for incumbent businesses, but it’s an essential component of economic growth. If we want to continue to see new innovations and businesses emerge to solve difficult problems, we need to be willing to disrupt the status quo.

Christensen’s Disruptive Innovation

In the 1990s, Clayton Christensen popularized the concept of disruptive innovation with his book The Innovator’s Dilemma. Christensen’s model is about how small startups can disrupt large incumbent businesses by offering a new product or service that is simpler and less expensive than the existing product.

Christensen’s famous book The Innovator’s Dilemma (1997) concluded it was almost impossible for an established firm to lead disruption. His data showed that the winners were almost always insurgents, or startups, who succeed by attacking dominant market players.

Three Disruptor Examples

Dollar Shave Club

Dollar Shave Club disrupted the razor blade market with a monthly membership business model. The incumbent, Gillette, had a dominant market share and a superior blade technology, but Dollar Shave Club had a fundamentally different and better product because of a business model that delivered a better price, a better value, a better experience, and better customer service. Gillette offered the best shave, but Dollar Shave Club was offering the best value.

Dollar Shave Club offered membership plans, which can be upgraded or downgraded at any time. The service was originally offered in 2012, when a YouTube video went viral. The company’s server crashed in the first hour after the YouTube video was published because of an unexpected amount of traffic. As of 2016, the company has acquired 3.2 million subscribers. The company was acquired by Unilever for $1 billion in 2016.

ThirdLove

ThirdLove was founded in 2013 and has disrupted the lingerie market by offering bras in over 80 sizes. The company has raised $68 million in funding and is valued at $750 million as of June 2020. Heidi Zak and David Spector, a husband-and-wife team in their thirties, started their company, to sell bras online, they were taking on an iconic brand, Victoria’s Secret. With a U.S. market share hovering around 33 percent, more than 1,100 stores, and an annual televised fashion show that drew millions of viewers, Victoria’s Secret towered over other lingerie makers.

ThirdLove was inspired by Zak’s own challenges with bra shopping when she could not find bras that were both beautiful and comfortable. In 2013, Heidi left her Google advertising job to take a data-driven approach to design bras. ThirdLove used the images to design both their prototype bras with an app that would determine bra size. They found that standard cup sizes did not fit 37% of women, and they developed half-cup sizes.

With social media advertising and a free-trial campaign, ThirdLove managed to break through the clutter by spending a small fraction of what it would have needed for a television or print ad campaign. It also got a boost from a new online “Fit Finder” quiz, which replaced the smartphone sizing app in 2016. Because the app was tricky to use and was available only for iPhone owners, ThirdLove’s data team developed a detailed questionnaire that was as accurate as the app in determining a customer’s size.

Casper

Casper disrupted the mattress market. The company was founded in 2014 and is a sleep technology company that produces mattresses, pillows, bedding, and furniture. The company was taken private by PE firm Durational Capital Management in 2022.

No industry has been more disrupted by direct-to-consumer start-ups than the mattress market. By the end of 2018, the new entrants would collectively have sales approaching $2 billion, with Casper (more than $400 million), Purple ($286 million), and Tuft & Needle ($250 million) accounting for roughly half that total.

The mattress industry underwent a major change in 2014. The bed-in-a-box trend took off, thanks to the emergence of an online brand, Casper, which pioneered the model of purchasing mattresses online. By 2021, the number of mattress brands exceeded 150 online mattress companies.

Not surprisingly, this online trend has profoundly changed the industry. Between 2016 and 2017, online mattress sales increased by 60.6%. And in 2018, 45% of mattress sales occurred online. This number has skyrocketed in the wake of the COVID pandemic and the increasing popularity of online shopping.

In April 2014, Casper began selling mattresses to great fanfare, thanks to a savvy media campaign that resulted in stories in the New York Times, Bloomberg News, and many other outlets. By the end of the year, the number of media articles about Casper totaled 158. In its first month, Casper’s sales exceeded $1 million. Casper marketed itself as more than just a way to avoid the miserable experience of going to a mattress store; it made buying a mattress seem fun. Customers began posting videos on YouTube of unpacking their Casper foam mattress, watching it expand, and then jumping onto it. Other YouTube videos showed Casper mattress boxes balanced on bicycles by delivery people. Orders poured in so fast that at times they exceeded the number of mattresses Casper had in stock.

Three Pioneer Examples

ACV Auctions

ACV Auctions, whose app allows auto dealers to instantly buy and sell wholesale inventory, has raised hundreds of millions of dollars since winning the 2015 43North competition and is Buffalo’s first tech unicorn. Founders Neiman, Greco, and Magnuszewski grew ACV from three employees to thousands and went public in 2021 on the NASDAQ stock exchange.

ACV’s digital marketplace and comprehensive suite of products provide greater access to trusted auto inventory and speed to liquidity for their auto dealer customers. The ACV differentiated approach to vehicle insights also allows ACV to stand behind the quality of the vehicles listed on their marketplace.

ACV pioneered the wholesale market’s first seller assurance service, Go Green, which provides the seller with assurance against claims of defects in the vehicle that are not disclosed in the auto’s condition report. The ACV approach instills more confidence to transact digitally, and they enable transactions that may not have happened in the traditional auction process.

The ACV repository of data enables transparent, comprehensive, and accurate vehicle information that auto dealers can trust, powering more efficient and frictionless vehicle transactions. Through the connection of hundreds of discrete data points collected along the entire used vehicle transaction journey, ACV improves the auto buying process and has built a data moat with their dynamic technology platform.

Instacart

Instacart was founded in 2012 and offered on-demand delivery of groceries from local stores and it has disrupted the grocery delivery market. The company raised $2.9 billion in 19 rounds of funding and was valued at $39 billion as of 2022 by Fortune and TechCrunch.

Instacart has disrupted the grocery delivery market by providing convenience and flexibility that customers desire. Instacart makes it easy to order groceries online or in-app from local stores and have them delivered to the customer’s location. They offer a wide selection of retailers and local grocers across North America, as well as curbside pickup at select locations. Their platform has more than 500 retailers and local grocers and operates in all fifty states.

With Instacart, you can track your order’s progress and communicate with your shopper every step of the way. This convenience and flexibility are what customers want and Instacart has delivered robust growth and elevated levels of customer service.

Plaid

Plaid is a financial services company based in San Francisco, California. The company builds a data transfer network that powers fintech and digital finance products.

Founded in 2013, Plaid raised $2.8 million from investors including Google Ventures, Spark Capital, and New Enterprise Associates. It has raised over $700 million and has an estimated value of $13 billion as of 2022.

In an ever-changing financial landscape, it is critical for companies to keep up with the latest technologies and trends. Plaid has done just that, emerging as a leader in the fintech space.

Plaid provides a data transfer network that powers Fintech and digital finance products. Their technology links banks and common apps such as Venmo, Coinbase, Robinhood, and Chime to offer banking services without having to create their own method to synchronize with banks.

Plaid’s technology verifies bank accounts and allows for immediate payroll deposits and electronic bill payments. In real-time, the service can verify identities and account balances.

Plaid has expanded steadily since its inception in 2013, with more than 11,000 banks and over 200 million consumer accounts claiming to be integrated. Beyond the financial ties, the firm makes budgeting and cost management tools available to app users.

Visa agreed to buy Plaid for $5.3 billion, nearly double the start-up’s valuation, early in 2020. Visa abandoned the acquisition due to antitrust concerns. The Department of Justice sued to block it, alleging that it would reduce competition in the payments industry.

Plaid faces significant competition from the rival disruptor firm Stripe. Stripe introduced a new product called Financial Connections that will let its customers connect to their client’s bank accounts and access financial data, allowing them to speed up or complete transactions.