How can a small firm with a second-rate product challenge big business and end up dominating the market? Disruption - the concept often used to explain such shifts - is now at the centre of a heated debate.
When Canon started to make cheap photocopiers in the mid-1970s, the market leader Xerox had little cause for concern. Xerox had after all invented the photocopier industry and the new machines, which used technology that was 20 years out of date, offered little competition for its products.
However Canon did find a ready market amongst those who could not afford a Xerox. Soon everyone had a copier and as the market expanded and the cheap copiers improved, Canon started to compete more directly with Xerox. Within 10 years, Xerox’s market share had fallen to under 40% and a decade later, Canon was the world’s number one copier brand.
It was cases like this that caught the attention of Harvard Business School Professor Clayton Christensen. How could big companies which seemed to be doing all the right things – staying close to their customers and delivering value – be so vulnerable when an innovation came along?
In his 1997 book, The Innovator’s Dilemma, he outlined his concept of disruptive innovation, where a new product or service takes root at the bottom of a market and moves upwards, eventually displacing the competition.
According to Christensen, many companies innovate too quickly because they try to keep up with the customers and believe that by targeting the top end of the market, they can charge the highest prices.
However in doing so they end up with products that are too expensive and complicated. This makes way for a disruptive innovation at the bottom of the market, one which allows a whole new group of consumers access to a product or service that was previously beyond their means.
Disruptive innovation explains how personal computers took over from mainframes, mobile phones disrupted the market for landlines, and discount retailers are challenging department stores.
Christensen’s ideas have been hugely influential in the technology world. Disruption has become an everyday term and there are now disruption seminars, disruption consultants and even a university degree in disruption.
However his theory has recently been subject to a stinging attack from his fellow Harvard professor, the historian Jill Lepore. Writing in the New Yorker magazine, she claims the theory is based on ‘a set of handpicked case studies’ and that encouraging disruption for its own sake results in devastation.
Lepore’s outburst has resulted in a heated debate amongst innovation experts worldwide. But who is right – and what does it mean for businesses? According to Dr Tim Kastelle, an innovation specialist from UQ Business School, the truth may lie somewhere between the two.
“The reason Christensen’s work had such a big impact was that he was the first to identify that large companies could fail by following textbook advice,” he says. “At the time the belief was that big companies only went out of business because they were incompetent.
“Lepore’s attack is based almost exclusively on Christensen’s 1997 book but he subsequently built evidence to support his arguments. To say disruption doesn’t happen is simply untrue. There is conclusive evidence that it does happen and it takes the characteristics Christensen has outlined.
“However Christenson has really overplayed his idea – it started as a great insight but he carried the argument too far. And Lepore is absolutely right in challenging the attitude that disruption is inherently good – it is only good if it ends up delivering superior value.”
So what can companies do to protect themselves? Dr Kastelle warns that they need to look out for potential disruptors and not discount new entrants to the marketplace too lightly.
“When a disruptive innovation comes along, it is easy to dismiss,” he says. “When you compare its features to the dominant player, it looks a poor contender and often the first reaction is to mock it. But by providing value for part of the market that is being underserved, it gains a foothold, which it can then build on and it can end up taking over the entire market.”
Markets which have a fairly large percentage of customers whose needs are not being met are vulnerable, as are companies which are focusing too much on incremental innovation, or smaller improvements to existing products.
It is a lesson that is highly relevant for Queensland businesses. According to Dr Kastelle’s analysis of data from the Brisbane Innovation Scorecard, the major annual business survey conducted by his colleagues Martie-Louise Verreynne and John Steen, the majority of innovation in the state is focused on incremental innovation, and as many as 80 to 90 per cent of firms are at risk of disruption.
Dr Kastelle has had first-hand experience of disruption when working in the water treatment industry In the 1990s. His company was competing against the ‘big six’ which dominated the market. They stopped servicing accounts worth under $10,000 to focus on the most profitable customers. Within a few years the smaller water treatment companies offering the same level of service at lower cost went from serving less than 30% of the market to holding more than 65% of it.
“When part of the market that has been with you for years moves to someone else, that’s a warning sign,” adds Dr Kastelle. “Another is when there is a segment of the market that is not economical for you to service.”
So how should companies react if they are threatened by disruption? According to Dr Kastelle, one option is to change the game themselves. This approach has succeeded for Dow Corning, a US corporation specialising in silicon technology.
When it started to lose its low-end clients to new market entrants, it duplicated their business model. Setting up a new company, Xiameter, allowed it to compete on price at the bottom of the market but at the same time clients were reassured by its links with the bigger business.
“Start by making small-scale experiments with disruptive models,” advises Dr Kastelle. “At the very least it will help you learn and if it succeeds, you will come out of it with a new and more competitive business model.”