Distant Early Warning Signs of Market Disruption

Disruption is caused by the new business models an innovation enables. A disruptive innovation can be hard to spot because competitors can offer a different value proposition, not necessarily a better one.

Distant Early Warning Signs of Market Disruption

Scott Anthony wrote a great blog post last month “The Key to Spotting Disruption Before It Happens ” that uses an article in the Economist on the US Postal Service, “Hoping For Deliverance” as a point of departure.

How could a relatively flat line be scary?

It just looked so eerily familiar. Go back and look at what happened to CD sales from 1996 to 2001. Or check out newspaper company revenues from 1996 to 2005. Or Kodak’s film sales during the 1990s. Or Blockbuster’s revenues in the early part of the 2000s. Or Digital Equipment Corporation’s revenues in the 1980s. And on and on and on. […]

In the early days of transformation, market leaders tend not to feel deep pain. The transformation takes root away from the mainstream, or in a seemingly non-connected market. It’s not yet good enough for mainstream markets. Or, the overall increase in consumption acts as a “rising tide” that lifts the boats in the mainstream market. This makes it easy for executives to say, “I get what you are talking about. But my business is healthy! It’s all overblown.”

It’s important to remember that it’s not really a disruptive technology, it’s a disruptive business model. Clayton Christensen was interviewed in April 2001 by Edward Prewitt in CIO magazine, these two  exchanges clarified what is driving the disruption of a market:

Q: Your research framework is commonly termed disruptive innovation, but you’ve written that innovations disrupt different companies to different degrees.
We’re really talking about a disruptive business model more than a disruptive technology per se. Usually, the technology simply is an enabler of the disruptive business model. For example, is the Internet a disruptive technology? You can’t say that. If you bring it to Dell, it’s a sustaining technology to what Dell’s business model was in 1996. It made their processes work better; it helped them meet Dell’s customers’ needs at lower cost. But when you bring the very same Internet to Compaq, it is very disruptive […].

I always want to look beyond the horizon when I’m looking at an Internet business plan and ask myself, Is there a company out there for whom the Internet appears to be a sustaining technology? Because if there is, I will always bet on the incumbent to win. And if this approach disrupts everybody, then I will always bet on the entrant. For example, in online drug retailing, a lot of smart venture capitalists invested in Drugstore.com and PlanetRx.com. But you look around and you see Merck-Medco out there, which is a mail-order pharmacy taking orders by fax, phone and mail, and shipping them out by the hundreds of thousands. Bring the Internet to Merck-Medco. How does it look to them? It’s a sustaining technology. So Merck-Medco does 10 times the volume of PlanetRx.com.

In that same interview Christensen offers some additional tests to spot a disruptive innovation.

Q: Your recent research mentions a few litmus tests to apply to recognize disruptive innovations.

• If you look back in history, the disrupted firm always viewed new technology as a threat. In reality, they were all poised on the brink of a big growth opportunity. But because the way they reacted was first to discount this innovation as meaningful and second to frame it as a threat, they ended up getting killed. So the first thing is to look at disruptive technology as a growth opportunity and not as a threat.
• In almost every case, a disruptive technology enables a larger population of less skilled people to do things that historically only an expert could do. And to do it in a more convenient setting. In hundreds of industries, this is a very common characteristic.
• You can’t disrupt a market in which customers are not yet overserved by the prevailing offerings. […]
• The successful disruptive business model facilitates or lubricates existing patterns of behavior. It’s not predicated on consumers changing behavior. […] People don’t willingly buy products that do a worse job of what they’re trying to get done.
• The disruptive technology almost always takes root in a very undemanding application, and the established market leaders almost always try to cram the disruption into the established application. In so doing, they spend enormous amounts of money and fail.

Update Sat-Aug-2-2014: Christensen’s use of “disruptive technology” leads people to focus on the technology and its application and not the business model assumptions behind it. In a later interview with the Economist “Still Disruptive,” he is more explicit: “Technology per se is not disruptive or sustaining: it is the way it is deployed in the market.” The disruption occurs not when the incumbents are felled, but when the new entrants find a fresh market that they can take root in. This is the point of both Anthony’s and Christensen’s observations: established firms either say “we are still standing” or “we see the threat but we cannot figure out how to apply the technology for our current customers.” They need to counter the threat in the adjacent markets that may in time blend into theirs.

“When the oak is felled the whole forest echoes with its fall, but a hundred acorns are sown in silence by an unnoticed breeze.”
Thomas Carlyle

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• Innovation Often Obsoletes Assumptions, Political Boundaries, and Work Process
• Moore’s Law Enables New Uses For Old Algorithms
• Rock Paper Scissors
• How To Determine Your Competition During Customer Discovery

Image Licensed from 123RF: Copyright: Anton Lebedev