Disruption theory gets disrupted by new research

SUMMARY:

I don’t write about disruption theory often, but a dose of new research got me thinking. Can we define disruption in a way that anticipates industry upheavals? Or better yet, invoke the change rather than react?

change-in-sceneryDisruption is a word I use sparingly. It’s the phrase that paid for a thousand keynotes. I rarely hear customers using it.

But new research from Deloitte’s Center for the Edge tweaked my curiosity. Perhaps because the research focuses on customer use cases, it has a refreshing focus on outcomes, not catch phrases. I’m still digging into the material, but here’s my overview, along with my first reactions.

I just learned about this content via the Forbes blog of Steve Denning. In What You Need To Know About Disruption: John Hagel, Denning shares a Q/A with Hagel that delves into his team’s research, as well as how they differ in their approach from father-of-disruption Clay Christensen.

In addition to the Patterns of Disruption case study archive, you can also check out a meaty 34 page PDF report link by Hagel and three co-authors. At its core, Deloitte’s argument is that disruption isn’t random. They believe history can illuminate specific “patterns of distruption.” Six months into their research, the authors have identified nine patterns (more on those shortly).

Fine, disruption isn’t random – but how do we define it in the first place? After acknowledging that he is wary of using a term that is so “overused,” Hagel goes on to tell Denning that their disruption criteria has a “high threshold.” A truly disruptive business must be capable of toppling the incumbent, not just challenging them.

That marks the first distinction with Christensen, who uses the phrase “disruptive innovation” to describe the bottom-up challenge to an industry’s status quo. Hagel’s group doesn’t care where the disruption comes from or what the approach is. They focus on outcomes: “At the end of the day, did it unseat the incumbents? If it did, it meets our criterion.”

Defining nine patterns of disruption

The nine patterns Hagel et al identified have not been widely circulated yet, but you can find them on page 25 of the PDF. The report authors grouped the nine into two disruption categories: “Harness network effects” and “Transform value/price equation”:

Harness networks effects

  • Expand marketplace reach – connecting fragmented buyers and sellerswhenever, wherever
  • Unlock adjacent assets – cultivating opportunities on the edge
  • Turn products into platforms– providing a foundation for others to build upon
  • Connect peers – fostering direct, peer-to-peer connections
  • Distribute product development – mobilizing many to create one

Transform value/price equation

  • Unbundle products and services – giving you just what you want, nothing more
  • Shorten the value chain – transforming fewer inputs into greater value outputs
  • Align price with use – reducing upfront barriers to use
  • Converge products – making 1 + 1 > 2

So how do disruption darlings Uber and Air BnB fit into these disruption models? Hagel classifies both in the “unlock adjacent assets” category, but not as bottom-up plays. As Hagel said to Denning:

One of the patterns of disruption that fits the most well-known stories today is the notion of that of unlocking adjacent assets and making them available to a particular market or industry. So you have Airbnb and Uber: they took assets that weren’t previously considered part of the market or industry and mobilized them in a much more leveraged way so as to disrupt the incumbents.

That would be one example of a pattern of disruption. It doesn’t have to do with coming from below, or from above. You could argue that Uber came in from above, not from below, by providing a higher quality of service.

The idea is you can then apply these nine patterns to identify a disruption challenge an industry is facing. One example Hagel uses is health care, which is vulnerable to the “expanded market reach” pattern? Why: because specialists can create new approaches and market them directly to constituents, “undermining a one-size-fits-all” mass market approach.”

What are the barriers to threat response?

Which raises the question: how do you avoid getting disrupted? The report authors say that a big problem is threat recognition. Some threats are not identified in time to mount an effective response. But even when threats are spotted, rolling out a new product or service is not a no-brainer.

A number of factors—such as poor decision making, cumbersome processes, a stodgy culture, and/or lack of leadership to drive change—can derail a business’s response regardless of the particular shape or pattern of the threat. Three barriers to threat response are noted:

  • Unwillingess to cannibalize existing revenue streams. An upstart competitor with a different cost structure can force this issue, especially when a new product or market opportunity results (The authors point out that in digital business, sometimes this can be a free service (e.g. Craig’s List) that completely undermines revenues to the point that your market share dominance no longer matters (80 percent of nothing is, well – nothing).
  • The new approach makes existing assets and investments irrelevant. New technology might reduce upfront cost barriers. Or perhaps major new investments are required: “In either case, the incumbent’s existing assets are no longer as effective for creating value in the market. Large incumbents that previously benefited from the barriers to entry created by the need for capital-intensive assets suddenly find themselves burdened with expensive, illiquid liabilities.”
  • The emerging threat undermined basic assumptions about the incumbent’s business and market. “Competing against new entrants with new approaches requires an incumbent to think about its product or service offering in a completely different way.”

Disruption use cases – real world examples

Disruption theory has limited value in generalities, so I dug into some of the authors’ use cases. They are divided into disruption type; here’s a couple from the batch.

Turning products into platforms – Android displaces Symbian. Symbian had a head start in the early days of mobile, gaining market share with a proprietary OS launched in 1998. Ten years later, more than half of the mobile OS market ran on Symbian. But in 2007, Android launched a mobile OS with an open platform for third party developers. Symbian was also dependent on phone manufacturer Nokia to maintain its market share. By 2014, Android had claimed 80 percent of the market. A key factor in Google’s success: the formation of the open handset alliance, (OHA), a partnership of 34 leading phone manufacturers, carriers, chipset makers, and developers to build the Android open mobile OS: “Google demonstrated its commitment to building critical mass quickly (a key factor for any platform strategy) and achieved increasing returns for all ecosystem parties involved.”

Unbundle products and services – The single (as represented by Apple® iTunes® 10 online store) displaces Tower Records. It’s easy to forget the minor role singles used to play in music revenues. Singles weren’t a good sales medium for brick-and-mortar retailers, totaling just 1.0 percent of music sales in 2002. But the physical CD had its limitations as consumers dealt with the frustration of shelling out big bucks when they only (usually) wanted one or two songs. Digital changed that forever, but it wasn’t until iTunes that the economics of selling music online became a bit more viable. The rest is history: “Over the next decade, fueled by customer demand and a low price point, the single displaced the CD as the primary form of music consumption.”

The stats tell the story: between 1999 and 2005, CD sales fell by 25 percent,12 and by 2012, seven times more singles were sold than CDs.13 The digital marketplace only accelerated the transition to singles—for every 1 percent increase in users who move to buying music online, there is a 6 percent decrease in album sales.

My take

Disruption theory is valuable for evaluating industry shifts. It fails as a broad ideal for romanticizing success. The Deloitte Center for the Edge group aids this conversation by identifying multiple patterns and use cases. But even so, disruption theory always does a better job explaining why the wrecking ball hit than warning where it’s swinging next.

To be fair, Hagel and his co-author intend their deep research to provide clues on avoiding and anticipating disruption. I have industry colleagues who are infatuated with creative destruction. I guess I am too, but it’s not a business model. Take the music industry example. Yes, CDs have been undermined and record labels put on notice. But the a la cart and subscription models have not made for lucrative business models.

Just ask Napster, who disrupted but couldn’t crack the monetization nut – the nutcracker came for them instead. Digital darlings Spotify and Pandora have not been able to build sustainable/profitable models as yet. We can learn from disruption, but whether we can be the hammer and never the nail is an open question.

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