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Disruption is typically an opportunity long before it is a threat. And you can respond when it’s not yet too late.
Did you hear the story of Netflix and Blockbuster?
Talk to just about any business leader out there and you’ll be told how sluggish Blockbuster folks were so blind to see it coming.
But a lot is untold about this story.
Blockbuster had over 2,800 rental shops, and was leader in the business of DVD rental. And like most leading companies, I’m guessing they had some of the top-notch talents in that space.
Most stories told actually focused on what Blockbuster did not do. And left out what they did. Whether intentionally or not. I don’t know.
This word “disruption” floats in almost every webinar and conference out there. And the bad thing is that it is getting misused. Yes, in most cases.
And this often give the impression that it was easy for Blockbuster to avoid what happened.
But unless you’re told what Blockbuster folks did to protect their business, it’ll be hard for you to draw the lessons you need to avoid a similar tragedy.
Well, I’ll not get into the details of what really happened between Netflix and Blockbuster. I don’t intend to write a 1000-page book today.
Instead I believe the lessons are more important. So, we’ll also draw lessons from Kodak’s story.
And I hope you leave with a full picture of how disruption takes place, and how you can identify similar threats early enough to turn them to opportunities.
Disruption is not what you may think
I like to think back to how the Harvard Professor Clayton described it when he first coined the word “disruptive innovation” in 1995.
Let’s assume you’re the CEO of a large successful company. The company is profitable, and shareholders are very happy.
You have three customer segments.
The top segment has your best customers. The VIP club. They actually contribute 80% of your profits. The lowest segment contributes less than 10%.
Then one day you learn that a small startup has launched a product that is somewhat similar to yours. But that product is really low quality compared to yours. The startup couldn’t afford the technology you use.
So no worries. None of your VIP customers will be interested. And so you continue to improve your product to meet the growing demands of your best customers.
On its part, the startup starts serving some customers in your lowest segment because their product is cheaper, and low quality of course. You wonder you could drop the price and compete with the guys, but it’s not just worth it. You’re confident the guys at the startup will soon get tired.
So you continue to focus on the your best customers.
But then, over time, the startup’s product keeps getting better. You notice that some customers in the middle segment are beginning to adopt the startup’s product.
Things are getting serious now. But your VIP club is still in tact. And so are the profits. You’re still trying to be more efficient by not focusing on low segments that yield low profits.
And the startup gains grounds at the lower end of your market. And their product gets even more better over time. And it’s cheaper too, because they operate a business model different from yours.
Until one day you’re shock to discover that some of your VIP customers have started buying from that startup. And this means they’re already in your three segments, with an offer that customers are getting more and more excited about.
Sorry to say this – but your business has just been disrupted.
This is what Clay called “low-end disruptive innovation”.
Was this avoidable?
It’s so tempting to say yes, right?
However, it’s never evident in reality. Remember the decisions you took to respond to the startup were in the best interest of the company – focusing resources on profitable customer segments.
But we can learn from those who have failed of course.
So let’s dive deeper into how you can identify threats to disruption, and early enough to turn them to opportunities.
Fortunately, it turns there are three warning signs you should watch out for.
So let’s jump in.
1. Have some customers suddenly stopped using your product or service?
When a company is well established, it often tends to focus more on serving its best customers. And can often neglect those at the low end of its market.
You’ve probably heard a business should focus on those 20% of customers that bring 80% of the profits. Remember Mr. Pareto?
And this totally makes sense.
But this turns out to open a wide window for disruptive innovations.
Startups are good at targeting neglected customers. They offer products and services that ‘good-enough’ for those customers. But since these are low-end customers, the larger company may not even notice that they left.
So you need to watch out for customers that have stopped buying your product or service.
One thing you need to know is that customers don’t really buy products or services; they hire them to do a “job”. They hire them to solve a problem.
So when customers stop using your product or service, it could be that they’ve found a better alternative that helps them do the job.
If you’re neglecting a lower segment of your market, a startup will likely offer them a cheaper alternative way to solve the same problem as your product or service.
And since customers only care about the problems they want to solve, your high quality product or service may soon become a luxury to them.
Giving room for the startup to gain grounds and eat up your market share. Startups are often great at business model innovation.
This is also to say you must know why customers are using your product or service, you must know the job they’re trying to get done, else you’ll not even know why they stopped stopped buy from you.
My advice to you is that you act early when you notice this kind of trend.
In a subsequent post I’ll show you win disruptors by creating a separate business unit that caters for your low-end segment.
Don’t worry, I’ll keep you informed through email.
And you’ll be on your way to transforming your business model.
That said, this is the next warning sign you should watch out for.
2. Are new players serving customers who lacked the money, skill or logistics to buy and use your product or service?
When Netflix launched in 1997, Blockbuster was the king of the video rental industry with over 2,800 rental stores worldwide.
Another David vs. Goliath scenario.
Netflix introduced a monthly DVD subscription service by mail, at the time Blockbuster charged customers late fees.
With Netflix, when customers were finished with their DVD, they would simply return and get another one. No late fees.
Then after a series of innovations, Netflix launched an online streaming offer. A complete change in business model.
Blockbuster filed for bankruptcy in 2010 as they couldn’t not compete with this streaming offer.
The mechanics of this disruption were slightly different from the “low-end disruptive innovation”. Here the disruptor targets non-consumers.
Think about this.
If a new company (often a startup) can transform your product or service and make it cheaper, accessible or more convenient for people who lacked the money, skill, or proximity to buy and use your product or service, they’re on their way to disrupt your business.
And the path to this type of disruption often looks like this:
- First, the disruptor offers a low quality version of your product or service. And the customers are happy with the convenience and accessibility. These are customers that were not able to access or use your product or service.
- Second, then the disruptor gains grounds, learns from customers and improves the offer to be appealing to more customers, including the customers buying from you;
- And finally, you find out that your customers are abandoning you for disruptor’s offer. They value the convenience and accessibility, and price too.
Professor Clay used the term “new-market disruptive innovation” to describe this type of phenomenon.
So when Netflix started shipping DVDs by mail, they could reach customers that could not access the brick-and-mortar stores of Blockbuster.
Furthermore, with the online offer, Netflix reached more customers around the world.
Let’s turn to the third warning sign.
3. Do your customers go through workarounds to achieve what they want from your product or service?
Before cell phone cameras came, how did you used to share pictures?
Maybe you had a Kodak camera, or Sony. And you had to connect it to a computer to extract the picture before sharing with your friends.
This was not really a problem for most of us, until the cell phone camera came and gave us a more convenient alternative.
Cell phone cameras disrupted the photography market as a whole.
They redefined what it means to take a photo and share moments of our lives with friends and family.
And like every major transformation, there’s always a loser. Kodak was the loser in this case.
In fact, if the experience around your product or service is built such that customers have to go through workarounds to solve a problem, chances are high that someone will come in and help them solve that problem conveniently.
And that ‘someone’ will likely disrupt your business.
Technology comes and goes, but customer jobs persist over time. So in this digital economy, you need to look out for digital technologies that can help you transform your customer’s experience before it’s too late.
You may be surprised to hear that Kodak actually invented the first digital camera. But still got disrupted by digital cameras? We’ll come back to develop this story in subsequent articles.
So if your customers have to struggle in some way to use your product or service, just like people manipulated Kodak cameras before sharing pictures, then you may be missing an opportunity to nail the job they’re trying to get done.
And you better sort that out, as soon as possible.
Disruption is typically an opportunity long before it is a threat.
I hope that by now we share this same belief. At least to an extent.
As you observe these warning signs, stay alert to the following characteristics mostly common with disruptive businesses:
- They are low-cost and highly accessible.
- They have lower gross margins than their contemporaries or the incumbent.
- They serve a smaller low-end target market at first, before expanding to a vast market due to their accessibility.
- They’re hard to see coming and aren’t taken seriously. They quietly, slowly “climb the ladder” and can take years or decades to gain traction before they dramatically upend competitors.
Now, there’s really much more I’ll tell you on disruption, so drop your email below to be notified whenever I release a new article.
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