Every Company Paves the Way for Its Own Disruption

In last week’s article, The Lies We Tell to Justify Fruitless Innovation, we discussed the why of innovation difficulties. We also visualized the trajectories of sustaining vs. disruptive innovation:

The underlying outcomes of last week’s points are the focus of this week’s article.

Every company paves the way for its own disruption.

Upmarket Growth Leaves an Open Door

Consider the following scenario…

You’re an executive at a highly performing company focused on upmarket growth and increasing shareholder value. As you pursue these goals, you have a limited (perhaps large, but still limited) pool of resources and capital.

Should you…
A. Invest resources to protect the bottom end of your business, characterized by the least loyal and most price-sensitive consumers.
B. Invest those same resources toward the growth of the most profitable side of your business, characterized by loyal customers willing to pay premium prices for a high-end product.

If you’re like most executives, faced with the question above, the answer is a no-brainer. Why would you invest in the low end of your business when there’s more profitable growth opportunity sitting right in front of you?

Welcome to the Innovator’s Dilemma

When framed as we’ve described above, the cyclical nature of innovation and the fact that (as we shared last week) roughly 90% of publicly traded companies fail to sustain above-average shareholder returns for more than a few years become utterly unsurprising. The simple reality is this:

As companies enter their “sustaining” years, they systematically ignore disruptive opportunities and threats until it’s too late.

And they’re encouraged to do so by their boards, by their shareholders, and by the very corporate structures they have put in place to ensure their own longevity. The very metrics and operational processes that companies instill to create efficiency and maximize shareholder growth are the same factors that leave an open vulnerability. Smart disruptors will find those vulnerabilities and exploit them rigorously.

Disruption is “Easy”

Take a step back and look at the scenario we’ve described above. Effectively, companies are inviting disruptors to exploit them.

Disruption works because incumbent companies aren’t motivated to protect the bottom end of their markets.

In fact, history is ripe with examples of incumbent companies happily divesting themselves of downmarket customers because it enables them to focus on higher margin opportunities.

Here are some examples of downmarket disruptions that have shaped industries:

• Canon and Ricoh entered the photocopier market at the low end, stealing market share from Xerox.
• Toyota entered the auto market at the low end, pushing then-incumbent GM to the brink of demise.
• Southwest upended the air travel market as one of the first low-cost airlines.

Another up-and-coming example of disruption that we’ve yet to see play out fully is 3D-printed real estate. A 3D printed, 2-bedroom home can be built at a cost of $10,000 — massively less expensive than its typical wood-framed counterparts. While 3D printed homes have yet to become mainstream, this is a market well worth watching in coming years as the technology matures and the quality enables up-market movement.Entrepreneurial OpportunitiesWhen we think “disruption” we typically think startups run by ambitious entrepreneurs looking to leave a mark. There are clear takeaways that can benefit any entrepreneur looking to create a new business…Entering the Market with a Sustaining TechnologyLet’s start with a simple truth: a sustaining innovation or technology is not a viable means to create a high-growth business. But, that doesn’t mean that it isn’t a reasonable way to enter a market; it simply makes for different market dynamics and shorter timelines.If you’re bringing a sustaining technology or innovation to market, spend time up front carefully researching the market opportunity and figuring out where there’s white space amongst the incumbents. Leverage your knowledge and your technology to capture an untapped, up-market opportunity. And then look to exit quickly to an incumbent who sees your vision as an opportunity to attain faster growth than they could otherwise achieve on their own.Planning for DisruptionOn the other hand, if you’re aiming to go to market with a disruptive technology or innovation, it’s important to remember this…An idea that seems disruptive to one company may be viewed as sustaining to another.In order to succeed, your disruptive innovation must prove disruptive market-wide. If it proves to be a sustaining opportunity to even one major incumbent and threatens their ability to grow up-market, you will lose. Target opportunities that incumbent competitors are highly likely to ignore (or even happily divest themselves of).If you can accomplish the above, you’re highly likely to set yourself up for success. In fact, companies following a strategy of careful disruption increase their likelihood of success from 6% to 37%.Go forth and conquer.