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Market Disruption as a Growth Strategy

July 24, 2011

Every growth company wants a disruptive strategy.  But just what is a disruptive growth strategy?  And why are good enough solutions like Google Docs so dangerous to market leaders like Microsoft?

I recently heard the master of disruption, Clay Christensen, at a TEDx event in Boston.  It brought me back to first principles on disruptive innovation, laid out in “The Innovator’s Dilemma”.  His ideas are more relevant now than when he first published them in 1997.  And it comes down to this:  beware of new entrants with ‘good enough’ solutions.

Photo courtesy of Jon Werner, TEDx Boston

The Disruption Model

Christensen created a simple model of markets driven by innovation.  At the high end are ‘luxury’ products and services with the highest price and performance customers are willing to pay for (e.g., Mercedes).  At the low end are products and services that are inexpensive but barely acceptable (e.g., the $2,500 Nano car from India’s Tata Motors).

Disruptors sneak up on market leaders (the innovators) by entering an underserved market with a low cost and easy to use offer that’s ‘good enough’ to get the job done.  The dilemma for innovators is how to respond to disruptors without cannibalizing their high margin business.

At the TEDx event, Christensen’s consulting firm, Innosight, ran a group game called Innovation Pictionary to illustrate the differences between disruptive innovations (e.g., VisiCalc, Poloroid, Zipcar) and sustaining innovations (e.g., Reebok Pump, Bose noise-cancelling headphones, Gillette 5 track razor).  Because ‘sustaining’ innovations are simply evolutionary improvements to existing products, new entrants are wise not to take on incumbents in these arenas.

Sun’s Dilemma

Sun Microsystems confronted the Innovator’s Dilemma during the last decade.  The high margin on its server products was protected by its proprietary operating system, Solaris.  Nonetheless, Red Hat targeted Sun’s market with a disruptive offer: an ‘enterprise’ server using the Linux open source operating system.  What made this strategy disruptive?  Linux was ‘free’ and it ran on inexpensive Intel processors.

 

Initially customers bought Red Hat servers for simple applications such as web servers.  However the economics of Linux were so compelling that innovations such as ‘clustering’ and ‘virtualization’ enabled Linux to match the performance of Sun’s high end servers and compete for ‘mission critical’ applications.  Without a response to the Red Hat challenge, Sun was ‘boxed’ into a shrinking high end segment of the server market and ended up as a division of Oracle.

Could Sun have responded differently?  It wouldn’t be called a dilemma if there were easy answers.  What’s remarkable about this story is that two decades earlier Sun had used a disruptive strategy to topple Digital Equipment.  Sun combined commodity hardware with its ‘open’ Unix operating system – later branded Solaris – to attack Digital’s proprietary and expensive VAX/VMS servers.

Microsoft’s Dilemma

How many more features do you need in Word?  The Microsoft Office Suite is a dominant but expensive and over-featured market leader.  Can Google Docs disrupt this market?  It’s popularity with high school students suggests it’s becoming good enough:  free, web-based, and designed for collaboration.  Unfortunately, Google Docs users are not yet able to exchange word processing docs or spreadsheets with Office users.  Will Google disrupt?  Can Microsoft sustain?  This will be an interesting battle.

A History of Disruption

The Innovator’s Dilemma is not new, nor is it limited to technology markets.  For example, Fidelity Investments disrupted the stock brokerage market by introducing the mutual fund.  This service allowed small investors to have diversified portfolios without expensive advisory fees.  Here’s a partial list of other well-known disruptive products and services:

INCUMBENT

DISRUPTOR

Single Lens Reflex Cameras Kodak “Brownie” Camera
Steel Mills Mini-mills
Retail stores Wal-Mart
University education MIT “Open Courseware”
Accounting services Quickbooks
Long distance phone Skype
Printed books Kindle

*          *          *

Back to the car market.  Mercedes can safely ignore the $2,500 Nano for now.  But recall that Toyota entered the US car market with a barely acceptable Corona in the 1960s; over time, Toyota used its foothold to create the Lexus and compete directly with Mercedes.  So what if Tata acquired Tesla Motors – the Silicon Valley startup behind a sporty but expensive all-electric roadster – and introduced a $25,000 Telsa roadster?  That could be pretty disruptive.

Follow Dave on Twitter: @WDavidPower

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One Comment leave one →
  1. axel arnold permalink
    December 30, 2011 5:42 pm

    OpenOffice is a great example of the innovative disruptive competitor with Microsoft Office. Completely compatible, multi-platform acceptance (Mac users need not grovel to MS), faster, leaner, and of course – FREE!

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