With entrepreneurial successes such as Airbnb and Warby Parker or SpaceX taking over industries, the desire to disrupt a sector via technological design is on the rise.
The Digitally advanced startups, innovators and inventors are disrupting the norm, in an otherwise controlled corporate industry, taking the lion’s share of the market and delivering a superior service fulfilling the customer’s needs.
At the same time, every corporate leader hopes they are not going to be the next in line to be interrupted or made obsolete, holding tightly to the structures in place where they dominate the market.
Clayton Christensen first proposed ‘The Disruptions theory’ in his book Innovator’s Dilemma. The concept is that an outsider, usually a startup or SMB comes into an established industry and shakes things up with usually a digitally advanced alternative or subcategory of an existing model. In the process, they are threatening or replacing the complacent legacy players (incumbents). Examples of this phenomena infiltrate business, politics and even national security.
The Disruption theory has seen its fair share of criticism for being biased towards success stories supporting the theory.
Regardless of where you stand on the disruption theory debate, change is inevitable and is impending across all industries as digital 4.0 takes effect globally. The fact that Airbnb has a higher valuation than the Hilton group, without owning any rooms (tangible assets) cannot be disregarded. Another example of a digitally advanced extension of a well-seeded business model is the fact that it’s cheaper and more convenient to take an Uber than a taxi. Uber drastically revolutionized the London taxi industry, for example, even getting to the point of causing riots and putting existing taxi drivers out of business.
Disrupting an industry means more than just startups gaining market share from incumbents. Disruption is a shift in ‘business as usual’. It’s a change in the money flows and value propositions. Broadly speaking disruptions squeeze out the inefficiencies and those profiteering from lack of transparency, pushing the industry forward and offering a more convenient – usually -digital option. Outages brings a new wave of competition to a stagnant market transitioning to Industry 4.0.
‘The Disruption Theory’ is meant to serve both as a chronicle of the past and as a model for the future. To build successful companies, we need to develop, educate and allow for entrepreneurs to understand which industries are ripe for disruption and what digital design will adopt the fastest, causing a mass change in that particular industry.
Corporate leaders need to understand that if their industry is under threat of disruption they need to deploy immediate countermeasures such as creating an in-house digital corporate innovation segment that can rival and protect their market stance against the new kid on the block.
There are seven common patterns for industries that are ripe for disruption:
1. Consolidation at the top.
One of the most important signs that an industry could disrupt is consolidation at the top. This manifests through imbalance or dominance by one side of the economic equation. Oligopolies, where a few companies have consolidated vast amounts of the market share on either on the supply or demand side, are good examples.
Airbnb first became profitable during the second half of 2016, and its revenue grew more than 80% from 2015 to 2016. Coincidentally (or not) in the same year consolidation in the hotel industry started ramping up too.
Looking ahead based on this argument, one can conclude that the automotive industry’s legacy business model, i.e., car ownership, is about to get disrupted by a new business model, ‘cars as a service’. Consolidation at the top in this sector has just begun with the deal the two archrivals Daimler and BMW signed for car-sharing services.
2. Customer experience is depreciating, but most legacy companies aren’t making any real changes.
This particular symptom usually happens in industries where the consumer has no other option but to stay with the corporate legacy provider out of necessity and the lack of options. The taxi industry is a perfect example of this stagnation and was precisely in this situation when Uber emerged, offering a real, convenient alternative.
3. Losing customer contact with adjacent-industry players.
Losing customer contact can very well spell the beginning of the end for some companies. Established corporate companies can miss the close, necessary connection with customer contact due to lack of digital development, innovation and with too much emphasis in other areas deviate away from customer focus.
In an era where data is the new oil, companies that lack this resource or no longer have access to it will severely affect their ability to build new products, innovate and meet evolving digitally advanced customer needs.
An example of this is Banks fearing that they will only become a provider to Amazon, for example, and in the process lose any hopes of getting any form of customer insight. Norwegian banks have teamed up to create a mobile payment solution, Vipps. Vipps (a mobile payment application) will allow the banks to stay competitive through customer insight, independent of where their customers have their actual accounts, what they choose to purchase or from where they want to do it.
4. The industry is part of CB Insight’s researches.
Professor Steve Blank – A Silicon Valley Entrepreneur who was at the forefront of the Lean Startup movement which is customer developed centric Twitted:
5. Opaque costing structure.
This particular pattern is more prominent, but not limited to, industries were, from the point of origin a good or a service exchanges multiple hands (middleman) before making it to the end consumer. Generally speaking, the middleman adds low to no value to the end consumer but has a positive impact on the final retail price. An excellent example of this is the mattress industry, where the startup Casper disrupted most of the industry with a direct to consumer business model.
To some extent, Tesla did the same to the auto industry using a direct to consumer business model, unlike the other players in the industry which are stuck in their archaic dealership model.
6. High Regulatory Entry Barriers.
Industries with high regulation often suffer from complacency. Companies in these industries fail to innovate and improve due to an acute lack of competition which can be rife in the corporate world. The big fortune 500 companies, for example, become complacent as they don’t have to worry much about customer experience or optimizing operations as in their mind’s eye they have already dominated and won the customer over in their chosen market. Corporations must wake up to and must ensure that there is room for innovation and expansion.
Telecommunication carriers felt safe under the regulatory umbrella hence failed to realize how new technologies and devices could disrupt their ‘bread and butter’ products: calls & SMS. However, companies such as WhatsApp didn’t fall under the incidence of the regulations and took advantage of a sleepy industry to render the SMS service obsolete. Whatsapp now dominates the market, offering something that the other telecommunication companies cannot compete against.
7. Customers are using outdated technologies because the majority of legacy players are relying on legacy infrastructures and ignoring the pull to innovate digitally.
Incumbents have legacy IT infrastructures which makes it hard to break the mould. Trying to build a mobile app seems pretty straight forward in this day and age, however, once a corporate product team attempts it they will soon realize how complicated the back-end system is and how negating this necessary detail has stunted the servers potential to grow and easily allows for startups to infiltrate with their tech-savvy alternatives.
Challenger banks like N26, Chime, Monzo pose a real threat to the incumbents because they can build the product that customers want without having to worry about the legacy infrastructure, breaking the mould at a faster pace with real technical skills for the digital era.
Do you want to find out how likely is your industry to get disrupted? Take this 5’ assessment.