The Disruptive Opportunity

Question 1

Introduction

Answer 1

• Established businesses often think of disruptive innovation as an attack – need defensive measures
– Historically – many industry leaders have been felled by disruption

• Disruption actually has a net effect of total market growth
– Powerful avenue for growth for both incumbents and upstarts

Question 2

3 keys to successful navigation

Answer 2

1. Recognizing that established players have more time than they think - Takes a long
   time before a new startup will be able to effectively disrupt an industry.
2. Finding the new customers who are eager to be served by the disruption - Finding a
   problem that is not currently being catered to.
3. Building an organization that is capable of serving the new customers - A
   customer-centric organization to serve their needs.

Question 3

3 Reasons why companies miss out on new growth

Answer 3

1. Underestimating the market - Seeing a developing market, but incorrectly concluding
   that it is outside the company’s scope.
   – New customers and the way they use the product are initially different – difficult for companies to recognize the opportunity with their existing systems
2. Lack of foresight - New entrants did not start out as competition to the new
   established players.
   – They see the market developing but incorrectly conclude it is outside their company’s scope
3. Wrong posture - Complacency leads to adaption fo defensive strategy
   - - need to recognise opportunities and do more than adopt a defensive posture

Question 4

3 Phases of Disruption

Answer 4

1. innovation creates a new, noncompetitive market independent of the established business
2. new market expands and slows the growth of the established business
3. the disruptive innovation has improved greatly over time and significantly reduced the size of the old market

• A disruption may not completely destroy the established business but it usually takes away all the growth
• Currently is an era of rapid change so companies don’t have the luxury of spending decades in search of opportunities made available by disruption

Question 5

3 Phases of Disruption Example

Answer 5

EXAMPLE: Minicomputer market
• Phase 1: minicomputer market started in 1965 and did not compete at all with mainframe computers
– New market appealed to small to mid size businesses that did not require all the functionality of a mainframe
- Stayed in phase one for nearly 2 decades – one set of customers purchased mainframes, the other minicomputers

• Phase 2: minicomputer companies improved the performance of the minicomputer to meet the demands of most customers in the mainframe market but at a lower cost
– Mainframes began to move more upmarket to more complex and higher-margin products

• Phase 3: mainframe could not move any more upmarket, market began to decline

• • They were providing more than the market could absorb and couldn’t compete effectively with minicomputers
• • Total market for minicomputers permanently surpassed mainframes
• • Took nearly 40 years to reach this stage of sustained lead in revenues

Question 6

Finding New Customers

Answer 6

The first step in locating new customers is identifying a new market.

We can use three
criteria to identify new market:

1. The disruptive innovation must be undervalued by current customers.
2. It must compete against nonconsumption; that is, it must allow people to do things
   they couldn’t do in the past for lack of money or skill.
3. It must help people accomplish things that they are already trying to do but can’t
   with the available products or services.

Question 7

New Customer, New Business Models

Answer 7

• New customers can’t be served according to the established market’s business model
– Minicomputer companies could profitably serve customers at lower gross profit margins because their selling costs were lower, inventory turned quicker and fixed costs were a lower percentage of their total business

• Focusing on established customers can make it difficult to conceptualise the new business model that would allow them to serve a new market profitably

Question 8

Online Newspaper vs New Competitors

Answer 8

E.g. Online newspaper vs New competitors, Most online newspapers simply replicated their print business model resulting in loss of revenue from the new categories.

Question 9

Sticking with New Customers

Answer 9

• Companies that want to succeed in new markets need to be disciplined – need to stick with the identified new customers so that the business models and product design fit the new market

Question 10

Sticking with New Customers Examples

Answer 10

e.g Hewlett-Packard Co. vs Teradyne Inc. Teradyne was able to stick with those customers and build the necessary new business model around them, the aggressive growth expectations and pull of the established market kept Hewlett-Packard from sticking with Nintendo.

Question 11

Realising New Growth

Answer 11

Lessons Learnt

1. Disruption creates new net growth
2. New customers must be found outside the established market
3. Disruptive technology is never disruptive to those who buy it
4. The new customers will make the disruptive path clear
5. Disruptive new businesses should start small and not be forced to grow quickly