Explaining Disruptive Innovation and asking the question about its relevance in our markets.
I had a great weekend and got a lot done for once. I’m still writing up the show report from my visit to the UK, but the week’s events turned my attention to a different topic.
On to the update.
Disruption Theory
Since the death of Clayton Christensen, I’ve been spending a little time looking over his works and particularly the theory of disruption, or Disruptive Innovation. The theory describes a repeatable mechanism whereby small newcomers to a market provide a good-enough product or service, often cheaper, that gains initial traction, enticing those same users away from the incumbent. As time passes the improvements to those less-costly products and services develop to rival the large corporations’ offerings such that the corporation can no longer compete, thereby forcing the incumbent to search higher up the market. This cycle often repeats itself, with the disruptor eventually being disrupted itself.
To explain the theory better, let’s look at a couple of examples; Mills in the Steel Industry and Uber.
Steel Mills
Christensen goes into much more detail in his book The Innovator’s Solution (recommended read), but the basic premise is that large-scale integrated Steel Mills were forced to look up to the higher-end of the market to continue to make the profits and achieve the growth required when faced with the low-end disruption provided by small-scale minimills.
Until that point, large steel mills were the suppliers of most of the world’s steel in installations that reacted the ingredients (ore, coke and limestone) in large blast furnaces. A process that was first industrialised not too far from my place of birth in 1709 by Abraham Darby, birthing the industrial revolution. The fact that mills cost enormous sums of money to build kept competition at bay. Minimills melted scrap metal in electric furnaces and can produce steel 20% cheaper than traditional mills. Minimills attacked the notoriously competitive rebar market, something the large mills left alone due to the decreasing margins. By producing steel at a 20% cheaper cost, the minimills’ margins were attractive compared to the large mills. As the margins plummeted in the rebar market, minimills moved up the stack to attack what was the large mills’ domain, having left the rebar (strengthening rods used in concrete) market to the minimills. But by having a 20% cheaper cost structure, minimills having innovated to produce competitive steel, they then attacked this market too, pushing the large mills further up the chain, and so on.
Source: HBR
The minimills used two advantages to the large mills, their lower cost structure and their innovative capacity to climb up the chain until they became a ferocious competition to the large mills. The large mills had no response because they were forced with either going upmarket or investing in the low-end that was the least attractive to them in terms revenue and profit, but the most attractive for the minimills.
Uber
Uber is often characterised as the archetypal disruptor, but the theory of disruption doesn’t quite fit. Disruptive innovation starts with the disruptor taking advantage of a low-end foothold in a market, providing just good-enough products and services and exploiting that opportunity until iterative and incremental improvements mean that product or service eventually competes directly with the incumbents’ offerings.
Uber hasn’t revolutionised the essential practice of hailing a cab. It has merely simplified and increased demand, attracting customers that would use alternatives (or substitutions to use Michael Porter’s terminology) rather than taxis. The initial beginnings of Uber in San Francisco served customers that were already used to hailing cabs. It started at the high-end and expanded downwards to increase its target segment.
Disruptive innovations are, as we saw earlier, considered “good enough”, or putting it another way, inferior to the market’s standards. Uber’s service was superior to the incumbents’, not inferior. Virtually no incremental innovative modifications to the core services of Uber have been made. Using Uber today is like it was at its inception.
What you should notice in these examples is that disruption is not merely releasing a product or service that is cheaper than the original function, that is targeting a low-end market with what is always a lower-quality alternative to the current choice. If you look at some of the cheap hotel chains like Ibis in Europe, or Travelodge in the UK, their product is not a competitor to the likes of Sofitel. Why? Because for Ibis to offer the same level of service and quality it would no longer be cheaper to provide. It would in fact cost the same as Sofitel. No disruption.
I am aware that Sofitel is in the same group of brands as Ibis and many others, all being part of the Accor group. This goes to serve my point, in that Accor has divided up the market from low-cost to high-end, placing specific branded hotels targeted to the demographic they’re focusing.
When I think of this theory, I’m often lead to wonder if this is not something that we can capture to use in much smaller circumstances. The theory lends itself to the large companies or collectives, like taxis getting disrupted by Uber or the Marriott’s of the world getting disrupted by Airbnb. These are the disruptions that get media attention and have such an impact around the world as a whole. But are they the only disruptions taking place? If not, where and how do micro-disruptions take place and can we understand them to use them in our own business.
I want to look at two possible contexts for disruption; internal and external. But first, I wanted to see if the scale has any bearing on the outcome of disruption. If you work for an SMB and your market is measured in the thousands and not millions, is it considered disruptive if you manage to create an innovation that has profound effects on that market?
I would say yes. The fact that on a small-scale, a market changes as a result of a lower-end offering forcing the incumbents to search the higher-end proves the market is being disrupted in some way. Their search relies on the fact they need to look for margins and growth. As an example, I wanted to discuss a new entry into the mobile communications sector in the French West Indies, Wizzee.
Wizzee, a disruptor in the making?
As I write this article, I spent less than 10 minutes signing up for a new mobile contract for my son, who until recently had 1 GB of data per month on what is an out-of-touch mobile contract. He’ll now get 50 GB per month for 4 euros per month less than the current subscription. I save 4€, and he gets, for all intents and purposes, all you can eat data. Why is this important? For two reasons that I want to explain here.
The first thing that struck me from my initial awareness of the new Mobile Virtual Network Operator (MVNO) was that unlike Orange’s attempt at a similar strategy, it understood and offered a package that is aligned to how the younger generation uses phones today.
Orange’s offer was initially acceptable, in the sense that it offered a mobile subscription with a little data thrown in for good, for a very reasonable price. Few options existed to extend the amount of data, and each one was scandalously expensive. I’m surprised authorities allowed this to pass, but that’s a different discussion.
Millennials and the younger generation of users use their phones is very different ways to the older generation. In my study on the impact of digital in the Caribbean, I noted that around 40% of all Internet traffic was flowing through mobile phones and that this was steadily increasing. What I didn’t explain is why. These later generations are fuelling that mobile data growth because of their communications choices.
We grew up calling people and talking to them one-to-one. The limitations of this method are, of course, availability. It works when both parties are available, and consequently, when one is not, it doesn’t. The Millennial generation doesn’t worry about this as their chosen communications methods are un-linked from time and availability constraints. They prefer to use text or video/speech communications in WhatsApp and other popular services. These services are Internet-connected and mobile data-driven.
And so, a subscription that targets that generation has to completely flip on its head the model of mobile phone subscriptions by offering data with a choice of voice and SMS (Millennials don’t use SMS), which, as you have no doubt noted, opposite to today’s standard mobile subscriptions that are voice with data tacked on. Wizzee is simply aligned to the reality of the mobile market today, unlike Orange (including Sosh, its MVNO) and SFR.
Secondly, just look again at my opening statement; I spent less than 10 minutes on a Sunday morning signing up to the service. It was “Fingers in ze nose”, as they say in France. It’s a digital product and has successfully rethought the process of signing up from A to Z. Simple, efficient and quick. You do the setup from your mobile phone or on the website. I decided to use the phone. After downloading the app, you follow the clear, easy to understand and well-explained instructions. The process of transferring your number from an old subscription is simplified. The app additionally provides help where it is needed without you having to search for it.
Digicel has done the work necessary to develop the service in line with Jobs to be Done Theory. This is Digital Transformation! The question is, however, is Wizzee a disruptor, well, yes and no?
Yes, in the sense that the product is aligned with the modern era, that is it simple, accessible and digital by nature. It is a good-enough product without bells and whistles, and the business unit has the cost structure to ensure its offering per GB is less expensive than Orange’s, for example. Orange operates 25 boutiques over the French West Indies with a staff measured in the hundreds. Wizzee has 0 boutiques and a team of less than 20, I’m guessing!
However, it is not in the sense that Digicel is still only selling access to a mobile network and that has not fundamentally changed in tens of years, much like Uber hasn’t changed the service of hailing a cab. Additionally, nothing Wizzee has built would stop an incumbent offering precisely the same thing. Of course, Orange won’t, or at least they won’t be as generous in their offerings as the larger companies rely on the luxury of brand power and trust.
Wizzee has no moat.
My thanks to HBR and Clayton Christensen’s books for the inspiration of this post.
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