Disruption
How to successfully respond to disruptive innovation
Posted by Costas Markides on 18 October 2016
Written by Costas Markides, Professor of Strategy and Entrepreneurship at London Business School
Why is it that some established companies respond to the invasion of a disruptive business model in their markets with great success while others fail miserably? For example, why did KLM, United Airlines and Continental fail to tackle the arrival of the low-cost, no frills, point-to-point airline business model while companies such as Qantas and Singapore Airlines appear to be doing just fine? Similarly, why are major newspaper companies such as the London Times and the NY Times struggling to respond to the arrival of online distribution of news while relatively unknown companies such as NRC Handelsblad in the Netherlands and Verdens Gang (VG) in Norway have found acceptable responses?
The secrets of success
Past research has identified some of the factors that could lead to success. These included: approaching the task of responding to the invading business model as both an opportunity and a threat; creating a separate unit to exploit the new market; funding the new unit in stages; cultivating outside perspectives in the new unit; appointing an active integrator; and modularizing integration between the unit and the parent company. I supplement these findings by describing here three other ingredients to success that my own research has uncovered:
Do not imitate your disruptor
One consistent result to emerge from my research was the following: established firms that entered the new markets (created by disruption) using the same business model as the disruptors ended up doing worse than companies that entered on the back of a business model that was radically different from that of the disruptor. Contrary to expectations, established firms cannot rely on the disruptors’ (winning) business model to exploit the new market.
You see this generalization playing out in industry after industry. For example, in 1993 Continental Airlines created a separate subsidiary called Continental Lite and set about to capture market share in the low-cost, no-frills, point-to-point airline market that Southwest had pioneered. Unfortunately for Continental, the strategy adopted by its Lite subsidiary was an almost replica of the Southwest strategy. As a result, it failed to make any inroads and Continental shut the unit down in 1994. European airline companies like BA (with its GO subsidiary) and KLM (with its Buzz subsidiary) had the exact same experience as Continental: they entered the new market using the same business model as the (European) disruptors—in this case easyJet and Ryanair—and ended up selling or shutting down their operations within a few years of entry.
The same pattern emerged in the newspaper industry. For example, in 2005 the Swiss newspaper company Edipresse entered the huge new market created by advertiser-funded free daily newspapers that were distributed through major cities’ public transportation systems during peak morning commute. It did so by developing its own free newspaper (called Le Matin Bleu) and started distributing it in Geneva and Lausanne using the same business model as the original disruptor, Sweden-based Metro International. Inevitably, the venture failed and was shut down in 2009. Compare these failed entry attempts with the success of, for example, Nintendo which fought against its disruptors Sony and Microsoft in the games console market by adopting a totally different business model from the one that Sony (and Microsoft) used to attack Nintendo. The end result was the tremendous success of the Nintendo Wii. Similarly, in the watch industry in the mid-1980s, SMH entered the low-end segment created by disruptors such as Seiko and Timex, not by adopting their strategy but by developing a new and innovative strategy around the Swatch watch. This catapulted the Swiss back to industry leadership.
It is easy to see why established firms rush to imitate the disruptor’s business model—this is, after all, the business model that has served the disruptor well and has helped them create and dominate a new market. Surely if it served them well, it will serve me well as well? Unfortunately, this is nothing but a trap! No matter how appealing it is to imitate this successful business model, established firms would do well to stay clear of it! Instead, they should counter-attack the disruptors by developing a totally different business model—just like Nintendo did in the games console market and SMH did in the watch market.
Don’t imitate the disruptor and don’t imitate yourself
The need to not imitate the disruptor’s business model should be obvious enough. But our research has also uncovered another less obvious key to success: the need to avoid wholesale “exporting” of the established business model and the established firm’s existing competences into the new market. While the desire to transfer the firm’s strengths and competences into the new market is understandable, our results suggest that this should be undertaken with great care and in moderation.
The reason why established firms engage in wholesale “export” of their established ways of competing into the new market is because they often look at the market created by disruption as simply an extension of the established market. After all, what is the difference between the low-end of the airline market and the established market? Aren’t they simply two segments of the same market? We found that firms that started their thinking in this way, approached market entry as a lateral move from their established market. Thus, rather than attempt entry like an entrepreneur with a clean slate, they became pre-occupied with how to leverage their existing assets in the new market. Rather than start out with the realities of the new market and work backwards to design a strategy appropriate for it, they started out with what they had in the established market and attempted to transfer it in the new market. As a result, they often imitated their disruptors’ successful business model and tried to out-compete them using their existing strengths.
By contrast, the successful firms were alert enough to appreciate that even though the new market appeared similar to the established market, this was nothing but an illusion. They therefore approached the new market like an entrepreneur by asking themselves: “If I were to enter this new market as a start-up firm, what strategy should I adopt?” This allowed them to develop an attacking (offensive) mind set: rather than focus on defending their existing market, their goal was to attack the new market. And since we know from past research that new market entry almost always ends up in failure unless the new entrant attacks like a guerrilla—with a business model that is radically different from the ones the incumbents are using—the firms that developed this attacking mind set ended up entering the new markets on the back of an innovative business model. This was their ticket to success.
Approach the disruption as a opportunity
In a recent survey, we asked firms to specify the reasons why they decided to enter the new market created by disruption. Most of the firms that entered the new market successfully were those that replied that they did it so as to not only defend their existing market but also to attract new customers. By contrast, most of the firms that failed in their market entry replied that they decided to enter the new market primarily as a defensive move so as to prevent the loss of existing customers. Thus, an important determinant of success appears to be how the disruption was perceived by the organisation—is it a threat to defend against or is it an opportunity to exploit? Viewing it as a threat led to failure; viewing it as an opportunity led to success.
These survey results found strong support in our field research. Consider, for example, the following two quotes from senior managers at two US firms. The first is VP at a major office supplies firm, whose company was rated as very successful in adopting Internet distribution:
We got onto the Internet long before anybody else knew what the Internet was. In fact, our biggest problem for the first two years was persuading our customers to use it! But we persisted because I knew in my bones that the Internet was it. This new technology was going to be the future. It would be the medium that would allow us to do great new things.
The second quote is from the CEO of a major bookseller whose company was rated as unsuccessful in adopting online distribution of books:
We were late in implementing [it] but not in evaluating it. And our evaluation was that this thing did not make sense. Yet, every time I tried to explain our reasons why we wouldn’t do it to Wall Street, my share price went down! Even in 1997 when online distribution of books went from zero to 6%, superstores increased their share from 10% to 22%--yet our stock price dropped by 40%. So in the end, we decided we had to do something.
Thus, it appears that unsuccessful firms look at the invading disruptive business model more as a threat to their established business than as an opportunity to exploit. As a result, they approach it with a defensive attitude and they set about to defend against it. More often than not, they do so by adopting the same disruptive business model (usually in a separate unit) and then use it to compete with the disruptors head-on. They believe that this will be enough to make them successful because they assume that they will be better than the disruptors. What gives them confidence that they can beat the disruptors is the fact that they are much bigger than them (i.e. have more resources) plus the fact that they already have certain skills and competences (from their main market) that they can leverage in the new market and so start out with an advantage over the disruptors. Yet, all the academic evidence shows that the strategy of being “better” rarely succeeds when it comes to new market entry. The strategy that improves the probability of success is the strategy of being “different”—that is, the strategy of attacking like a guerrilla.
Not only do established firms make the mistake of utilizing the wrong business model but they also bring the wrong mind set into the battle. Their goal and emphasis is to defend and protect their main market rather than exploit the new market that the disruptors have created. Inevitably, this defensive attitude leads them to short-term oriented actions and behaviours that compromise the viability of their chosen strategy. More often than not, their response ends in failure.
In short, the companies that fail in their response make four fundamental mistakes:
- They assume that the new market created by the disruption is similar to their core market.
- They adopt the same business model as the disruptors (usually in a separate unit) and compete head-on with them, hoping to win by being “better” than them.
- They view the disruptive business model as a threat to their market, an attitude that leads them into a defensive mind set.
- They display short-term behaviours and limited commitment to the new market, probably as a direct result of their defensive mind set.
By contrast, the firms that tend to succeed in their forays into the new markets accept that the disruption is damaging to their main market but they also recognize that the new business model has created a new market adjacent to their main market. They therefore attack the new market in an effort to attract new customers.
In short, the companies that succeed in their entry do four things right:
- They approach the new market created by the disruption as a fundamentally different market from their core market.
- They enter the new market by adopting a business model that is fundamentally different from the one that the disruptors are using.
- They view the disruption not only as a threat to their existing business but also as an opportunity to develop a brand new market.
- They approach the new market with commitment and long-term orientation.
Overall, therefore, we’d encourage established firms to approach disruption with an open and creative mind. Developing innovative ways to exploit the disruption is often an important ingredient to success—the key is to find ways to adopt the disruption in ways that suits their skills and competences rather than simply imitating it. Doing so does not guarantee success but it does increase the probability that they will successfully attack the disruptors in the markets that they created.