Thursday, November 29, 2012

Dealing with Disruption

In my previous posting titled Are All Reverse Innovations Disruptive?, I discuss two key factors that help determine whether a "reverse" innovation has the potential of becoming disruptive - the sustainability of a low cost advantage and the effectiveness at closing of the performance gap.  Both of these provide insight into not only how the disruptor might behave but also as to how the "disruptee" should counter behave in response. For example, by understanding the underlying cause of competitive advantage, the "disruptee" might be able to change the definition of what consumers perceive as "value" thereby "disrupting the disruptor."

The December 2012 issue of the Harvard Business Review (HBR) has a couple of articles that take the above discussion further. Dealing with disruption essentially consists of two parts - identifying the source of disruption and executing a strategy to overcome its potential impacts. In the first article, Surviving Disruption, authors Maxwell Wessel and Clayton M. Christensen explain how disruption is less a single event than a process that plays out over time, sometimes quickly and completely, but other times slowly and incompletely. Therefore dealing with disruption requires a systematic way to chart the path and pace of disruption so that you can fashion a more complete strategic response. They propose the following three steps to help determine whether the disruption will hit you dead-on, graze you, or pass you altogether, you need to:
  1. Identify the strengths of your disruptor’s business model;
  2. Identify your own relative advantages;
  3. Evaluate the conditions that would help or hinder the disruptor from co-opting your current advantages in the future.
To help evaluate the relative sustainability of the advantages identified in bullets # 1 and 2 above, the authors propose a systematic assessment of five kinds of barriers to disruption, listed below from easiest to overcome to hardest.
  1. The momentum barrier - Status quo is a difficult thing to change.
  2. The tech-implementation barrier - Does existing technology suffice?
  3. The ecosystem barrier - Also known as the platform advantage.
  4. The new-technologies barrier - The technology needed to change the competitive landscape does not yet exist.
  5. The business model barrier - The disruptor would have to adopt your cost structure.
Perhaps, most important though, according to the authors, is for the "disruptee" to understand and segment their customers by the "job" they want to get done. As an example, they discuss the ongoing battle between online grocery retailers and the brick-and-mortar grocery stores. Out of the three job categories the authors identify - "emergency item" shoppers, "dinner" shoppers, and "non-perishables & brand" shoppers - only the last category is currently susceptible to disruption based on the three step and five barrier analysis presented by the authors. The two crucial questions then become "what can the disruptor do to win over the other two categories of shoppers?" and "what can traditional stores do to keep all three categories of shoppers to themselves?"

The answer to the second question is provided in the next article titled Two Routes to Resilience in the same issue of HBR. The authors Clark Gilbert, Matthew Eyring, and Richard N. Foster explain that companies facing disruption (such as the grocery stores above) need to reinvent themselves in response to disruptive market shifts, technologies, or start-ups. But rather than a complete upheaval they propose that companies under assault pursue two distinct but parallel efforts: 
  • Transformation A should re-position the core business, adapting it to the altered environment. 
  • Transformation B should launch a separate, disruptive business that will be the source of future growth. 
Such an approach allows the company to realize the most value from its current assets and advantages, while giving the new initiative the time it needs to grow. Fueling both transformations is a “capabilities exchange” that allows both efforts to share resources without interfering with the mission or operations of either. The authors walk readers through the dual transformations of three companies that were facing massive disruption: the Deseret News, which was losing advertising to online upstarts; Xerox, whose copier business had been eroded by Asian rivals; and Barnes & Noble, which was threatened by e-books. 

The Bottom Line
Dealing with disruption has no silver bullet. It is a complex undertaking with the appropriate response being vastly different on a case-by-case basis. Yet, there are guiding principles that can help. Understanding your consumers and their "jobs" is crucial to pinpointing the segment of your consumers that are most vulnerable to disruption. Next is identifying the source of the disruptor's competitive advantage and how sustainable it is in the face of the five barriers discussed above with respect to each consumer segment. Finally, executing the response strategy is best thought as two discrete and parallel transformations - rebuilding the core and disrupting the core - with a well thought out capabilities exchange fueling both.

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