Disrupt: To throw something into chaos or disorder.
We all deal with disruptions. It could be something as simple as that talkative co-worker or as difficult as a change to your operating system. Yes, both of these disruptions can cause headaches, but the results aren’t going to be catastrophic. You can adapt by learning to ignore the talkative co-worker or where Powerpoint has decided to hide nearly every function you need.
When it comes to disruptions in business or particular industries, the simplest of them can cause an established firm to panic and / or scramble to respond. For instance, let's look at Tesla Motors. Many established auto manufacturers had the capabilities necessary to produce electric cars but didn’t understand the market for high-end electric vehicles because it had never been done before and the returns weren't enough to justify the investment. That gave Tesla a golden opportunity because they understood that these large entrenched competitors were going to ignore the high-end electric market. But why? The answer is that it’s outside of their core business, and effective management strategies actually make it difficult to pursue disruptive innovations. Large organizations have a tough time capitalizing on disruptive technologies because these innovations initially represent a small market opportunity. A billion dollar multi national organization can't justify pursuing a five million dollar opportunity to management and the executive team. Typically organizations are looking at achieving 20% growth each year, so it's almost impossible to justify pursuing opportunities that have little chance of helping them reach these goals. To get a better understanding, let's tap into this excerpt from Clayton Christensen's the book, The Innovators Dilemma:
“The most vexing managerial aspect of this problem of asymmetry, where the easiest path to growth and profit is up, and the most deadly attacks come from below, is that “good” management—working harder and smarter and being more visionary—doesn’t solve the problem. The resource allocation process involves thousands of decisions, some subtle and some explicit, made every day by hundreds of people, about how their time and the company’s money ought to be spent. Even when a senior manager decides to pursue a disruptive technology, the people in the organization are likely to ignore it or, at best, cooperate reluctantly if it doesn’t fit their model of what it takes to succeed as an organization and as individuals within an organization. Well-run companies are not populated by yes-people who have been taught to carry out mindlessly the directives of management. Rather, their employees have been trained to understand what is good for the company and what it takes to build a successful career within the company. Employees of great companies exercise initiative to serve customers and meet budgeted sales and profits. It is very difficult for a manager to motivate competent people to energetically and persistently pursue a course of action that they think makes no sense.”
Well-run organizations have management filter through the different opportunities, and typically, these managers decide to support a project that is safe. No one wants to be the person that has a program or project fail. especially if it doesn't promise high returns That’s career suicide and it's why many managers back projects that move upmarket by making enhancements to existing products rather than entering into a unknown market. Better, faster, and cheaper in the name of sustaining existing technology; that’s what most established firms decide to pursue. To better understand why, let's again revert to the work of Clayton Christensen:
“Three factors—the promise of upmarket margins, the simultaneous upmarket movement of many of a company’s customers, and the difficulty of cutting costs to move downmarket profitably—together create powerful barriers to downward mobility. In the internal debates about resource allocation for new product development, therefore, proposals to pursue disruptive technologies generally lose out to proposals to move upmarket. In fact, cultivating a systematic approach to weeding out new product development initiatives that would likely lower profits is one of the most important achievements of any well-managed company.”
How can large organizations compete in these disruptive markets? What’s the solution? If you wait for the market to mature your too late and if you decide to pursue the opportunity before it's viable, your company will not see the ROI it's looking for, and the project could be abandoned. Established organizations that have proven to be successful create an entirely different division that pursues the disruptive downmarket opportunity or outsources the R&D to a contracting firm to investigate. This keeps the company's internal politics and fear of failure out of the equation.
The important thing to convey is how quickly markets can shift. For example, Netflix has all but annihilated Blockbuster Video, cell phones decreased demand for landlines, and tablets are eliminating the need for PCs. The key to success is to develop a disruptive strategy that researches innovations in markets that are not mature and understand which ones will develop in the future. Whether you decide to create a different division or outsource the R&D, that’s how you can innovate and compete in disruptive markets.