“Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death.”
– Old saying
Disruptive innovation, coined by famed Harvard Business School professor Clayton Christensen, is occurring across multiple industries—a harbinger of opportunities for those paying attention and devising strategies to exploit them. Incumbents are under extensive pressure as market boundaries blur, emerging technologies accelerate the proliferation of new entrants, and a new urgency sets in to solve societal, environmental, and economic woes. Market capitalization and cash will buffer incumbents only so long if they make radical changes to product portfolios and services without consumers in mind.
Understanding disruptive innovation is key to exploiting opportunities staring you in the face
Professor Christensen described disruptive innovation as a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves upmarket, eventually displacing established competitors.
Incumbents or established enterprises (banks, health plans, retailers, etc.) are incented by stockholders and their ambition to pursue the most profitable segment of the market. This results in neglecting the lower end of the market, which drives the least profits (see Exhibit 1).
Exhibit 1: A potential logical conclusion of disruptive innovation is an incumbent’s death
Source: Harvard Business Review, Disruptive Innovation, HFS Research 2021
Thus, the lower end of the market becomes an opportunity for entrants (service providers, as a service players). They consider their lower profits an investment to enter the market, and the cost of adding experience. The new entrants establish strong relationships with buyers while building credentials, domain expertise, and making investments to address the higher end of the market.
Incumbents should follow the breadcrumbs leading to potential disruption. Those that don’t will become part of the pool of incumbents overcome by the disruptors when entrants begin to service the mainstream market.
Disruption does not discriminate so pay attention!
Incumbents across industries face a variety of cyber, regulatory, and competitive challenges. They are generally prepared to address those through their strategy and organization. However, they don’t give the threat from disruptive entrants the attention it deserves. Mostly because new entrants are in their blind spot, plus there is intrinsic enterprise hubris in being well aware of the academic examples of disruption such as when Netflix and video streaming disrupted Blockbuster, or iPhones disrupting laptops. It is happening as we write, and incumbents aren’t exhibiting sufficient defense.
Disruption comes in many shapes, making it difficult to recognize, so we thought we would list a few examples to jolt you into recognition and action.
- Approximately 75% to 80% of large employers (those with greater than 500 employees) are self-insured, accounting for about 50 million employees whose healthcare they underwrite. The US government underwrites healthcare for another 140 million Medicare and Medicaid beneficiaries. A clear sign that health insurance has been shifting and will accelerate disruption with the emergence of alternate models or direct to providers in partnership with technology enabling service providers.
- While mainstream in the gaming world, augmented and virtual reality (AR/VR) adoption has been limited in travel thus far. Virtual reality tourism and business travel are beginning to play a role in how the travel and hospitality industries recover or disrupt travel and leisure, which has struggled more than any other industry during the last 18 months. It also faces more uncertainty about the future due to COVID-19, travel regulations, and consumer fickleness.
- Industry 4.0 transformed manufacturing from the manually intensive processes of yesteryear to software-managed. Now their real estate and machinery are taking a back seat to technology-enabled controls that a new set of service providers making investments in industry 4.0 capabilities have implemented and managed.
As Christensen puts it, disruption is a process, and it is heavily impacted by customer desires and expectations, as well as the evolution of technology. There’s not been a period in recent history when customer expectations have shifted as much as they did during the last 18 months of pandemic disruption, particularly for retail and shopping habits. Even pre-pandemic, retailers felt the most vulnerable to digital disruptors compared to other industries (see Exhibit 2). The rise of e-commerce, changing business models, customer expectations, and advancing technology are setting the stage for potential disruptive innovation.
Exhibit 2: Retailers see the greatest disruption from digital competitors
Source: HFS Research, 2021
Admitting there are challengers is the first step…
Disruption is inevitable. However, the divide between a disruptor and the disrupted is very narrow, and the speed of emerging technology proliferation is making it narrower. Given the inevitability, it is incumbent upon the incumbent (!) to rapidly prepare, organize, and execute strategies that will help save the day!
Developing and maintaining a healthy paranoia is to feed a diet of being prepared. This includes understanding the competitive landscape with a new lens. Explore the capabilities of your vendors and partners that could be engaging in co-opetition and driving slow disruption under your nose.
Invest in getting closer to your consumers and building capabilities to meet their current and future needs. Develop necessary strategies to explore adjacencies (markets and capabilities), develop new ecosystems, and reenergize client relationships.
Restructure current organizational value chains originally developed to address legacy challenges. Incumbents that continue to orient towards challenges of the past will exacerbate their disruption given their talent, investments and solutions are oriented away from their current reality.
The Bottom Line: You are being disrupted as you read this. Recognizing that reality and addressing it as if your life depends upon it is going to be crucial. Make uncomfortable vulnerability your friend to recover and build a wide moat—don’t let history repeat itself.
The hubris of doing what has worked in the past will only accelerate disruption. Disruption occurs because incumbents become too comfortable in their surroundings and leaving windows and doors open for entrants. More market entrants mean more choices for consumers, peeling customers away from incumbents. To make matters worse, consumers have giant megaphones—thanks to social media—and they are using it in creative ways to make their opinions known. If you think you are not being disrupted, think again!