Disruptive Innovation is Never a Surprise

by Jeffrey Phillips

Yes but, or How dinosaurs die

Disruptive Innovation is Never a Surpriseby Jeffrey Phillips

It’s pretty clear that disruption of major industries can happen, but I’ll stipulate that it rarely happens “out of the blue”. In fact, many larger organizations have been disrupted out in the open, in plain sight. GM and Ford watched Toyota and Honda enter the markets, and in some cases acceded the “low end” market to them. Major steel manufacturers watched Nucor and other mini-mill firms enter at the low end of the steel market and happily left much of that market to Nucor, only to watch Nucor climb the capability ladder and eat their lunch.

These slow conversions of the market are based on what I call the “yes but” argument. Large firms look a new product or service which carves off a small portion of their business and say to themselves “Yes, but they won’t take our core customers” or “Yes, but they can’t grow from there” or “Yes, but our brands are stronger”. It’s as if they assume the disrupter plans only to carve off some small portion of their business and then remain static. The larger firms are willing to give up some of their markets and anticipate that the disrupters will settle into a comfortable slow growth model just like the dinosaurs that rule the market. The dinosaurs never seem to understand the amount and nature of change that is happening in their own markets.

I was thinking about this when considering Square, the new product offering from the founders of Twitter. Square allows anyone to process a credit card on their cell phone, allowing individuals and very small businesses the ability to take cash, checks or credit cards at their businesses. The banks and firms that provide merchant services sniffed and said “Yes, but they are just riding on our networks” or “Yes, but that’s only for small businesses”. Instead of partnering with or simply buying Square, they acknowledged it and ignored it. Now I see that Verizon has partnered with ChargeAnywhere, a similar offering to Square. Verizon has clearly decided it wants a part of the transaction flow between small businesses and its customers. Rather than simply process the transaction – that is, act like a “dumb pipe”, Verizon through its partner will gain value from the transactions, and increasingly can replace card readers in small businesses. Take another example. Paypal is on track to exceed $2B in transactions in 2011. Is Paypal “large” yet? I’m sure a few years ago the banks were arguing “Yes, but it’s just an interesting fad”.

What in your business are your people saying “Yes but” about? What small disrupters are taking your customers away “out in the open”? I’m sure the dinosaurs ignored small mammals, and if we could go back and listen to their conversations we’d hear the dinosaurs telling themselves, “Yes, but they are so small” or “Yes, but they can barely defend themselves”. If your team is saying “Yes but” about a small competitor or even a firm that they’ll argue “doesn’t really compete with you”, pay attention.


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Jeffrey PhillipsJeffrey Phillips is a senior leader at OVO Innovation. OVO works with large distributed organizations to build innovation teams, processes and capabilities. Jeffrey is the author of “Make us more Innovative”, and innovateonpurpose.blogspot.com.

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  1. Another clear example is in the telecommunications industry: the big carriers thought Skype was cute, never a serious threat – then cable said I want to be in that business. The telecommunications industry tried to use legislation to keep out the new entrants. Then there was vonage, and google, …and the list continues to grow. Large, successful companies fail to recognize when their offering becomes commoditized, and that opens the way in for smaller, more agile companies. Just take a look 100 years ago when the Dow index was compiled – how many of those Giants are still around today? Leaders in companies have to look at the market with fresh eyes, and see what is on the edge. The edge is where innovation creeps in.

  2. Yes, but…

    while you are mostly right, you leave out a couple of big points, and your conclusion isn’t quite right. Big companies can generally see what’s happening, but their culture, their cost structure, and the necessity to destroy their own margins to compete on the same footing as a disruptor will almost always prevent them from doing what hindsight will tell them they should have done when they had the chance.

    Moreover, developing (directly) competitive strategies to fight the disruptors is almost always the wrong thing to do. The “dinosaurs” have to be conscious of what is happening in the market place and the long term implications if nothing changes, but the best way to compete is to focus on your own strengths rather than go toe-to-toe with a disruptor. Build a big moat and fill it with lots of nasty stuff to protect your space, and not cede the low end of the market by default.

    The biggest problem for incumbents is that they have to be prepared to eat their young — their sales and distribution channels almost always will stand in the way, because they have a vested interest. And, since the revenue those channels generate is necessary to both support the existing cost structure until a transition can be completed, and to fund the building of a new business model, the people that create that revenue have a ton of power to stand in the way of innovation. Hence the destruction of the old way of distributing music by Apple, rather than by the music industry itself.

    Another entrenched party with a vested interest in preventing change to business model, cost structure, and work processes is organized labor. For example, your examples of Ford and GM, assume that management didn’t see the Japanese coming for 40 years. But you and I and everyone else saw it, so how could they miss it?

    There were two issues that were impossible for NA car companies to address — the low value of the yen relative to the dollar in the 70s and 80s, and the high cost of unionized labor and inflexibility of unions in allowing restructuring of work changes that could have reduced labor and non-labor costs considerably. The only way to break those shackles was for GM, and the entire NA car industry literally to be staring down the brink, and for the US economy (and therefore dollar valuation) to be so crippled that we could once again compete on cost.

    So, I think we need to be careful about bashing our own for being dinosaurs, too dumb or too slow to adapt. Structural problems at a country level, such as bad laws, over-protection of IP (yes, over protection is a more serious inhibitor to innovation than the loss of incentive from under-protection), over-valued currency (or a competitive country’s under-valued currency) can easily trump innovation, and are usually beyond the power of any business to change, especially in the short term.

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