Choosing to disrupt

The recent debate over ‘disruption theory’ has focussed on the over-use of the word ‘disruption’ and also on whether it can be used to predict the fate of incumbents in various industries. Somewhat lost in that discussion is precisely what disruption means for start-ups. There has been a tendency to think that start-ups should have as their goal to disrupt a market or industry. For those looking for ideas, a good place to start is markets where a group of customers is under-served by existing firms. However, as Peter Thiel notes in his new book, there is a roundaboutness to that advice.

The concept was coined to describe threats to incumbent companies, so startups’ obsession with disruption means they see themselves through older firms’ eyes. If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path.

Here I want to emphasis another ‘blind spot’ that a disruption mentality can lead a start-up; to fail to consider the myriad of business model options available of which disruption (something I’ll define more precisely in a moment) is just one.

Let me first clarify a point of terminology. In my last post, I presented a definition of a disruptive technology or innovation that (a) under-performed existing technology on ‘market metrics’ and (b) had a significant trajectory of improvement on those metrics. Some people didn’t like my focus on metrics (that reflected my research) but the mixture of under-performance and improvement is a common feature of such technologies whether they start off at the low-end or high-end (a la Tesla) of the market.

By contrast, here I want to focus not on the type of technology but, instead, on the type of strategy. A disruptive strategy involves a start-up whose business model is to (a) compete (immediately or eventually) against established firms in the market (as oppose to cooperate or license to them) and (b) to focus on execution in doing this. While a technology is a technology and you may not have much choice about its characteristics, a strategy is something that you, by definition, have choices over. Hence, you can choose to disrupt.

The question then becomes: when is choosing to disrupt a good idea? One dimension of this is whether you are choosing to compete or cooperate with established firms. Snapchat’s recent decision not to join Facebook shows that it is not obvious that cooperation will always been chosen while the opposite was true for Whatsapp. I don’t want to focus on that here as it has been given more than enough discussion in the MBA literature.

Instead, what of the dimension whereby a start-up chooses to focus on execution. First of all, what does that mean? The bottom line it means lots of hard work that never really stops. In particular, you want to continually expend effort and resources to ensure that you have either higher quality or lower costs than rivals; that is, you have strong capabilities. But to see this we must do the game theorist’s trick summed up in this quote from chess Grandmaster Jose Capablanca:

In order to improve your game, you must study the endgame before everything else. For whereas the endings can be studied and mastered by themselves, the middle game and opening must be studied in relation to the end game.

Consider a future whereby your start-up has entered and succeeded by offering a product at a lower price or higher quality than others. To maintain this, you must have capabilities and be able to sustain them. (For the economists reading this, the idea is that you have, say, lower costs than your rivals in Bertrand competition allowing you to capture margins in the long-term). This occurs because you are constantly playing the game at a level higher than would be competitors. Moreover, because you are doing that, your actual competition remains weak even though there is always a chance for new entrants (something that keeps you working hard).

So focussing on execution means that your plan to beat competitors is not based on securing intellectual property protection or raising long-term entry barriers but instead on continual re-investment to ensure that you stay ahead of rivals.

“Wait a minute?” you may ask, “why would you choose to do that?” After all, if you could choose to have entry barriers and market power, why not go that route? Of course, you may want to but here I wanted to consider when it might be advantageous not to.

First, it is easy to focus on execution and compete head to head with incumbents in the sense that you don’t need to ask many people for permission to do so. You don’t need to approach established firms and risk being ripped off and pre-empted. You don’t need to convince customers to buy your product against the risk of being locked in, in the future. You can “just do it.” That means you can do it quickly and also do not have to do it perfectly right away. In other words, you can follow the playbook of the Lean Start-up. And if you don’t have lots of resources, doing things quickly and cheaply with a plan to continue to get better at it over time is a good way to go. Now that doesn’t mean that you have to make a big splash. Instead, you can still do sensible things like targeting under-served customers and neglected niches that incumbents may be not looking at. This is why it has an affinity with disruptive innovation. But it is still a choice all the same.

Second, it may be more costly to try and build entry barriers. Intellectual property protection may not be strong or may take too long to be resolved. You may not be able to build up network effects with a closed system you can control. Just asked Twitter who started off nice and open and only later tried to reign in control of their core activity stream.

Of course, it is equally the case that you might choose not to disrupt. If you believe, for example, that you can’t build capabilities that can be used to maintain future leadership or that you aren’t at the stage of your life where you want to execute as part of your life, then disruption may not be the strategy for you. Of course, that does not mean it isn’t the right approach but that there are going to be other things than the business that might drive your entrepreneurial choices.

That said, it is natural to write this as if your theory about how the future might play out is something you are certain about. With any choice of entrepreneurial strategy, you are really choosing to learn things about what the right strategy is. By pursuing a disruptive strategy you are testing a particular set of hypotheses. For instance, you may be testing whether the idea is of value to a particular under-served customer segment. You are also testing the hypothesis that established firms will be slow to respond and give you breathing room to develop the technology on a trajectory that leads to broader market success. That means that if either initial customers don’t like the product or you get a swift and competitive reaction from an incumbent, you may have to change business model; likely switching to cooperate with said incumbent. Indeed, like all hypotheses, it is easier to tell when they are proven false than when they are proven correct.

[Note: this post reflects on-going research with Scott Stern and Fiona Murray. All views expressed here are my own.]

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