Why do customers embrace disruption?

Why do customers embrace disruption? They don’t, they embrace what they want.

It is not like there are a bunch of customers out there looking for disruption. They are looking for things that meet their needs. The problem is that many incumbent organizations forget that their mission is to meet their customer’s needs. When they don’t the opportunity for disruption is created.

With all the talk about disruption of business models and industries, the supply side, there seems to be little talk about the customer, the demand side. After all, unless someone buys what we are selling it is hard to stay in business for very long.

As discussed in “What makes a start-up successful?” too often we talk about the technology, or new business model, and not about what it does for the customer. Therefore, for something to be disruptive it has to be successful. It has to have customers. Kind of like, if a disruptive technology grows in the forest and no one buys it, it didn’t happen.

The reason why customers embrace disruption is because the new; product, service, offering, solution is meeting a need in the market that the incumbent providers are not, or at least not very well.

Clayton Christensen, the inventor of the phrase “disruptive innovation”, explains that customer requirements move through four phases;

  • Functionality,
  • Reliability,
  • Convenience,
  • Price,

as can be seen at the bottom of the Integral Organization Model.

In the Integral Organization Model we see that the output of an organization is to deliver a value proposition to its customers. As offerings mature the basis of the value proposition moves through the four phases to price. Once the market is competing based on price the focus of the organization becomes internal. The internal meetings talk about cost cutting, efficiency and price optimization. The focus on meeting customer needs is diminished. This creates the opportunity for disruption.

The world of this mature market is described as a Red Ocean by W. Chan Kim and Renee Mauborgne, in their book Blue Ocean Strategy. They also point out the new functionality based market, described as a Blue Ocean;

“…imagine a market universe composed of two sorts of oceans; red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space.

In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to out perform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.

Blue oceans in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries... …In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.”

Christensen studied the disk drive industry and discovered the reason why customers bought new disk drives, which had less capacity, were slower and cost more per megabytes was because their form factor was smaller. The new disk drive’s functionality was that they could fit into the space requirements of a departmental computer, a personal computer, a laptop and now flash drives in smart phones and tablets.

This is a blue ocean strategy emerging from a red ocean. What Christensen found was that the incumbent disk drive manufacturers rarely succeeded in the new form factor disk drive business. The main reason for this is because they operated on the left hand side of the Integral Organization Model as described in, “What is a Perfect Organization?”.

The reason to embrace the new technology was not price, it was not performance, it was functionality.

Often this new functionality is not as good as the existing solution, think about the early days of Skype when its voice quality was not as good as the telecom’s international calling. But it was good enough to communicate with our friends around the world.

Because the new functionality is only just “good enough” it is not immediately embraced by the mainstream. Organizations didn’t stop using their video conferencing rooms. But consumers do. Now it is easy for family and friends to video call each other around the world, even if the line does drop in and out.

The incumbent video conferencing providers strive for higher quality to their solutions and extra features like multi-room and screen sharing. We start to see boards rooms being decked out with panels of screens and cameras all at great expense.

The next phase is reliability. With better Internet quality and improvements to the technology the connections drop out less and buffering time disappears. The people using web based communications are wondering why their organizations are spending so much money on the fancy video and phone systems.

What has been just “good enough” is getting better. There are now more new entrants offering this different functionality, Skype, Apple’s FaceTime, and Google Hangouts. Web conferencing starts to grow with companies like WebEx (now owned by Cisco) and GoToMeeting (owned by Citrix).

Once the “reliability” box is ticked the next phase of decision criteria comes into play, and that is convenience.

People want to be able to communicate from anywhere to anywhere using anything. Apps appear for our phones, tablets, laptops. We gain the ability to “web call” into traditional phone systems with Skype Out and Skype In. When we say we had “talked” to another person that may not mean we actually spoke to them but we exchanged messages, texts or had a “chat”.

The phone on our desk at work has become less and less used. Why bother picking up the phone, looking up the person’s number, usually on our mobile phone, and dialing the number. Now it is far more convenient to dial from the contacts app on our mobile phone.

The desk phone now is mainly used for conference calls and guess what, we even have the web conferencing app dial our phone because it is more convenient. Of course today we are working more from home, or on the road, so the ability of join meetings from anywhere adds to the functionality and convenience.

You know something has hit the convenience phase when your parents start using it.

Once the new functionality has become reliable and convenient with multiple providers in the market the decision criteria shifts to price. We have now created a new red ocean.

This process from blue to red ocean in the office and personal technology world is what is driving the “Consumerization of IT”.

An interesting question is at what stage of this cycle is the Apple iPhone? It clearly offered new functionality when it was first launched in 2007 with the tag line, “there’s an app for that”. Today’s business use of the iPhone is much more reliable than the first version of iOS. And it is now much more convenient to buy a new iPhone instead of queuing up for blocks on the day of launch, we can go into multiple retailers or order online.

Is Apple facing a red ocean market with all the Android players?

In summary, if we have a great idea to create disruption in a market, we need to test our idea to make sure it is offering new functionality. If we are trying to disrupt the incumbents based on price, chances are our offering is based on sustaining innovation and not disruptive innovation. As Christensen tells us, if it is sustaining innovation the incumbents usually win. To understand the difference please read, “What makes a start-up successful?”

Integral Organization Model References

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