In Seeing What’s Next, (Christensen, Anthony & Roth, 2004) the authors discuss the three basic steps of how innovative disruptions develop:
- Entrants enter behind a shield of asymmetric motivation – they capitalize on overshot or untapped customers.
- Entrants grow and improve, while incumbents flee — fleeing is sometimes easier than fitting a disruptive innovation into an already-established business model.
- Entrants utilize the sword of asymmetric skills
To illustrate this principle, consider the following (fictional) story:
The only clothing store in a small town, Original Goods, sells high-end, fashionable clothing. This is primarily due to the demands of a historically upper-middle-class population of middle-aged professionals, retirees, and tourists. Their marketing efforts, supply chain relationships and distribution are highly specialized to this demographic, and have remained relatively unchanged for years.
In response to an influx of young professionals and recent college graduates to the area, a new disruptor in the market – New Wares – introduces a clothing store that sells lower-cost, yet equally as fashionable items. It is successful in targeting this new demographic with both in-store sales and online store pick up. Within 6 months, New Wares opens an incredibly successful online retail store which distributes nationally, and accounts for more than 75% of their first-year profits.
New Wares’ sales are remarkable in the first year, setting them up as a ripe competitor for Original Goods. Sales are down at Original Goods as most of their younger professional and tourist customers have moved their business to New Wares, due to its increased convenience, online ordering options, and lower prices. Original Goods attempts to launch their own online store to co-opt into this segment of the market, as a defensive response to New Wares’ success. They quickly fail to make substantial profit from the online store, as their technology is outdated, they are unable to establish good processes around capturing and fulfilling orders, and their marketing efforts are antiquated and focused on brick-and-mortar sales to a different customer demographic.
Original Goods decides not to further upgrade its systems or delivery capabilities to effectively “cram” this segment into its business model, and abandons its online retail store. It cedes this segment of the market to New Wares. In response, Original Goods introduces new, locally-crafted garments to its product offerings, and focuses on creating an aggressive marketing campaign to support a “locally-made” company, in attempt to win back the patronage of the professionals and tourists they previously lost as customers. This move is mildly successfully, and Original Goods wins back the loyalty of a small portion of its lost customers, but cannot compete with the online presence and profits of New Wares. Original Goods simply cannot rival New Wares’ ability to utilize technology to target a younger, ever-expanding lower-income population.
Original Goods struggles since they do not see the value in targeting a new demographic of customers, (an example of asymmetric motivation), and are unwilling to update their systems and processes. They lack the infrastructure or motivation to support processing online orders, and thus, fail to develop as a co-option to New Wares’ online retail offering. They develop a defensive co-option, offering locally-made goods in-store, in an attempt to win back the business of a select demographic, but are unable to re-capture a significant portion of their market with this initiative alone.
Several years later, due to decreased sales, Original Goods downsizes its retail location and staff, and focuses exclusively on the sale of designer garments to a very specialized, higher-income population. They maintain their business in this way until the owner retires, never enjoying the profits and business success of New Wares or becoming a viable competitor in this market.
Rigid or outdated company resources, processes, and values prevent incumbents from successfully entering into new markets, and competing with disruptive innovators. This gives an advantage to the entrants. Similarly, entrants are most successful in markets where there is an asymmetry of motivation between themselves and incumbents – where they see value in a customer population that has been previously overlooked by existing companies. Due to Original Goods’ lack of flexibility, unwillingness to change their outdated systems, and inability to restructure their processes, New Wares emerges as the market leader. If Original Goods had completely re-structured their business model to successfully include this new market demographic and handle online ordering, the outcome may have been dramatically different.
Source: Christensen, C.M., Anthony, S.D., & Roth, E.A. (2004). Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change. Boston, MA: Harvard Business School Publishing Company