How To Recognize and Survive Business Disruption?

In the 1960s, German shoe brands ruled the athletic shoe market. During this period, with an initial investment of $1000, an unknown small company called ‘Blue Ribbon Sports’ launched radically different shoes under the brand name ‘Nike’ and disrupted the whole industry. In the next twenty years, Nike became the undisputed leader in the sports shoe industry.

The year 1962 was called the year of discounting. Hundreds of discounting stores popped up over the whole of USA. In the same year, three big companies started their own discount chains -Woolworths, K-mart and Dayton-Hudson opened gigantic stores in the big cities where the population was above 50,000. Everyone thought that these chains would go on to conquer the world. And then one guy started a small discounting store called ‘Wal-Mart’ in a small town called Rogers, Arkansas. Nobody gave him any importance. No media covered him. He was considered as one among those hundreds of small discounting stores waiting to be eaten up by the three giants. But…. five decades later, Woolworths have vanished. Kmart has only 365 stores with the sales of $25 billion to Wal-Mart’s 11,718 stores with the sales of $500 billion. Target’s revenue in 2017 was $72 billion. Wal-mart has disrupted the retail business.

Amazon disrupted Barnes & Noble.

Netflix disrupted Blockbuster’s business.

All the dominant companies lost their market share to startups.

Companies like Blockbuster, Barnes & Noble failed to detect the emerging signals of change that went on to disrupt their businesses. They reacted very late and struggled to develop effective solutions though they had the ability to counter those changes if they had recognised the disruption earlier itself.

How did these established companies allow their businesses to be disrupted by small companies and lose their leadership? How to identify whether our industry or our business is about to be disrupted? How to survive disruption? How to stay relevant?

OBSERVING CUSTOMERS

A business’ sole purpose is to meet the unmet needs of a customer. The same condition applies to the disruptive business.

• Ford’s model T disrupted the market because it solved the problem of inexpensive transportation among common middle-class people.
• iPhone, Uber, Airbnb disrupted their respective markets by catering to the needs of customers who didn’t even know they had those needs at that time.

Most of the time, a disruptive product or service happens because the existing businesses failed to meet the needs of their customers or ignored their needs. The companies failed to observe their customers. They failed to live like them.

Be Your Own Customer -Nike came and disrupted the market because Adidas and Puma failed to understand the pains and needs of athletes. Bill Bowerman, Nike’s co-founder was himself an athlete and also a famous track field coach. He knew the needs of track athletes very well. He was looking for a lighter shoe so that an athlete could run faster and also a shoe that could last the race of long-distance running. But it was hard to find.

This forced Bowerman to come out with new designs. It changed everything. Nike’s shoes were lighter - protected athletes from various injuries -gave enough cushion support -gripped well on multiple surfaces -lasted longer than any other competing brand. They made specialised shoes for various contexts.

Nike’s Cortez and Waffle Trainer revolutionised the shoe industry. Nike could succeed because Nike’s founders and their first batch of employees were all athletes. They lived like their own users. They knew their customer’s changing needs better than anybody else at that time.

Understand Shifts in User’s Attitude and Changes in Contexts -By 1970s, Most of the Americans were unhappy with the coffee experience as every vendor was making coffee from cheaper Robusta beans rather than from Arabica beans. Particularly, the younger generation disliked the taste of coffee. Robusta beans are of very inferior quality compared to Arabica beans.

Coffee beans packed in the cans and sold in the supermarket shelves were also going stale, affecting the tastes. In the same period, people were becoming health conscious and began to cook their own food at home. They were looking for a naturally processed, authentic coffee beverage & was willing to grind the beans in their home.

Maxwell Coffee House and the other coffee giants were oblivious to those changing needs, and shifts in attitudes of customers. They failed to spend time and observe the customers. Even at this time, to save the cost, Maxwell Coffee House was actually increasing the ratio of Robusta in their coffee blends which were completely against the consumer’s interests.

In this scenario, one small company opened a store in Seattle and began to sell authentic good quality, naturally processed coffee beans under the brand name ‘Starbucks’ and slowly became the leader in the following decade.

Be Humble and Observe -How did Blockbuster allow their business to be disrupted by Netflix? Because they lost touch with their own customers. Blockbuster failed to observe what problems their customers were facing. The customers were fed up with late fees, poor selection of movies, bad customer service, difficulties in locating movies, wrong merchandise mix, and unclean store environment. Sometimes, customers had to take multiple trips to the store for renting a particular movie. Despite this harrowing experience, the customers managed it as they had no alternatives until Netflix entered the market.

OBSERVE NON-CUSTOMERS

Nokia was a market leader in mobile phones in the early 2000s with a huge customer base and designs to meet customer needs. They had an efficient research and design team. Their designs were user-friendly and made after extensive research. Nokia thought they were keenly observing people, finding out opportunities and solving the problems. Unfortunately, they became irrelevant sooner than they could predict and respond.

Clayton Christensen says, “Best firms succeeded because they listened responsibly to customers, invested aggressively in technology, manufacturing abilities, designed wonderful products to meet the next generation needs. Same best firms failed after some time, because they listened to the SAME customers, invested again, designed again to meet NEXT GENERATION needs”.

If you are just focussing only on existing users or customers, your industry may soon be ripe for disruption.

Blue Ocean Strategy offers a solution -focus on ‘Non-customers’ that would help in ‘Radical Value Innovations’.

Focusing on existing customers will break the existing market into finer segments, forcing us to tailor the offerings further, and reducing the market further. To break away from this, the first step is to shift your focus from “Customers” to “Non-Customers”.

BOS talks about three tiers of non-customers

• First Tier — “Soon-to-be” non-customers who are on the edge of your market,
• The second tier — “Refusing” customers who consciously ignore your market
• The third type — unexplored non-customers who are in markets distant from others.

Wal-mart’s Non Customers -In the early 1970s, big discounting stores were on the rise. Kmart and other bigger retailers opened their stores in towns having a population above 50,000.

What did Sam Walton do? He targeted the non-customers -People from small towns. Sam Walton opened his Walmart stores at villages where the population was less than 5000. None of the bigger brands was ready to provide products at discounted prices to these people. Walmart disrupted the retail market and went on to become a leader.

Nike’s Non Customers -In the early 1960s, every shoe brand was competing to target athletes. Though Nike began its journey by manufacturing shoes for athletes, it soon diverted its focus to non-customers -The common people.

Nike’s original founders Bowerman and Phil Knight firmly believed that people could live a healthier and longer life if they could run for a few miles every day.

Bowerman thought that people mistake that only elite Olympians are athletes. For him, everyone’s an athlete. He firmly believed that if a person has a body then he is an athlete.

Nike educated customers about the benefits of running as a fitness routine through advertisements, magazine articles, publishing books and sponsoring fitness programmes. Soon, the jogging culture spread like a wildfire. Running became trendy and cool. The market for shoes expanded beyond athletes and Nike became the leader.

OBSERVING LESS AFFLUENT PEOPLE IN THE RESPECTIVE FIELD

Clayton Christensen also furnishes a couple of conditions about choosing Non-Customers.

01) Can the product or service be provided to less affluent people in a more convenient context, something that historically was available only to more skilled or more affluent people? Less affluent people and a more convenient context(A critical parameter).

02) Is there a large population available?

Aristide Boucicaut -In 1848, 32-year-old Aristide Boucicaut was at the crossroads of his retail career. The intense competition, increasing price wars, and shrinking profit margins had rendered his business unsustainable. He was looking for a solution to break-away from the competitive race.

Boucicaut’s Non Customers -Boucicaut saw a potential opportunity in the emerging middle class, as they were getting wealthier from the Industrial Revolution. Before industrialisation, people had few things available in the market that could be owned. Mass production had enabled accessibility to exciting items. People could now own more things. Boucicaut felt that this class of people desired to belong to be a part of a higher class. They were a steadily growing group and got new aspirations.

The challenge was that every other shop owner would target this emerging middle class. Boucicaut had to dig his head below the surface and see things where most people would not explore in order to locate his ‘Non-Customers’. After brief research and with his own experience, Boucicaut figured out his potential ‘Non-customers’ — Women from the emerging middle class.

Why Women? -In the 1840s, Women of upper classes, emerging middle classes had no other sources of exciting activities or recreation other than visiting family tombs or friend’s homes along with her husband. They were bored… They needed excitement… They too needed space on their own… Women of the emerging middle class were desperate to fit into the upper class. Though they already owned things, they continued to acquire more and more things.

Moreover, Boucicaut had a wonderful understanding of his customer’s needs as he had been selling women’s clothing for more than Nineteen years.

To cater to their needs, Boucicaut provided a convenient context by opening a giant store called ‘Le Bon Marche’, the world’s first large departmental store, and it went on to revolutionise and disrupt the retail industry.

Boucicaut’s non-customers ‘Women of the emerging middle class’ matched Clayton Christensen’s conditions — 1) Is there less affluent people, who previously lacked money, skills to buy? 2) Is there a large available population? 3) Can a Convenient context be provided?

OBSERVING SIGNALS FROM TECHNOLOGY

• In the 1960s when DEC launched mini-computer, IBM who was dominant in the digital world selling huge mainframe computers termed it as irrelevant to his market and his customers. Gradually, mini-computers grabbed IBM’s mainframe computers.
• When desktop personal computers were launched, DEC announced that “Desktop PC has limited applications and it will not affect its Mini Computers Market”. Unfortunately, Desktop PC came to rule the computer world and DEC lost its relevance in an important growing segment.
• Polaroid, the name synonymous with instant photography, controlled the instant photography market but the company failed to manufacture digital cameras though it had its capabilities and lost its leadership.
• Xerox was a leader, but then lost relevance in Desktop printing, and lost its ground.
• On the other end, Intel successfully transformed itself from memory business to microprocessor business.

History shows that technology played a massive role in sinking some of the established business leaders. The traditional industries failed to adopt new technology.

Brands have to constantly adopt new technologies and experiment to avoid being disrupted and to remain relevant in the industry.

How to find out the next disruptive technology?

We need to constantly look for it. Major research labs at universities and public companies constantly work on new, exciting and novel technologies and publish them in little-known journals and also present them at Academic Conferences.

Apple introduced the computer mouse in the 1980s which revolutionised the PC industry. But computer mouse was demonstrated by Doug Engelbart in 1968.

Steve Mann demonstrated Google Glass in the year 1981. GPS existed as early as 1973 but was widely adopted only post-2000. Microwave technology was developed in the 1930s but was commercialised only in the early 1950s.

John Kolko writes, “Anything that will be a billion dollar industry in 10 years is already 10 years old. A business has to constantly read those tech journals and attend those highly esoteric tech conferences”.

Walmart & Technology -Walmart did not let any newcomer disrupt its market because it adopted many technologies and underwent constant changes. Wal-Mart’s executives constantly explored and researched about the advanced technologies available in the other parallel industries. Based on their research, they built an advanced distribution system, computerized warehouses and data processing facilities by investing in sophisticated equipment and technology ahead of other retailers.

They began building the satellite system -an interactive communication system connecting stores, distribution centre, and central office in 1978 when no other retailer had even heard about the computers. This Communication system helped Wal-Mart to grow rapidly as it could control the whole network through the collection of data. Wal-Mart was well ahead of time. K-mart and other giant retailers failed to research, experiment and adopt new technologies.

Netflix & Technology -In1997, movies stored in VHS tapes ruled the market. They were bulky and costly. It was expensive to store, pack and ship those VHS tapes. Randolph was looking a way out from those problems. He kept digging through technology material to find a solution. In one of the technical magazines, he discovered an optical media storage format called DVD. He kept following up on the progress of DVD technology. Once the technology arrived in the commercial market, Randolph and his business partner Hastings test mailed a DVD to one of their houses and it arrived safely. DVD also worked fine. Both of them felt that DVDs would solve the problem of high shipping and inventory costs. So, they started a company called ‘Netflix’ and became an early adopter for DVD technology. Netflix got a head start due to its adoption of DVDs. Blockbuster failed to read the signal of DVD technology.

OBSERVING SIGNALS FROM EMERGING COMPETITORS

It is important to identify disruptive business companies in the initial stages and follow how they are innovating in response to changes in the environment and user’s attitudes.

Competition is always a good thing, that it always brings out the best in people, but that’s only true of people who can forget the competition-Phil Knight.

It would be difficult to identify who would be that potential disruptor because of the following challenges.

• Disruptive businesses would have a different business model than what’s already there in the market.
• It would take a long time to see the effects of business disruption in the respective fields.
• Most of the disruptors were not even aware that their business would disrupt the traditional business. Like any other business owner, they’re trying to solve a problem faced by a customer through a product or service.

Blockbuster and It’s Competitor -In the late 1990s, while Netflix, a small firm adopted DVD technology, Blockbuster and major retailers continued to sell movies in VHS tapes. These giant retailers were sceptical about DVDs, considered them as a threat and clung on to VHS tapes for a long time. They refused to stock DVDs in their stores and lost crucial time in the DVD rental business. What would have happened if Blockbuster experimented DVD technology as soon as Netflix adopted it?

Later when Netflix entered online rental, Blockbuster saw online DVD rental as a threat to its established, robust brick-and-mortar sales and tried to protect its customers. The company did not see a necessity to invest in the online DVD rental. It took more than three years for Blockbuster to consider investing in Online rental and by that time, Netflix had already crossed the chasm.

Sam Walton and Competition -For fifteen years(Before Wal-Mart), Sam Walton had been running a chain of independent variety stores in smaller towns. By 1960s, those stores generated the revenues of $1.4 million. Things appeared fine. But Sam Walton kept observing the retail market. He kept observing other retailers in the nearby towns and copied their best practices. He travelled far and wide to see new entrants as well as new developments in the market. He watched how the emerging competitors were building their business and what new merchandising practices were implemented. His observation showed that the future headed towards ‘discounting stores’. He saw how some larger stores were doing revenues of more than $2 million from each store compared to $1.4 million from Sam’s 15 stores. He visited many discounting stores all around the country and studied the concept in-depth. It was clear that discounting would go and dominate the market. “Buy it low, stack it high, sell it cheap” was the guiding principle of discounting.

Sam had only two choices — Stay in the variety store business which would be soon disrupted by the discounting wave of future or open a discount store. He wisely chose the second option. Thus Wal-mart was born. He changed the course of his business to join the disruptive business bandwagon.

While seeking signals from competitors, do not try to copy the product features or benefits from your competitors. Observe how your competitor’s consumer segment is changing, type of technology they are exploring, the changes in their business models and understand the reasons behind those changes.

THREAT OR OPPORTUNITY

In the initial years, Netflix was struggling to garner mainstream customers and many of them were still renting movies at Blockbuster. Netflix’s brand awareness was also so low among the common masses. Hastings thought that one way to grab attention was to project a David-Goliath image by targetting Blockbuster as it was a well-known name by then.

Netflix had 300,000 subscribers compared to 20 million Blockbuster subscribers. In every interview and advertisements, Hastings and his team took swipes at Blockbuster. Hastings wanted Blockbuster to simply acknowledge a potential threat from Netflix as it would create brand awareness in the minds of consumers. But Netflix gained another benefit too.

Framing Bias -Cognitive and Social psychologists have noted that if you frame a phenomenon to an individual or a group as a threat, it elicits a fear that would result in more intense and energetic response than if you frame the same phenomenon as an opportunity. If they encounter a threat, a response called ‘threat rigidity’ sets in and they cease being flexible and become focussed on countering the threat in order to survive. -From ‘The Innovator’s Solution’.

As Hastings and his team continuously projected Netflix as a threat to Blockbuster, media too followed the same script. Unfortunately, Blockbuster too fell into the trap, saw online DVD rental as a threat to its established, robust brick-and-mortar sales and tried to protect its customers. As Blockbuster considered it as a threat, the company did not see a necessity to invest in online DVD rental. Only after three years, Blockbuster realised their mistake, began to consider it as an opportunity and committed resources. But by that time, Netflix had already got a massive head-start. Blockbuster missed the growth opportunity which eventually led to its destruction.

Similarly, Barnes & Noble saw selling books online as a threat and not as an opportunity. Sam Walton, on the other hand, saw ‘discounting’ as an opportunity and not as a threat to his ‘Variety Store’ business. To avoid being disrupted, it is important to see everything as an opportunity rather than a threat.

EXPERIMENTATION

One of the way forward to escape disruption is to keep innovating. Innovation is possible through an integrated process of experimentation.

Through literally thousands of small experiments, bigger brands like Nike, McDonald’s, Starbucks came out with innovative products that transformed the lives of consumers and their businesses.

“The most important and visible outcropping of the action bias in the excellent companies is their willingness to try things out, to experiment.” — From the book ‘In Search Of Excellence’.

Starbucks -Starbucks’ was looking for ways to grow the market by targeting non-customers. Spending time with those customers showed that there would be good demand for some sort of blended coffee beverage among non-customers.

The Starbucks’ team began experimenting to create a blended drink by adding and mixing various constituents. Finally, they arrived at a drink of particular combination. They launched the beverage in a couple of stores. They tweaked it after consumer feedback and re-launched again. The results were great. The iconic ‘Frappuccino’ drink was born. Then they launched it nationwide in the year 1995.

Starbucks’ team expected to sell around 1,00,000 drinks in the first week but they sold around 2,00,000 drinks. A couple of weeks later, the sales were around 8,00,000 units.

Frappuccino changed the trajectory of the company by bringing in new customers who were not normally coffee drinkers and filled its stores in afternoons and during warm weather when the coffee business was typically slow.

Nike -Nike’s co-founder Bill Bowerman always experimented with footwear from his college days which he continued even after becoming a famous coach. He learnt how to make shoes from a local cobbler. He tore the shoes, cut cross-sections, added various materials, then put them together. He would ask his wards to run wearing those shoes. He had constantly used his runners as his test subjects. He continuously monitored the performance of his shoes along with his runner’s performance.

• In 1965, one of Bowerman’s athletes’ foot got injured when he unknowingly misstepped into the path of a passing teammate, in a long-distance race. That injury led to a stress fracture in one of the metatarsal bones. Bowerman ripped apart the athlete’s shoe and saw that the shoe had spongy cushioning in the heel and forefoot but zero arch support. Moreover, the outer sole was wearing faster, forcing the metatarsals to bend until it snaps. Bowerman began experimenting and the ‘Cortez’ shoe was born which went on to push Nike into everyone’s mind.
• Bowerman saw that whatever shoes available in the market were not gripping well enough on some of the well-advanced synthetic surfaces. Bowerman began experimenting for a shoe that would be suitable for multiple surfaces. One day, while having breakfast, his eyes caught the waffle iron’s grided pattern and a thought struck in his mind -“What if you reversed the pattern and formed the material with raised waffle-grid nubs?”. The ‘Waffle Trainer’ shoe was born.

Waffle trainer not only felt different but was unique in aesthetics because of pillowy mid-sole cushion and the unique outer sole. It was considered a trendsetter in the styling of shoes. The visual appeal of the shoe drew customers in thousands to the stores. It became a cultural artefact. Soon people began wearing this shoe to classrooms, grocery stores. The shoe became everyday wear and pushed Nike to a leading position. Adidas tried converting its athletic shoes to everyday wear but had only limited success. They never had a distinctive and popular shoe like waffle trainer. Thanks to Nike’s persistent experimentation culture.

Technology Experimentation -In the early 1990s, through continuous experimentations, Starbucks’ R&D team discovered that they could capture coffee’s flavour and aroma in a concentrated extract. When they ran the tests with coffee made by those extracts, the results were encouraging. This extract opened a whole new possibility for Starbucks — Starbucks began adding coffee extract in a wide range of products including coffee-flavoured beer, coffee ice cream, ready-to-drink bottled beverages. The extract helped Starbucks in growing the coffee market. The brand could attract more non-customers and easily fight against non-consumption.

BE YOUR OWN DISRUPTOR

Rather than reacting and adapting to business disruption brought by somebody else, the best way forward is to be your own disruptor. Find a way to disrupt your own business.

KILL YOUR OWN BUSINESS

Bezos was taken back when Apple disrupted Amazon’s music business. He was aware of how great companies failed when they ignored to embrace the new disruptive changes happening in the market and allowed newcomers to disrupt the market. Bezos himself had ignored the warnings in the music category. He didn’t want to repeat the mistakes. Instead of somebody else disrupting the market, he wanted Amazon to disrupt its own market. He set up a team to come with ideas to kill their own business. He chose ‘Books’ as the first category and asked the team to find ways to kill Amazon’s ‘book business’.

The ‘Kindle’ was born and transformed the publishing business. Bezos thought that if Amazon didn’t lead into the age of digital reading, then Apple or Google would.

OBSERVING SIGNALS FROM SUPPLIERS

Andrew S Grove, Former President and CEO, Intel wrote, “Businesses often take suppliers for granted. Sometimes, whether because of a change in technology or a change in industry structure, suppliers can become very powerful and they can affect the way the rest of the industry does business”.

Nike’s Hold On Suppliers -In the early 1970s, Phil Knight, Nike’s co-founder was observing China’s economic and political developments for some time. He was attracted by China’s potential market opportunities -One billion people, Two billion feet.

Phil strongly felt that the first brand which enters the China market would soon establish a strong global competitive edge due to the economics of scale. Moreover, the production sector of China would be cheaper than any other place in the world due to the lower labour costs. He was determined to enter China as soon as it opens its economy to the outside world. He kept in touch with people from the Chinese government. No other shoe brands had given a thought about investing in China at that time.

In the 1980s, When China opened its economy, Nike was the first American shoe company to enter its market and also the first one to sign manufacturing and production deals with local manufacturing companies. Nike established long-term contracts with the available good quality Chinese suppliers. Nike blocked competitor’s choices of the best suppliers in China. By being first to China, Nike got a massive head start in volumetric production.

Most of the American and European shoe brands including Nike were manufacturing their shoes in Japan. In the early 1980s, Japanese Yen’s value rose and the labour cost dramatically increased. Every shoe manufacturer suffered including the German giants but Nike remained unscathed and became a leader.

Starbucks’ Hold On Suppliers -For procuring coffee beans, Starbucks made long-term contracts at fixed prices for some origin countries to gain protection against price fluctuations. The brand also promised the farmers to buy the entire yield over a fixed period. The company has invested a lot to improve the farmer’s life which built loyalty and ensured a long-term supply of good quality coffee beans. This blocked competitors from accessing the good quality coffee beans.

The company also have signed long-term contracts with specialised highest quality coffee beans like ‘Narino Supremo’ Bean Crops which grows only in special places which further blocked any new competitors from accessing the beans.

Intel, being a supplier of microprocessors have disrupted the PC market industry through the ‘Intel Inside’ campaign. Major PC manufacturers lost their businesses as people went for PCs with Intel than a PC with a particular brand name.

CONCLUSION

The one factor which would help any business to overcome disruption is being constantly aware of changing user’s needs, wants and desires. If you miss this, your business would be soon for ripe for disruption. Another important factor is technology. Business Disruption is not limited to only technology industries. It affects every industry. But technology plays a major role in all business disruptions. Keep exploring, experimenting with various relevant technologies and adopt or ignore if needed.

References: Only The Paranoid Survive by Andrew S Grove, What Is Strategy-HBR article by Michael Porter, The Five Forces Of Competitive Strategy-HBR article by Michael Porter,What Great Brands Do by Denise Lee, Sam Walton’s Made in America, Blue Ocean Strategy by W Chan Kim, ‘The Everything Store’ by Brad Stone, ‘Netflixed’ by Gina Keating, Pour Your Heart Into It by Howard Schultz, ‘Shoe Dog’ by Phil Knight,The Innovator’s Dilemma by Clayton Christensen, Wired to Care by Dev Patnaik, Designing for Growth by Tim Ogilvie and Jeanne Liedtka, The Innovator’s Solution by Clayton M. Christensen and Michael E. Raynor, The Birth Of Shopping documentary 2011, Article on Women in Nineteenth-Century by Kimberly M. Radek-Hall.