Directions of Disruption

Disruptive companies can approach a traditional market from two points of attack.

Starting with a High End Focus

Some companies begin by serving the high-end of the market with a better product (at a higher price) than the incumbents can offer. As the company gains experience (experience curve) and economies of scale, it can move “down-market” to compete with the incumbents’ core market. Some companies stay boutiques. The ones that successfully disrupt an industry can lower price faster than they lower quality, resulting in a substantially better product at comparable price to the incumbents.

Examples of companies that took this route: Starbucks, Apple, McKinsey, Tesla.

Starting at the Bottom

A second approach is to start with a very low-end. Companies offer the lowest price possible, better yet, free.  The most cash-strapped, cost-conscious customers will sacrifice quality (and customer service, reliability, convenience, functionality) for the substantial savings. Companies that are successful in this path have a business model (and cash flow model) that gives them time to stay in business. Successful disruption means the quality improves faster than the price, leading to a slightly worse product at substantial discounts.

Examples of companies that took this approach:  Toyota, Walmart, Dell, Southwest Airlines, Ikea.

 

disruptor-strategy

Note the curve of the arrows in the diagram: the high end drops price faster than quality, the low-end improves quality faster than price.

 

End Game

The truly industry-changing disruption occurs when companies choose to move beyond the incumbents: high-end boutiques ending with higher quality, lower-priced products than the incumbents; low-cost products improving to the point where they are better than the incumbents. Not all companies take this path. Some prefer to stay slightly higher-end (Starbucks) or slightly lower-end (Walmart), preferring not to risk disrupting their own brand /profit-margins from the high-end or mass-market appeal from the low-end.

 

 

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s