Why Big Corporation Cannot Be Truly Disruptive
Disruption is a term often thrown around these days. Companies such as Facebook and Netflix are considered as examples of disruptive businesses and the technology world, especially, is continuously searching for the next disruptive idea.
But the discussion is mainly centred on start-ups. Does this mean a big corporation cannot be disruptive? This guide will look at 1) what disruption means, 2) the strategies available for business, and 3) the obstacles ultimately stopping big corporations from being truly disruptive.
WHAT DISRUPTION MEANS
The difficulties big corporations face in terms of being disruptive are easier to understand once you define the meaning of a disruptive business. Disruption is constantly mentioned in today’s media, yet few understand the intricacies of disruption.
The disruptive business idea was first coined by Clayton Christensen from Harvard Business School. In his book “The Innovator’s Dilemma”, he talked about the theory of disruptive innovation and its possibilities for businesses.
In essence, a disruptive business has to transform the industry it operates in. A disruptive business changes the game and challenges the status quo within the industry. This can be done by introducing a new product or service for the industry, which has a transformative impact on how other businesses must operate in the field from now on.
Therefore, disruptive businesses don’t simply come up with an improved product or service. The idea must always have a deeper impact and it could even create a completely new industry or market.
The other terms often mentioned in connection with disruptive business are disruptive innovation and disruptive technology. For example, the difference between innovation and disruptive innovation is again the impact of the idea. A disruptive innovation changes the industry or market, whereas general innovation is mainly about improving an existing product.
Examples of disruptive businesses
It is often easier to understand the distinction between disruptive businesses and other innovative businesses through examples. Below are a few businesses that disrupted their industry.
It’s well known Richard Branson has been a big advocate of disruptive business and one of his businesses has potential to be truly disruptive. His Virgin Galactic created the space for commercial space travel, which could change the way we take our holidays – on the moon rather than the Bahamas!
While Virgin Galactic has certainly challenged international space agencies such as NASA and created a commercial market for space travel, the technology hasn’t quite developed yet to reach its full potential. But Branson’s space travel business is nonetheless a great example of market disruption.
But a business doesn’t always have to open up a completely new market in order to disrupt. Zappos is an example of staying in the same market space, but changing the way the industry operates for good.
The company’s business idea was all about offering free shipping for customers, both when they receive the product and when they possibly return it. The shoe business was in fact the first to offer this service, which many of us now take for granted.
Finally, you also need to mention Facebook. While monetization and disruption often go hand-in-hand, Facebook was adamant from the start that it wants to remain free. The purpose was to get traffic, not revenue.
It was only later, once it had become the largest social media platform on the planet, it utilized advertising as a revenue source. At that moment, it was easy to capitalize on the huge market space it had created by having many users.
THE TWO DISRUPTIVE BUSINESS STRATEGIES
When businesses are looking to disrupt, they often have two clear paths to follow. These two main models were laid out also by Christensen in his book.
The two disruptive business strategies are:
- New market disruption – This kind of disruption takes place when a product or service enters an existing category that has previously not created consumption. Therefore, the product or service will offer customers something, which doesn’t yet exist in the market, although the industry is already there.
Customers who previously were not able to use the products or services in the market will now be able to do so because of the disruptive business. The product or service they offer could be available due to a variety of reasons, such as cheaper price, better availability, enhanced usability and so on.
The examples of businesses that have disrupted in this manner could include Virgin Galactic and Ryanair, for example. Both opened up an existing market for more customers, Virgin by offering the option of space travel to other than the scientific community and Ryanair by dropping air travel prices to those of trains and bus routes.
- Low end disruption – The other strategy occurs when the business competes for the bottom of an existing market by dropping prices. The product or service is aimed directly for customers who want the cheapest products or services from the industry.
This kind of disruption occurs when the industry offers mainly products or services that the market wants, but with prices, the market is not necessarily prepared to pay. It can also be characterized by the market over-supplying the customers’ needs.
In a way, Ryanair could also offer an example of this, as the company stripped services away to drop prices. It bet on the idea that customers might not require a free meal during flight, for example. On the other hand, Zappos is another example, as they offered exactly the same products but dropped the price of getting it by removing delivery fees.
Another disruptive business example is the digital camera business Flip. The cheap digital camera didn’t have the same technical qualities that professional cameras did, but the market nonetheless loved it. Later, the company itself was disrupted by the rise of the smartphone with their in-built digital cameras.
It is important to note that while businesses can use cheaper price as part of their disruptive strategy, low price alone is not enough to disrupt. Rather, disruptive businesses must use technological or business model advantages for their benefit and to scale the existing products or services for the new market.
If the business just cuts cost to offer a product or a service without offering the similar service, the business is not disrupting the market. As mentioned above, the new product or service has to change the way the market operates or the market size in order to be disruptive.
Take the example of the hotel industry. A cheaper hotel won’t be disruptive, unless it can offer the same luxuries as the pricier hotels, but with lower costs. On the other hand, it could disrupt the market by opening it up to a completely new customer base.
BUT IS THERE A THIRD ALTERNATIVE?
As you’ll see in the next section, the above two models can be difficult to achieve if the business is already established. But there could be a third strategy, which might offer more opportunities for larger corporations.
This is the cross-boundary disruptive business strategy. Former Inter CEO, Andy Grove, has argued that businesses can be disruptive also by getting involved with an entirely different industry. Since only an established business, can grow its operations beyond its initial industry, this strategy is only suitable for big corporations.
According to Grove and his research partner professor Robert Burgelman, there are certain conditions under which “a firm can create a new growth spur for itself by entering an entirely different industry”. The conditions for the disruption require:
- The new industry to be stagnant, where innovation by existing companies is nearly non-existent
- The new product or service has to shake up the industry, in a similar manner to typical market disruption
The perfect example of this kind of strategy would be Apple. The company, which was known for its desktop computers and laptops, entered a completely new market with its iPhone.
The company’s venture into the industry accomplished both requirements for a big corporation disruption. It found an industry, which had become rather stagnant, as mobile phone makers were only slightly improving existing phone models.
It also didn’t just create a phone for the sector, but changed the status quo and the way manufacturers developed phones. While smartphones had certainly existed before the iPhone, Apple offered a better customer experience with its invention of apps as well as the use of technology.
PROBLEMS BIG CORPORATIONS FACE WITH DISRUPTION
When it comes to innovation, most of the conversation is dominated by start-ups. If you look at the biggest disruptive businesses in any industry, the clear majority of them achieved disruption as a start-up. While Facebook is now a huge corporation, it didn’t disrupt the market as an established business. The examples, such as Apple, are much harder to find.
But what are the obstacles big corporations face that limit their chances of disruption? The below highlights the problems larger companies are faced with.
Innovation flourishes in the start-up mentality
A start-up business is essentially built on the idea of innovation. Because the business is entering a market that is already there, the business must create a fresh idea before it can begin operating. This means start-up companies are driven by the passion to change the market.
On the other hand, innovation isn’t at the heart of a big corporation, as they have already made it, so to speak. The company has achieved a market share and its focus isn’t directed at creating new ideas, but rather making sure its existing ones are up to date.
Start-ups are also built around this single idea and since the business is not established, it can focus all of its energy in developing the idea. It has the ability to place all of its efforts in streamlining the idea, whilst a big corporation has to also focus on its day-to-day operations.
The innovative mentality is also enhanced in start-ups by the kind of staff it has. Start-ups are looking for innovations, risk-taking and people, who aren’t after the money. Since you can’t guarantee the business will hit off, the people building the business won’t be motivated by money in the same way as people working for a big corporation.
For big corporations, the key is to find qualified people who know what they are doing. This typically means focusing on finding the doers and not necessarily the innovators.
Innovative disruption is all about changing the business model
The other problem is to do with the differences in the business model between big corporations and start-ups. As the definition of innovation shows, the whole process is about changing the existing business models in the market, so that the status quo of the industry changes.
A start-up is starting from a point where it has an idea for a product or service and it needs to find a workable business model to execute this idea. It is starting from nothing and creating the business model to disrupt as it goes along.
In contrast, an established business is required to implement its established business model. This is required because it guarantees the business operates efficiently and its customers remain satisfied. With an existing customer base, not to mention shareholders expecting a return, the business cannot start tweaking its business model too much in order to disrupt.
For example, a start-up looking at new market disruption strategy would come up with a product or service that caters for a new market within an established industry. Since it doesn’t have an existing customer base, it is focused solely on creating one. But a big corporation could end up alienating its existing customers by targeting a new market.
If your customers love the product and the service, it’s quite a big risk to completely change this concept and continue to attract the same customer base. Not to mention its potential impact on the brand image. Customers could easily feel let down if the business tries to change its business model completely.
The problem of bureaucracy and risk-taking
Much of the above problems also boil down to big companies’ limitations to take risks. For example, finding a viable business model for disruption will require risk taking and it is inherently a risky thing to do. A big corporation could end up blowing a lot of money into an idea that won’t even work. A start-up has much less to lose in business terms from a failed idea.
Disrupting an industry is not easy and changing the status quo can be, if not impossible, then at least extremely difficult. The willingness to take risks naturally falls if you already have something good going for you. The stakes are higher for big businesses and big part of it is the fact they aren’t simply accountable for themselves.
The owners of a big corporation cannot take big risks without the approval of the board and the shareholders. But these are often more focused on maintaining the status quo and ensuring the profit keeps flowing in. On the other hand, a start-up is typically a small group of people who won’t necessarily miss a lot, as the business is not generating any revenue in the first place.
This is not only a question of risk-taking, but of bureaucracy as well. A big corporation has to go through a lot more paperwork and discussions in order to start innovating and changing its business model, whereas a start-up can skip these.
More focused on optimization rather than disruption
While big corporations might not be able to be truly disruptive, it doesn’t mean they cannot be innovative. In fact, for any company to survive it will have to develop its products and services to keep customers happy. After all, big corporations must ensure a disruptive start-up doesn’t completely put them out of business.
But the difference here is that big corporations tend to be more focused on optimization rather than disruption. They are looking for ways to maximise the market share by innovating, not by disrupting the industry.
For example, a big business will have an advantage of being able to access larger datasets. Analyzing the information about their customers can create better opportunities for understanding what customers want. With the help of this information, the big corporations can develop and improve existing, as well as new, products or services. Therefore, they can optimize their business model to fit market needs, some of which might not have been as obvious without the data analysis.
Nevertheless, for big businesses, disruptive innovation can be nearly impossible since the definition of disruptive innovation requires the challenging of the status quo. Since the business is already part of this status quo, it cannot truly be disruptive. It can, of course, innovate and optimize the market share it enjoys.
THE BOTTOM LINE
While big corporations enjoy certain advantages, such as access to better resources and customer data, their ability to disrupt is still limited. Big corporations aren’t best suited for fostering new ideas because their business model, culture, and risk-taking ability is hindering their innovative capabilities.
If you take the strict definition of disruption, which often requires the changing of the status quo, big corporations are nearly incapable of truly disrupting a market, which they are already part of – you cannot disrupt yourself.
But as the above has shown, big corporations might be able to disrupt if they look into cross-boundary disruption, as well as by creating partnerships with other companies in the industry. This could offer them a better chance of creating a lasting impact and changing the rules of the game.
Welcome to the 13th episode of our podcast! You can download the podcast to your computer or …