For years Sleep HealthCenters, an American company that ran clinics at which people with sleep disorders could stay overnight to have their ailments diagnosed, grew nicely and steadily. But in 2012 its dream business turned sour as folk began using cheap, wearable devices that let experts monitor them while they snoozed in the comfort of their homes. Sleep HealthCenters closed some of its facilities as its revenue fell, but its fortunes faded rapidly and the following year it threw in the towel.
Like Sleep HealthCenters’ bosses, plenty of other executives have had nightmares as competitors wielding new technologies have sapped their firms’ profits. Makers of portable GPS navigation systems, for instance, saw sales plummet after Google launched a free, turn-by-turn navigation service in its Google Maps smartphone app. And music companies saw their margins shrink after Apple launched its iTunes digital-music service.
These and other examples of disruptive innovations are becoming more common thanks to the plummeting cost of computing power, the internet’s ability to make new offerings go viral and a host of other factors. Larry Downes, a researcher and writer, and Paul Nunes of Accenture, a consultancy, argue that if companies are to survive attacks by “big-bang disrupters” they need to ditch the traditional way of thinking about new entrants inspired by texts such as Clayton Christensen’s 1997 classic book, “The Innovator’s Dilemma.”
According to this, new competitors typically start wooing a company’s least profitable customers with a product that is cheaper or one that costs the same but boasts innovative features or is more easily customized. They then gradually bite off bigger chunks of a market as their wares become better known. Savvy incumbents can stop the rot by spotting insurgents early and buying them or by launching rival offerings, though this risks undermining their own profits.
Downes and Nunes think this mindset and the strategies it has inspired are no longer useful in a world where entire product lines and markets are being created and destroyed at breakneck speed. As Google’s decision to offer free navigation services shows, disrupters may not give a jot about making money in traditional ways from a service. Moreover, the web means all-out assaults on a market can now be mounted quickly and cheaply. So firms can no longer be sure that rivals will take a step-by-step approach to conquering a market.
Yet it is not clear that all this invalidates the work of Christensen and others. True, rivals can grow fast, but few successes happen overnight, so eagle-eyed companies still have time to neutralize the opposition. Thus Facebook spotted the rise of Instagram, a popular photo-sharing service, and snapped it up in 2012. Amazon has also swallowed plenty of potential rivals, including Zappos, an online shoe retailer, and Quidsi, another e-commerce company.
The web helps to spawn big new businesses. But some turn out to be one-hit wonders, as Zynga discovered to its cost. A pioneer of social games online, the American firm splashed out $180 million in 2012 for OMGPOP, a game developer that had launched Draw Something, a wildly popular game app downloaded millions of times. But soon after the deal was inked, Draw Something’s popularity waned and OMGPOP failed to produce another hit. Last year Zynga closed the studio.
All of this means that the challenge facing incumbent firms is, therefore, to work out which threats are worth worrying about and how best to respond to them — a rich seam that “Big Bang Disruption” fails to mine deeply enough. Downes and Nunes are right that the competitive heat has been turned up by new technology. But cool heads are still needed when dealing with disrupters.
Big Bang Disruption: Strategy in the Age of Devastating Innovation. By Larry Downes and Paul Nunes. Portfolio; 278 pages; $29.95.
© The Economist Newspaper Limited, London (January 11, 2014)