When should incumbents be afraid — very afraid? At the moment that a disruptive innovation crosses into the mainstream market and establishes itself as a viable competitor, the third stage in a disruptive innovation’s life cycle. You might think a response at this late phase would be too late — but there are still ways incumbent firms can preserve their advantage. To illustrate how, let’s look at four disruptions that are close to crossing over and ask how they can be dealt with.
1.Navigation via integrated smart devices. The brouhaha between Apple and Google over Apple’s maps application on the latest iPhone highlights the importance of location. Nokia, in fact, has placed a major bet on using location-based insight as a means to revitalize the company, highlighted by an $8.1 billion acquisition of NavTeq in 2007.
The emergence of higher-functioning cellphones and tablets clearly marked the beginning of the end of standalone devices manufactured by companies like Garmin and TomTom. With smartphone penetration now up to 50% in the United States, expect sales of standalone devices to rapidly dwindle (the same appears to be happening with standalone e-readers).
2.Mobile payment solutions. 2012 was a big year for payments leader Square, founded by Twitter co-founder Jack Dorsey. The company followed a close-to-textbook disruptive strategy by bringing a simple plug-in to iPhones and iPads to small merchants who didn’t have the ability to accept credit cards, and then expanded to broader applications. Square and similar developments like PayPal Now by eBay’s payments arm pose a clear threat both to companies that manufacture payments processing terminals (like NCR, which is attempting to respond with its Silver offering), and potentially to the credit card companies themselves, who receive a piece of every credit card transaction. In 2012 Square received a significant round of funding, and formed an innovative deal with Starbucks (which included an investment of $25 million). Those and other related moves suggest that these disruptive solutions draw ever closer to the mainstream.
3.Over-the-top communications mechanisms. Disruption has been swirling around the telecommunications industry for years. As smartphone penetration continues, watch carefully to see the degree to which carriers begin to lose lucrative messaging revenues as consumers increasingly embrace so-called over-the-top solutions like Skype, Viber, and, of course, Apple’s own messaging solution.
4.Remote file sharing. Dropbox and Box.net have turned simple and easy remote file sharing solutions into big businesses. In classic disruptive fashion, these services first took root among consumers and smaller companies looking to avoid investing in costly physical storage solutions. Assuming providers can get over legitimate security concerns that might inhibit enterprise adoption, remote file sharing seems well positioned to establish itself as a mainstream solution at both home and at work (full disclosure: Innosight’s investment arm has backed a Singaporean company that competes in this space).
Incumbents in these markets that lack a viable response strategy will need to quickly consider acquisition options, or risk being left seriously behind. Incumbents that do have a response strategy in place should ask three questions to assess its viability.
1.Have we created mechanisms to ensure that we take advantage of our unique capabilities? Large companies can never be faster than pure-play startups, but they can be better than startups if they find a way to take advantage of things they have that startups lack, like relationships with regulators, scale economies, or channel access.
2.Is our strategy evolving as rapidly as the market? Honing a disruptive approach typically requires a few twists and turns (or, in the popular parlance of the lean startup movement, pivots). Sometimes the funding and the planning processes big companies impose on their internal ventures inhibit making these kinds of course corrections.
3.Have we brought in sufficient outside talent? When a big company staffs a new venture entirely with inside talent, it runs the risk of encountering Einstein’s definition of insanity — following the same process while expecting different results. Not only can outside talent help to discover a viable strategy, it can bring vital expertise in the new business model required for success.
Disruption isn’t accidental, it isn’t disorderly, and it is no longer the sole province of startups. Incumbents that act appropriately can use the forces of disruption to drive new growth. Those that don’t act appropriately are destined to suffer the fate of K-Mart, Borders, Kodak, Research in Motion, Blockbuster, Palm, and many more.