To Disrupt or Not to Disrupt?

Disruption isn’t always the right strategy for startups. It’s a choice.

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Disruption 2020

What will it take to innovate and compete over the next decade? These articles examine some of the biggest challenges companies will face, such as building the future workforce and identifying tomorrow’s disrupters. Included are contributions to MIT SMR’s special issue on disruption, published in memory of Clayton Christensen.

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The term disrupt has become synonymous with being an ambitious startup of any type. There’s an almost cult-like devotion to the idea that becoming a disrupter is the best path to success — witness, for example, the annual TechCrunch Disrupt conference. But most studies of disruption have focused on the disrupted — why businesses that are seemingly at the top of their game suddenly find themselves in distress. In short, industry leaders are vulnerable to disruption when they are stuck in their profitable business model, finding themselves unable to see or respond to the mismatch between what they are offering and what current or future customers actually want. In almost every instance, disruption is precipitated by a new technological opportunity.

But even if market leaders in an industry are hamstrung in exploiting those new opportunities, can we take for granted that others — notably, new entrepreneurial entrants — will be able to do so? And even if they are able to seize those opportunities, should they? Disruption is a choice. But it’s only one of many viable options for startups. Rather than single-mindedly heading down the path of would-be disrupter, new entrepreneurial companies can and should evaluate the trade-offs between disruption and other strategies. Doing so allows them to choose a strategy that is right for that startup, in that market, at that time, and to learn as the company commercializes its idea. To disrupt, or not to disrupt? That is a very important question. Here’s how to think it through.

A Tale of Two Startups

Even the early days of disruption saw glaring examples of alternative paths that could be chosen. In the late 1990s and early 2000s, the internet had just gone commercial, and there were numerous attempts to exploit it as a technological opportunity. One domain that garnered initial attention was the prospect for online grocery shopping. One company, in particular, stood out as a potential disrupter of grocery retailing. As we will see, things didn’t really work out. What’s more, as will be explained later, those lessons have not (yet) been learned.

Webvan was perhaps the quintessential dotcom company, enjoying a massive IPO of over $4 billion before going bankrupt just three years later, in 2001. During its years of operation, Webvan offered a unique and, in many ways, beloved service. Customers could log on to its website, do their entire grocery shopping online, and have it delivered to their door — for less than they would pay at the supermarket. Its advertisements highlighted the consumer pain point of waiting in store lines. The company’s plan was to generate enough scale to use local distribution centers to ship goods to people and bypass supermarkets altogether, saving on stocking, rent, and, of course, bricks and mortar.

However, the plan didn’t work: Webvan could not deliver goods at a cost that allowed the company to keep charging low prices. As it turned out, creating a new value chain for distributing goods to customers was expensive, involving massive investments in logistics and distribution centers. Unless customers ended up buying more groceries than before, Webvan would never reach a scale that justified those costs. Despite its value proposition, it wasn’t able to attract enough consumers — even in the internet-savvy Bay Area — to generate economies of scale. And there were other issues, such as supplying products that needed refrigeration. All this meant that the would-be disrupter flamed out before supermarkets noticed a difference in their bottom line.

To use the internet for grocery shopping seemed like a good idea. But was the strategy of being a disrupter the right way to go? We know now that it wasn’t (at least back then). Another entrepreneurial venture, Peapod, saw a similar opportunity but chose a different path. Founded by the Parkinson brothers in 1989, prior to the commercial internet, Peapod initially used computer networking to allow consumers to purchase groceries from supermarket chains such as Jewel, Krogers, and Safeway. In 1996, with the internet more freely available, Peapod set up a website and expanded its supermarket chain partnerships. The strategy was to hire people to shop at grocery outlets on behalf of Peapod’s customers. Advertisements featured busy professionals — most often women — who didn’t have time to do the grocery shopping. And Peapod charged a premium for the service.

Compared with Webvan, Peapod’s strategy was decidedly nondisruptive. Supermarkets were its partners, not competitors to eventually be consigned to the dustbin of history. To be sure, Peapod attracted less funding and no financial exuberance, but it didn’t need as much — its mission was not to construct an entirely new value chain but to slot itself into an existing one. And its customers were not those looking for a bargain, but those willing to pay a premium for convenience. In other words, Peapod positioned itself at the high end of the market rather than at a low end. Nothing it did was anywhere in the disrupter playbook.

Things worked out well for Peapod. It went from a successful IPO to growth, to flirting with some distribution assets before being acquired by Ahold — the owner of Stop & Shop — in 2000. It exists as a subsidiary of that company today.

A Tale of Two Other Startups

The path of a disrupter is not always a lucrative one. As part of its makeup, the disrupter chooses to take on established businesses, and sometimes an entire system, head-to-head. Competition is never easy and requires an aggressive, up-front investment. Partnering within the system appears to be an easier path, requiring fewer resources and incremental value. But it is far from clear that partnering is a path to sustained success.

That was surely apparent to Webvan’s founder, Louis Borders, who also founded the eponymous Borders chain of bookstores. By the late 1990s, traditional bookstore chains started to see their sales challenged by a new entrant, Amazon.com. Amazon was founded in 1994 by Jeff Bezos, who moved to Seattle from Wall Street, not to sell books, but to take advantage of the opportunity presented by the internet. He chose books because he believed that they would be easy to ship without being damaged, consumers knew what they were paying for, and it was expensive for traditional brick-and-mortar retailers to stock a large variety of books. In Bezos’s equation, variety was key; hence, the name Amazon to connote immense size.

Amazon was a disrupter by choice. It had its own website and sourced books independently of book retailers. When it entered, however, there had been a few precursors. For instance, in 1992 Charles Stack created Book Stacks Unlimited, a Cleveland-based outfit for dial-up book ordering. It soon offered a website, Books.com, that offered a large selection of titles but sourced its books from existing retailers. In other words, if Amazon was Webvan, Books.com was more like Peapod. By contrast, however, its life was relatively short; Books.com was acquired by an online player, Cendant, and ended up in the hands of Barnes & Noble.

It would be tempting to try to explain these disparate cases by pointing out failures in execution by Webvan and Book Stacks or by suggesting that the grocery and book markets were different in terms of the “right time” to exploit their respective opportunities as a disrupter. But the stories, I believe, carry another lesson: There is nothing inevitable about disruption, because there is no compelling reason when an entrepreneurial opportunity emerges to be a disrupter rather than something else. If anything, the lesson is that to be a disrupter, a company has to tailor all of its strategic choices toward that goal, as Amazon did. Similarly, Netflix successfully disrupted Blockbuster (and other Main Street video chains) in part because it always understood that it was creating an alternative value chain to video stores. It was never tempted to engage in halfway solutions that included physical drop-off and pick-up points (something the “vendor machine” rental operations such as RedBox attempted).

The conclusion? Choosing to be a disrupter should not be a startup’s first choice. It’s a hard road — much harder, longer, and resource-intensive than many new entrants realize. That doesn’t mean there’s not a viable path to disruption, but disruption should be a considered choice, and there are alternatives. An entrepreneurial startup should weigh each scenario carefully before going all in. Here’s how to think through the right strategy for any particular circumstance.

The Disrupter’s Choices

A convenient way to work through the problem involves compartmentalizing choices into four categories — technology, customer, organization, and competition. Being a disrupter requires particular orientations toward each of these categories, as I have explored in work with colleagues at MIT.1

First, consider the choice of technology. Clayton Christensen long distinguished between disruptive technologies (which perform worse today on metrics most consumers care about) and sustaining technologies (which do not). Most companies pursue sustaining technologies (such as modest improvements in an iPhone upgrade) as a way of retaining existing customers and keeping a healthy profit margin. The reason to choose a technology that is “worse” initially is its potential to outperform older technologies in the relatively near future. Moreover, disruptive technologies tend to be what established companies either are not good at or do not want to adopt for fear of alienating their customer base. In other words, the very existence of disruptive technologies represents an opportunity for startups.

Which brings us to the choice of customer for a disruptive entrepreneur. Christensen noted that, if you want to sell a product that underperforms existing products in some dimension (say, a laptop with less computing power), you need to find either a way of selling at a discount so that a lack of performance can be compensated for or a set of customers who do not strongly value that performance more than some other feature (for example, longer battery life). This was a struggle for Webvan. The company entered the general grocery business hoping to meet all customers’ needs instead of seeking a more targeted base from which to build its internet retailing business.

Those low-end customers will establish a beachhead for the business. However, the startup cannot stop there, as Eric Ries has emphasized.2 It needs to move rapidly up the performance technology curve to take advantage of its disruptive potential and grow. This requires rapid market-facing experimentation and rapid product performance improvement that will not only retain its newly acquired low-end customers but also allow it to compete for mainstream customers. A recent example is Soylent.com, which produces “pure nutritional need” food products. The company has experimented with different flavors as well as product types in response to market feedback.

Choosing to aim for mainstream customers, in turn, requires choosing an organization tailored to the hustle, market responsiveness, and capability investment that will allow for such growth. Amazon did this spectacularly well, right from the outset — gathering customer information and developing capabilities to predict demand for millions of different products.

The final choice to consider is what you want to compete with. Is your company headed down a disruptive path by adopting technology on a trajectory distinct from market leaders? Are you targeting customers you believe they aren’t serving well? And have you built sufficient organizational capabilities to take advantage of that opportunity? If so, it wouldn’t be surprising if you chose head-to-head competition with incumbents versus cooperating with them. Webvan could have chosen to slot itself in the existing value chain for groceries but did not. Amazon could have dealt directly with existing booksellers but did not. In each case, the incumbents eventually became targets.

But if all of these conditions are not clear — and desirable — an entrepreneur can choose alternative paths. One option is to become a value chain entrepreneur, partnering with existing market leaders. A startup can do this by slotting itself into the value chain and either becoming a customer of those incumbents or a supplier to them. Peapod chose to be, in effect, Stop & Shop’s customer. But it was not an arm’s-length relationship. The companies formed agreements that allowed Peapod to more smoothly run its online service and give customers access to existing supermarket products and prices. Taiwan-based electronics manufacturer Foxconn Technology has built its business on being a supplier of components and assembled products for Apple, Samsung, and others. Foxconn is not consumer-facing; instead, it works closely with designers to ensure it can deliver high-quality products efficiently.

How to Choose

Any entrepreneur with insight on how to exploit a new technological opportunity has many choices with respect to which strategy to use to bring that insight to market. Entrepreneurs can exploit technological opportunities via different paths, depending on their decisions about the four crucial strategic choices. But that’s not to say that such choices are always clear-cut. In fact, inevitably there will be considerable uncertainty regarding which strategy is best and, indeed, whether there is one strategy that will turn out to be the best.

Given this, how can an entrepreneur decide whether disruption is the most appropriate path?

To expose the set of assumptions that might drive the success of a posited disruptive strategy, I would suggest that entrepreneurs put themselves through an adversarial process. First, they should outline the technology, customer, and organizational choices they would need to make in order to build a new business that could take on existing market leaders. In so doing, they need to ask themselves: Under what conditions will this path create value for identified customers? And under what conditions might an incumbent’s competitive response be muted or delayed? An incumbent who is slow to respond is ideal for a would-be disrupter; an incumbent with a deep resource base and a quick reaction to a new threat can obliterate a would-be disrupter swiftly.

Having outlined a disruptive business plan, you should set that aside and draw up an alternative value chain plan. Is there a different path to success? Ask yourself: How can your company cooperate with existing market leaders to bring a technological opportunity to market? How would your company go about adding value to customers in the existing value chain or system? How can your company add to existing technologies — perhaps in a modular way? And can you build connections in the organization that would make it the preferred partner to incumbent businesses? You will need a clear statement of how your product adds value in existing value chains and under what conditions you will have sufficient bargaining power to capture some of that value.

The end result of this exercise is not one but two business plans — one of a disrupter and one not. You will then be in a position to choose.

What will guide that choice? In some situations, the choice may be easy. For instance, the entrepreneur may not be able to access the resources to undertake one of the plans. Or a plan may lack coherence — there may be no path from a targeted set of beachhead customers to generating market feedback and exploiting a more dynamic technological opportunity. In these cases, a plan can be easily discarded.

In other situations, perhaps mainly when there are valuable technological opportunities either way, both plans will look good, and the choice will come down to other factors. A financier may be attracted to one more than the other. Or the entrepreneur may have preexisting relationships with partners in the value chain that make one path more natural. Or the entrepreneur may simply identify with one path more than the other. Think of entrepreneurs such as Richard Branson who wanted to shake up markets: Even if they could have chosen other paths, they did not. That said, most entrepreneurs would be better off laying out their choices before making them.

Prepare to Pivot

Is disruption a binary choice? Does an entrepreneur need to know up front whether to pursue that path? In reality, the choice will probably have a dynamic component: If a strategy is found to be lacking, the entrepreneur can potentially switch paths. A shift in strategy from disruption to value chain or the reverse, without changing the core idea of the venture, is called a pivot. The difference between a successful pivot and a failed strategy of sticking with the wrong plan for too long often comes down to how well that company prepared for the possibility of Plan B.

Pivots can occur in either direction. For instance, strategy and innovation researcher Matt Marx and management scholar David Hsu3 have documented the case of Genentech, a biotech startup that was founded with a view of cooperating with existing pharmaceutical companies and licensing drug prospects to them. Genentech did this with its breakthrough technique for producing synthetic insulin, which it licensed to Eli Lilly and Co. However, it also had aspirations to make its own pharmaceutical products. This involved garnering key regulatory skills and marketing capabilities. By licensing products and learning from licensees, Genentech was able to pivot beyond intellectual property development within a decade of its founding.

In other cases, startups might pivot from disruption to a value chain strategy. In research with Marx and Hsu,4 I examined startup entry in the voice recognition software industry over an almost 50-year period. We found that a number of startups first entered and competed head-to-head with market leaders — presumably on a disruption path — but pivoted to becoming the incumbents’ partners.

Ironically, we found that startups that pivoted away from disruption almost invariably did so because the technologies they developed were in fact disruptive. Why would a successful disruption lead anyone to pivot away from a disruptive strategy and toward a value chain opportunity? A technology disruption may provide a clear strategic path for a startup, but an incumbent might see the threat and opt to cooperate rather than compete with the entrepreneur. That, in turn, might end up as a win-win. The startup wouldn’t need to fund an all-out battle with the incumbent but could find common ground for cooperating while enticing new customers with the improving technology. This means that even if entrepreneurs start out on a disruptive path, disruption might be forestalled as incumbents see that cooperating is in their interests. By adjusting their response to take advantage of the new entry, the incumbents can funnel the disruptive impact away from their own business.

Pivots can be planned (an entrepreneur may compete initially to show incumbents the value of cooperation) or unplanned (if a disruptive strategy is not effective and warrants a change). Either way, the possibility of pivoting means that any initial choice can be seen not as a final decision but as a potential continued learning opportunity. Just make sure you’ve walked through your pivot scenario in enough detail to know when it’s time to execute it.

The Future

Disruption in an industry is a complex phenomenon. Market leaders might be vulnerable, but it takes others to make disruption happen. It is not a foregone conclusion. There is a viable alternative — a value chain approach.

The future of disruption likely depends not only on technological opportunities and their characteristics but also on the tools for experimentation and understanding that allow entrepreneurs’ choices of technology, customer, organization, and competition to coalesce into a coherent whole. Disruption is an option. But there is a choice.

Topics

Disruption 2020

What will it take to innovate and compete over the next decade? These articles examine some of the biggest challenges companies will face, such as building the future workforce and identifying tomorrow’s disrupters. Included are contributions to MIT SMR’s special issue on disruption, published in memory of Clayton Christensen.

Brought to you by

Deloitte
See All Articles in This Series

References

1. J. Gans, E.L. Scott, and S. Stern, “Strategy for Start-Ups,” Harvard Business Review 96 (May-June 2018): 44-51; and J.S. Gans, S. Stern, and J. Wu, “Foundations of Entrepreneurial Strategy,” Strategic Management Journal 40, no. 5 (May 2019): 736-756.

2. E. Ries, "The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses" (New York: Currency, 2011).

3. M. Marx and D.H. Hsu, “Strategic Switchbacks: Dynamic Commercialization Strategies for Technology Entrepreneurs,” Research Policy 44, no. 10 (2015): 1815-1826.

4. M. Marx, J.S. Gans, and D.H. Hsu, “Dynamic Commercialization Strategies for Disruptive Technologies: Evidence from the Speech Recognition Industry,” Management Science 60, no. 12 (2014): 3103-3123.

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Anonymous
A really valuable paper. A must read article.