New-Market Disruptions: Three Case Histories
New-Market Disruptions: Three Case Histories
New-market disruptions follow a remarkably consistent pattern, regardless of the type of industry or the era in history when the disruption occurred. In this section we’ll synthesize this pattern from three disruptions: one from the 1950s, one that began in the 1980s and continues in the present, and a third that is still in its nascent stage. In these and scores of other cases we’ve studied, it is stunning to see the sins of the past so regularly visited upon the later generations of disruptees. Today we can see dozens of companies making the same predictable mistakes, and the disruptors capitalizing on them.
The Disruption of Vacuum Tubes by Transistors
Scientists at AT&T’s Bell Laboratories invented the transistor in 1947. It was disruptive relative to the prior technology, vacuum tubes. The early transistors could not handle the power required for the electronic products of the 1950s—tabletop radios, floor-standing televisions, early digital computers, and products for military and commercial telecommunications. As depicted in the original value network of figure 4-1, the vacuum tube makers, such as RCA, licensed the transistor from Bell Laboratories and brought it into their own laboratories, framing it as a technology problem. As a group they aggressively invested hundreds of millions of dollars trying to make solid-state technology good enough that it could be used in the market.
Figure 4-1: Value Networks for Vacuum Tubes and Transistors
While the vacuum tube makers worked feverishly in their laboratories targeting the existing market, the first application emerged in a new value network on the third axis of the disruption diagram: a germanium transistor hearing aid, an application that valued the low power consumption that made transistors worthless in the mainstream market. Then in 1955 Sony introduced the world’s first battery-powered, pocket transistor radio—an application that again valued transistors for attributes that were irrelevant in mainstream markets, such as low power consumption, ruggedness, and compactness.
Compared with the tabletop radios made by RCA, the sound from the Sony pocket radio was tinny and static-laced. But Sony thrived because it chose to compete against nonconsumption in a new value network. Rather than marketing its radio to consumers who owned tabletop devices, Sony instead targeted the rebar of humanity—teenagers, few of whom could afford big vacuum tube radios. The portable transistor radio offered them a rare treat: the chance to listen to rock and roll music with their friends in new places out of the earshot of their parents. The teenagers were thrilled to buy a product that wasn’t very good, because their alternative was no radio at all.
The next application emerged in 1959, with the introduction of Sony’s twelve-inch black-and-white portable television. Again, Sony’s strategy was to compete against nonconsumption, as it made televisions available to people who previously couldn’t afford them, many of whom lived in small apartments that lacked the space for floorstanding televisions. These customers were delighted to own products that weren’t nearly as good as the large TVs in the established market, because the alternative was no television at all.
As these major new disruptive markets for transistor-based products emerged, the traditional makers of vacuum tube–based appliances felt no pain because Sony wasn’t competing for their customers. Furthermore, the vacuum tube makers’ aggressive efforts to develop solid-state electronics in their own laboratories gave them comfort that they were doing what they should about the future.
When solid-state electronics finally became good enough to handle the power required in large televisions and radios, Sony and its retailers simply vacuumed out the customers from the original plane, as depicted in figure 4-1. Within a few years the vacuum tube–based companies, including the venerable RCA, had vaporized.
Targeting customers who had been nonconsumers worked magic for Sony in two ways. First, because its customers’ reference point was having no television or radio at all, they were delighted with simple, crummy products. The performance hurdle that Sony had to clear therefore was relatively easy. This entailed a much lower R&D investment prior to commercialization than the vacuum tube makers had to make to commercialize the identical technology. The established market presented a much higher performance barrier to surmount, because customers there would only embrace solidstate electronics when they became superior to vacuum tubes in those applications.
Second, Sony’s sales grew to significant levels before RCA and its competitors felt any threat. The painlessness of Sony’s attack persisted even after its products improved to become performance-competitive with low-end vacuum tube–based products. When Sony started to pull the least-attractive customers from the original value network into its new one, losing those who bought their lowest-margin products actually felt good to makers of vacuum tube–based appliances. They were immersed in an aggressive up-market foray of their own into color television. These were large, complicated machines that sold for very attractive margins in their original value network. As a result, the vacuum tube companies’ profit margins actually improved as they were being disrupted. There simply was no crisis to prompt them to counterattack Sony.
When the crisis became clear, the manufacturers of vacuum tube products couldn’t just switch to the new technology and pull customers back into their old business model, because the cost structure of that model and of their distribution and sales channels was not competitive. The only way they could have retained or recaptured their customers would have been to reposition their companies in the new value network. That would have entailed, among other restructurings, shifting to a completely different channel of distribution.
Vacuum tube–based appliances were sold through appliance stores that made most of their profits replacing burned-out vacuum tubes in the products they had sold. Appliance stores couldn’t make money selling solid-state televisions and radios because they didn’t have vacuum tubes that would burn out. Sony and the other vendors of transistor-based products therefore had to create a new channel in their new value network. These were chain stores such as F. W. Woolworth and discount retailers such as Korvette’s and Kmart, which themselves had been “nonvendors”—they hadn’t been able to sell radios and televisions because they had lacked the ability to service burned-out vacuum tubes. When RCA and its vacuum tube cohort finally started making solid-state products and turned to the discount channel for distribution, they found that the shelf space had already been claimed.
The punishing thing about this outcome, of course, is that RCA and its colleagues didn’t fail because they didn’t invest aggressively in the new technology. They failed because they tried to cram the disruption into the largest and most obvious market, which was filled with customers whose business could only be won by selling them a product that was better in performance or cost than they already were using.
Angioplasty: A Disruption of Heart-Stopping Proportions
Balloon angioplasty is an ongoing example of a new-market disruption. Prior to the early 1980s, the only people with heart disease who could receive interventional therapy were those who were at high and immediate risk of death. There was a lot of nonconsumption in this market: Most people who suffered from heart disease simply went untreated. Angioplasty enabled a new group of providers—cardiologists—to treat coronary artery disease by threading a catheter into a partially clogged artery of these previously untreated patients and puffing up a balloon. It was often ineffective: Half of the patients suffered restenosis, or a reclogging of the artery, within a year. But because the procedure was simple and inexpensive, more patients with partially occluded arteries could begin receiving treatment. The cardiologists benefited too, because even without being trained in surgery they could keep the fees for themselves, and had to refer fewer patients to the heart surgeons, who earned the most handsome fees. Angioplasty thereby created a huge new growth market in cardiac care.
If its inventors had attempted to market angioplasty as a sustaining technology—a better alternative than cardiac bypass surgery—it would not have worked. Angioplasty couldn’t solve difficult blockage problems at the outset. Any attempt to improve it enough so that heart surgeons would choose angioplasty over bypass surgery would have entailed extraordinary time and expense.
Could the inventors have commercialized angioplasty as a low-end disruption—a less-expensive way for heart surgeons to treat their least-sick patients? No. Patients and surgeons weren’t yet overserved by the efficacy of bypass surgery.
The successful disruptive innovators chose a third approach: enabling less-seriously ill patients to receive therapy that was better than the alternative (nothing), and enabling cardiologists profitably to pull into their own practices patients who previously had to wait until they were sick enough to be referred to more expensive experts. Under these circumstances a booming new market emerged.
Figure 4-2 shows the growth that resulted from this disruption. Interestingly, for a very long time cardiac bypass surgery continued to grow, even as angioplasty began thriving and improving in its new value network. The reason was that in their efforts to treat patients with partially occluded arteries, cardiologists discovered many more patients whose arteries were too clogged to be opened with angioplasty—patients whose disease previously was not diagnosed. So heart surgeons felt no threat—in fact, they felt healthy, for a long time—just like the large steel mills and the makers of vacuum tubes.
Figure 4-2: Number of Angioplasty and Cardiac Bypass Surgery Procedures
Note: Outpatient and other nonhospital procedures not included (angioplasty numbers are underestimated).
Source: American Heart Association National Center.
As cardiologists and their device suppliers pursued the higher profits that came from better products and premium services, they discovered that they could insert stents to prop open even difficult-toopen arteries. (Stents caused the up-kink in angioplasty growth that began in 1995.) Customers who otherwise would have needed bypass surgery are now being pulled into the new value network, and the cardiologists have done this without having to be trained as heart surgeons. This disruption has been underway for two decades, but the surgeons only recently have sensed the threat as the number of open-heart cardiac surgeries has begun to decline. In the most complex tiers of the market, there will be demand for open-heart surgery for a long time. But that market will shrink—and now that the disruption is apparent, there is little that the heart surgeons can do.
Like pocket radios and portable TVs, the “channels”—the venues in which interventional cardiac care is delivered—are also being disrupted. Bypass surgery is a hospital-based procedure because of the risks it entails. But little by little, as technology has improved cardiologists’ ability to diagnose and prevent complications, more and more angioplasty procedures are being performed in cardiac care clinics, whose costs make them disruptive relative to full-service hospitals.
Solar Versus Conventional Electrical Energy
Consider solar energy as a third example. It defies profitable commercialization despite billions of dollars invested to make the technology viable. This is indeed daunting when the business plan is to compete against conventional sources of electricity in developed countries. About two-thirds of the world’s population has access to electric power transmitted from central generating stations. In advanced economies this power is available almost all the time, is a very cost-effective means of getting work done, and is available essentially twenty-four hours per day, cloudy and sunny weather alike. This is a tough standard for solar energy to compete against.
Yet if developers of this technology instead targeted nonconsumers—the two billion people in South Asia and Africa who have no access to conventionally generated electricity—the prospects for solar energy might look quite different. The standard of comparison for those potential customers is no electricity at all. Their homes aren’t filled with power-hungry appliances, either, so it would be a vast improvement over the present state of affairs for these customers if they could store enough energy during daylight to power an electric light at night. Solar energy would be much less expensive, and would probably entail fewer headaches from governmental approvals and corruption, than would building a conventional generation and distribution infrastructure in those areas.
Some might protest that photovoltaic cells are simply too expensive ever to be made and sold profitably to impoverished populations. Maybe. But many of the technical paradigms in present photovoltaic technology were developed in attempts at sustaining innovation—to push the bleeding edge of performance as far as possible in the quest to compete against consumption in North America and Europe. Targeting new unserved markets would lower the performance hurdle, allowing some to conclude, for example, that instead of building the cells on silicon wafers they can deposit the required materials onto a sheet of plastic in a continuous, roll-to-roll process.
If history is any guide, the commercially viable innovations in clean energy will not come from government-financed research projects designed to make solar energy a preferred source of power in developed markets. Rather, the successful innovations will emerge from companies who carve disruptive footholds by targeting nonconsumption and moving up-market with better products only after they have started simple and small.
Extracting Growth from Nonconsumption: A Synthesis
We distill from these histories four elements of a pattern of newmarket disruption. Managers can use this pattern as a template to find ideal customers and market applications for disruptive innovations, or they can use it to shape nascent ideas into business plans that match this proven pattern for generating new-market growth. These elements are as follows:
The target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.
These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to buy it even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network. The performance hurdle required to delight such newmarket customers is quite modest.
The technology that enables the disruption might be quite sophisticated, but disruptors deploy it to make the purchase and use of the product simple, convenient, and foolproof. It is the “foolproofedness” that creates new growth by enabling people with less money and training to begin consuming.
The disruptive innovation creates a whole new value network. The new consumers typically purchase the product through new channels and use the product in new venues.
The history of each new-market disruptor in figure 2-4 mirrors this pattern. From Black & Decker to Intel, from Microsoft to Bloomberg, from Oracle to Cisco, from Toyota to Southwest Airlines, and from Intuit’s QuickBooks to Salesforce.com, new-market disruptions fit this pattern. In so doing, they have been a dominant engine of growth not just for shareholder value but for the world economy.
Disruptions that fit this pattern succeed because while all of this is happening, the established competitors view the entrants in the emerging market as irrelevant to their well-being. The growth in the new value network does not affect demand in the mainstream market for some time—in fact, incumbents sometimes prosper for a time because of the disruption. What is more, the incumbents are comfortable that they have sensed the threat and are responding. But it is the wrong response. They invest massive sums trying to advance the technology enough to please the customers in the existing value network. In so doing, they force the disruptive technology to compete on a sustaining basis—and nearly always, they fail.
It’s quite stunning, when you think about it. This pattern would strike most managers as a dream come true. What more could you want than a situation where customers are easily delighted, powerful competitors ignore you, and you’re locked arm-in-arm with channel partners in a win-win race toward exciting growth? We will explore next why this dream so often becomes a nightmare instead, and then suggest what to do about it.
We stated earlier that few technologies are intrinsically sustaining or disruptive in character. These are extremes in a continuum, and the disruptiveness of an innovation can only be described relative to various companies’ business models, to customers, and to other technologies. What the transistor case illustrates is that attempting to commercialize some technologies as sustaining innovations in large and obvious markets is very costly.
Figure 4-2 was constructed from data provided by the American Heart Association National Center. Because these data measure only those procedures performed in hospitals, angioplasty procedures that were performed in outpatient and other nonhospital settings are not included. This means that the angioplasty numbers in the chart are underestimated, and that the underestimation becomes more significant over time.
There are many other examples of this, in addition to those cited in the text. For example, full-service stock brokers such as Merrill Lynch continue to move up-market in their original value network toward clients of even larger net worth, and their top and bottom lines improve as they do so. They do not yet feel the pain that they ultimately will experience as the online discount brokers find ways to provide ever-better service.