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The term “disruption” has become a popular expression to describe a specific type of firm competition that can affect the profitability of and, in many cases, very survival of firms. Although the term is used quite broadly now, I’ll define disruption as any type of technological change that leads to the survival of incumbents being challenged. Unlike the conceptually simpler types of competitive threats such as dealing with rivals who charge lower prices or who sell better quality products, disruption is more complex and potentially more severe. The reason for this is because disruption today often makes the entire business model of a firm less valuable, if not completely inferior to the point of being unprofitable, but in the beginning this is usually not obvious.1 Once disruption is evident however, incumbent firms are often left with the hard choices of either having to execute dramatic changes to their entire business with an unclear probability of success, or to simply try to run a good business and hope the ultimate damage to profitability won’t be as bad as feared. Trapped in this corner, incumbent firms facing disruption understandably often shrink dramatically or disappear entirely.
Today, there is an unprecedented level of industry disruption happening in our economy, led by a group of technology firms that include Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), and Uber. The speed of disruption is also occurring much more quickly than in any period of human history. In a 2015 survey of global business leaders conducted by the Global Center for Digital Business Transformation at IMD business school found that respondents believed that 40% of all incumbents in each industry would be displaced by disruption within the next five years.2
To understand why this is the case, it’s useful to first consider how new product innovations are ultimately adopted into mainstream society. One can break down this process into several stages.
Stages of new product innovation
Invention. When a novel new product innovation is created, it is often inferior in a number of ways to the competing products that are already out on the market. For example, the first digital camera was invented (ironically) by a Kodak engineer in 1975, and was as large as a toaster, took 20 seconds to take a picture, and captured very low quality images.3 At the time, it was understandable that film-based camera manufacturers didn’t panic about their survival.
“Take-off” in the number of firms. When new inventions appear in the market and hold potential promise (although are not yet perfected), other firms eventually enter the market with their own versions of the product. This “take-off” typically results in a period where consumers witness substantial improvements in product quality and performance.
