Meet the New Disrupters

The Theory of Disruptive Innovation presciently explained that fast-moving disrupters entering the market with cheap, low-quality goods could undermine companies wed to prevailing beliefs about competitive advantage. In the past decade, however, disrupters have changed dramatically, says this week’s guest. They now enter the market with products and services that are every bit as good as those offered by legacy companies — and make it harder than ever for traditional businesses to compete.

In this week’s episode, Rita McGrath, a professor at Columbia Business School and author of the MIT Sloan Management Review article “The New Disrupters,” explains these three big points:

1. The original theory of disruption has evolved since it was created 25 years ago.
2. Because of the way technology and barriers to entry have changed, disrupters today can be cheap, convenient, and high quality.
3. Incumbents can compete — if they stop wasting money on being better analog versions of themselves.

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Transcript

Rita McGrath: You know, if I’m selling you a hammer — I sell you a hammer, and we’re kind of done. What you do with it after that is up to you. But if you’re subscribing to my furniture service, let’s say, we have an ongoing relationship now. And that is a completely different way of thinking about the connection between companies and their customers than we’ve historically dealt with.

They’re at what I call the innovation theater stage, which is, you know, we put everybody in an airplane, and we send them off to Silicon Valley, and they have coffee in Palo Alto, and they ride around on Lime scooters or whatever it is. And then they come back to Boise or Topeka or Chicago, and the place is the same as it was when they left.

The best way to deal with disruption is not with a disruptive response. It’s with a response that says, “Hey, I’ve been sort of experimenting and trying things out all along so that when the inflection point comes, I’m not taken by surprise.” And I don’t think many executives, even today, really absorb the implications of that.

Paul Michelman: I’m Paul Michelman, and this is MIT Sloan Management Review’s Three Big Points. Each episode, we take on one topic that leaders need to be on top of right now and leave you with three key takeaways for you and your organization.

Today we’re bringing you the final installment of our three-part series honoring the late Clayton Christensen, the architect of disruptive innovation.

The Theory of Disruptive Innovation has been around for more than a quarter century. It’s inspired a generation of business leaders and those who study business. A whole ecosystem of innovation research has expanded in that time. And today’s guest says that the classic theory of disruption has evolved over that period — and that there’s a whole new generation of disrupters to look out for.

Rita McGrath: I think one of the biggest changes has really been the difference in assumptions about costs and entry barriers that essentially have been ushered in by the digital revolution. So, you know, 25 years ago, if you wanted to open up a competitor to Gillette, just as an example, you would’ve had to invest tens of millions of dollars in advertising, you would’ve had to invest in product R&D, you would’ve had to invest in servers and programmers and … you name it. And today, basically two guys in a garage with a smartphone have been able to launch challenges to well-entrenched incumbents.

Paul Michelman: That’s Rita McGrath, professor at Columbia Business School and author of the MIT Sloan Management Review article “The New Disrupters.” She says that in this latest wave of disruptive innovation, entry barriers are lower than ever. And that’s enabled new kinds of businesses.

Rita McGrath: One of the most vibrant is this whole cohort of direct-to-consumer companies that are offering essentially everything as a service. You can buy furniture as a service, mattresses as a service, shaving equipment as a service, you name it. … Clothing. So we’re going from a traditional, I’d say, buying-and-selling-product model to a model which is much more relational with your customers. So, you know, if I’m selling you a hammer — I sell you a hammer, and we’re kind of done. What you do with it after that is up to you. But if you’re subscribing to my furniture service, let’s say, we have an ongoing relationship now. And that is a completely different way of thinking about the connection between companies and their customers than we’ve historically dealt with.

Paul Michelman: McGrath says that these challenger companies are so threatening to legacy businesses because they are cheap, convenient, but also high quality. And that’s changed the overall landscape in a few ways.

Rita McGrath: We’re seeing industries blurring. So the hard distinction between what one industry is and another is [has] basically become more or less irrelevant — although a lot of our structures have yet to catch up with that. But, you know, the most significant competitor you face is likely to be from some other industry. So I think that’s a big shift in what we have taken for granted from the past. … The old strategy recipe used to be that you found an attractive position in an attractive industry, you threw up entry barriers like crazy, and then you giggled to yourself for decades while you enjoyed a sustainable competitive advantage. And, you know, if that world ever existed, it certainly doesn’t anymore.

Paul Michelman: Part of the reason the ecosystem has shifted so much isn’t just high-quality competitors or lagging incumbents — it’s also the consumers themselves that are different.

Rita McGrath: Consumers have changed. Today, it’s all about access to assets, not ownership of assets. My friend Tammy Erickson jokes that you look at millennials, and they don’t even want to own a jar of spices. There’s this sense of being able to consume just what you want, exactly when you want it, which wasn’t the case for older generations.

Paul Michelman: We’ve heard it before that many incumbents are failing to keep pace. But it may not be for the reasons you think.

Rita McGrath: It’s not just that they haven’t kept up. It’s that the whole mantra of shareholder value, in my opinion, has caused firms to be focused on, essentially, value extraction and not really diving into growth-creating initiatives. And that’s a grave concern. The great irony of this is that the focus on value extraction ultimately causes companies to deliver less value for shareholders — and for everybody else.

Paul Michelman: McGrath acknowledges that while many senior leaders have bought into the idea of innovation, they tend to take superficial approaches.

Rita McGrath: The topic of innovation has become very central to senior leaders’ agendas. And I believe that’s because competitive advantages don’t last as long as they did, for many reasons. And also that the ability of newcomers to start up and really get in your face has rapidly evolved. And so where I think most corporations are is, innovation is part of the conversation, but it’s not yet a proficiency. They’re at what I call the innovation theater stage, which is, you know, we put everybody in an airplane, and we send them off to Silicon Valley, and they have coffee in Palo Alto, and they ride around on Lime scooters or whatever it is. And then they come back to Boise or Topeka or Chicago, and the place is the same as it was when they left.

Paul Michelman: It isn’t all bad news for legacy companies. They can defend themselves — and even take the offense.

Rita McGrath: If they’re open to expanding into areas that aren’t traditionally sort of their right to play. … A great example of this was when Amazon decided to get into the cloud computing business. You know, observers were outraged. There were newspaper articles written about “What is Jeff Bezos thinking? He’s a goods producer; why is he getting into enterprise-level computing?” And, of course, today we realize that was an act of genius. But when it first started, people were like, “Well, this doesn’t fit our frame of reference — this isn’t good.” So it can be an advantage for incumbents, but they have to be willing to be open-minded about it.

Paul Michelman: Being open-minded means thinking broadly about the future.

Rita McGrath: I understand what you’re doing to keep your core business happy. And, of course, that’s what investors see the most. But what are you also doing to generate the next-generation core business? What are you doing then to invest in your options for the future? Are you really putting enough muscle behind those small bets, those small experiments, that can help you meet and overcome inflection points? The best way to deal with disruption is not with a disruptive response. It’s with a response that says, “Hey, I’ve been sort of experimenting and trying things out all along so that when the inflection point comes, I’m not taken by surprise.” And I don’t think many executives, even today, really absorb the implications of that.

Paul Michelman: More importantly, though, remember that it is within any company’s power to take on the upstarts — and even to act like one.

Rita McGrath: This is a complete set of new practices with a discipline that can be learned. You don’t have to be Steve Jobs and run around in black T-shirts and work at two in the morning. You know, any ordinary person can do the bulk of it. And I think that’s where we have not seen as much progress as we could have.

Paul Michelman: The conditions for disruption today do provide advantages to new players; some of the conditions could also benefit legacy companies.

Rita McGrath: It’s never been cheaper to start a company, and it’s never been easier to get past entry barriers, but it’s also never been harder to scale a company. So incumbents have learned about disruption. Innovation is now part of the conversation, but all too much of it is still innovation theater. And that’s a shame, because we know how to innovate these days. I think part of the dilemma that we have with true innovation-fueled growth is that the financial markets haven’t figured out how to price it appropriately. And so executives are still dealing with incentives that aren’t necessarily aligned with a long-term growth mission.

Paul Michelman: That’s Rita McGrath. She’s the author of the MIT Sloan Management Review article “The New Disrupters” and a professor at Columbia Business School.

OK, kids, it’s time for three big points about the new disrupters.

Number one: The original theory of disruption has evolved since it was created 25 years ago.

Number two: Disrupters today can be cheap, convenient, and high quality because of the way technology and barriers to entry have changed.

And number three: Incumbents can compete if they stop wasting money on being better analog versions of themselves.

That’s all for this week’s Three Big Points. You can find us on Spotify, Apple Podcasts, Google Podcasts, Stitcher, TuneIn, and wherever fine podcasts are streamed. If you’d like to support our show, please post a rating or a review on whatever podcast platform you prefer.

Three Big Points is produced by Mary Dooe. Music by Matt Reed. Marketing and audience development by Desiree Barry. Our coordinating producer is Mackenzie Wise.