On the difficulty of defining disruption

A small business in possession of a good idea needs a fundraising strategy. More often than not, the easy option is to brand oneself as “disruptive”. And why not? The term, once used for naughty children or heavy snow, has become a business buzzword that resonates everywhere from Silicon Valley to Slough.

There are numerous conferences named “Disrupt” or “Disruption” where start-ups flock to make investment pitches to venture capitalists. Consultancies offer to teach self-disruption skills to executives, who are scared of being outsmarted by start-ups.

Uber, Netflix, challenger banks, the iPhone. These are disrupters and other businesses can be disrupters too. The concept has become so entrenched that the University of Southern California introduced a degree in disruption in 2013, backed by hip-hop star Dr Dre, who believes the Beats headphones he developed have been a disruptive force.

Yet even the management consultants who are at the heart of the cult of disruption struggle to define it. “Driving growth through enterprise innovation strategies in the digital age” is how an Accenture guide to “self-disruption” puts it. The paper then proceeds on to some run-of-the-mill case studies, detailing improvements Disney and Spanish bank BBVA have made to their websites and apps.

The term “disruptive innovation” was popularised by Harvard Business School professor Clayton Christensen, in his 1997 book The Innovator’s Dilemma. He used the phrase narrowly — to refer to a product or service that starts as a simple application at the bottom of a market, and then eventually moves upmarket to displace an established competitor. His prime example was the hard disc drive, which in the early 1970s ushered in the era of the personal computer. Yet while the disc drive, at least in terms relative to the pace of technological change, withstood the test of time, many businesses that have been labelled as disrupters over the years enjoy only fleeting success.

Remember Encarta? In his book The Disruption Dilemma, the University of Toronto’s Rotman School of Management professor Joshua Gans recounts how Microsoft’s CD-Rom encyclopedia thrived in the 1990s after market leader Britannica, which for decades had sold leather-bound volumes of learning to middle-class American households keen to better themselves, failed to embrace technology. Encarta was considered a disrupter for a while. Then Wikipedia came along and the popularity of Microsoft’s service “fell by the wayside”, Prof Gans points out. For in reality, Britannica, which gave up on printing its books in 2012, was not disrupted by Microsoft’s CD-Rom but by computing itself. Any investor who had bet on CD-Roms displacing textbooks in the 1990s would likely not have been enriched for long.

The success of other businesses, which were ultimately labelled as disrupters, would have been hard to predict, Prof Gans argues. Netflix clearly profited from mistakes made by Blockbuster, the chain of video rental shops that filed for bankruptcy in 2010 after failing to spot the opportunity, as Netflix had, of mailing DVDs to customers instead of holding them in store. That allowed Netflix to build a bank of DVD customers who paid a monthly subscription for their films.

Refining a business model that customers are turning away from may not be innovative at all

When the technology allowed, Netflix was able to convert that bank of subscribers into customers of its online movie-on-demand product. But according to Prof Gans, it would have been impossible to tell in the mid-noughties that Netflix would win the race to succeed where Blockbuster had failed. “Had Netflix not succeeded, would Blockbuster’s case have been that different?” Prof Gans asks. “Netflix was one of a number of services that brought on-demand videos to the marketplace.”

The once so-called disrupter is now struggling to grow its subscriber base as much as investors expect, while spending billions of dollars on new content as it battles the encroachment of competitors such as Amazon’s Prime Video service.

This year’s FT Future 100 UK report highlights 17 companies for their success as disrupters. Many offer something novel, which could shake up an industry — but some could also turn out to be a gimmick. The businesses include INDE, which develops augmented reality technology to engage shoppers, analysing their responses to retail environments, and SuperAwesome, which helps children to interact with content providers, including Disney, in a safe and anonymous way.

The survey tried to assess innovation, looking at the number of people and the spending that companies allocate to research and development. That is a useful metric, when combined, as in the report, with scores reflecting the novelty of a business model alongside rapid revenue growth.

Yet judging a business for how much it invests on innovation also has its limitations. Prof Christensen pointed out that only the right kind of innovation spending makes sense. Ploughing funds into refining a business model that customers are turning away from, whether print media or casual dining chains, may not be innovative at all.

Evidence suggests that industry disruption is dependent on whether the larger operators that start-ups compete with are nimble in response — or complacent. Blockbuster turned down an opportunity to buy Netflix for $50m in 2000.

But that is not always how the story goes. In the 1950s, Hawaiian sea cargo group Matson was threatened by container shipping but embraced it, going on to develop the cranes that ensured heavy boxes could be lifted and moved at ports.

Amazon has rapidly moved into Netflix’s market. Investors in SuperAwesome or INDE cannot know whether Facebook, Amazon or Apple will buy them, or develop products that could wipe these young companies out. What is viewed as disruption is often plain old luck. And no self-styled “disruption consultant” can engineer or predict that.

The writer is a companies reporter at the Financial Times