Disruption: Its Use and Abuse

Well into the 1990s, the mediascape of The Netherlands had but a single player of note – daily newspaper De Telegraaf ruled and did so without the benefit of any real competition. At its height, De Telegraaf sold almost three times as many copies as the runner-up.

The paper’s deep pockets – a veritable war chest at one point containing close to €600m in ready cash – meant De Telegraaf could spend lavishly on its newsroom, maintain a worldwide network of staff correspondents and globe-trotting reporters, and acquire whatever media outlet it fancied. Money was no object and simply did not enter the equation.

Hugely profitable and well-protected against hostile takeover, De Telegraaf ran one of Europe’s largest and most modern printing plants whose presses produced up to 360,000 broadsheets or tabloids per hour, fed with paper imported from Canada by the shipload. Three of the country’s six national newspapers rolled off De Telegraaf’s presses. The business employed well over 6,000 people who enjoyed perks and benefits unheard of elsewhere in the industry.

This comfortable existence was rudely disturbed in 1998 by news arriving from – of all places – Stockholm. Here, the tabloid Metro – an upstart free paper cobbled together on the cheap and distributed amongst commuters in the Swedish capital – announced the company’s intention to replicate its formula in The Netherlands.

Asleep at the Wheel

The announcement instantly caused mayhem at the Basisweg in Amsterdam. Caught napping, the management of De Telegraaf initially had great trouble grasping the completely alien concept of a free newspaper: How can news possibly be free? How can money be made? What has the world come to?

Once the shockwaves had subsided, management responded in grand style to the disruptive Swedes: De Telegraaf promptly set up its own free tabloid and unveiled plans to invade the miscreants’ home market. There’s nothing quite like beating disruptors at their own game.

While that went well, the newspaper was finally bumped off its lofty perch by the Internet to which it arrived late, underestimating its disruptive powers. In 2012, De Telegraaf bought Metro from its publishers. A year earlier, the company had exited the Swedish market. Money, or the lack thereof, now is an issue and, as many others, De Telegraaf let go of its corporate frills, fighting for survival in a much disrupted world.

Disruptor par Excellence: The Washing Machine

For all its transformative power, the impact of the Internet – while huge – pales in comparison to the societal changes wrought by the humble washing machine. In his bestselling book 23 Things They Don’t Tell You About Capitalism, Cambridge economist Joon Chang shows how the washing machine, and the electric iron and vacuum cleaner, reduce the time it takes to complete multiple domestic chores from hours to minutes. These appliances set women free and allowed half of the demographic to join the workforce. The contraceptive pill, and before that the wartime need for labour, drove women out of the home and into the broader economy – upsetting market dynamics in the process and boosting household incomes.

Dr Chang argues that, so far, only more advanced economies fully benefit from these profound changes. Household appliances have yet to impact many pioneer and emerging economies. Billions of people still wash and iron their clothes by hand. Swedish statistician Hans Rosling calculated that the turning point is reached when disposable household income crosses the $40 per week threshold. It is at this point that families are able to afford a washing machine. Mr Rosling estimates that only about two billion of the world’s more than seven billion inhabitants own the appliances needed to free up time for life’s more lucrative pursuits.

With the Internet claiming centre stage and hosting the latest generation of disruptors, it is often overlooked that many people still lack the basic requirements for latching on to progress: piped water and electricity. In India alone, about 400 million people are off the grid. In a recent report, the World Health Organization (WHO) concluded that fully 39% of the world’s population – or some 2.6 billion people mostly in Asia and Sub-Saharan Africa – has no access to improved public sanitation, defined as a facility that separates humans from contact with faecal matter and provides water free from outside contamination.

Whilst more widely available than clean water, electricity only reaches 83% of the world population, leaving around 1.2 billion people in the dark and without ways to join the modern world. Though unlikely candidates for a mega-disruptor status, the World Bank and the United Nations are fully committed to get the entire world hooked up to water pipes and power grids, recognising the unsurpassed transformative qualities of both basic services.

Disruption Defined

Disruptors build on foundations laid down by previous disruptions: e.g. washing machine are no good without piped water and electrical power. This also gets to the heart of the new global craze surrounding disruptors. In economic sense, the term has been around for only two decades and is applied rather narrowly. It first appeared in the Harvard Business Review as a warning to established companies that, though well-run and performing at peak efficiency, could see their business models undermined or wiped out almost overnight by newcomers thinking outside the box and reinventing the proverbial wheel.

Predictably, Clay Christensen, the article’s author, went on to become a management guru dispensing wisdom to the corporate world on how to deal with change, sudden or otherwise. Since first appropriating the word to describe a business upset, Mr Christensen has seen disruption turned into a catch-all buzzword applied to anything novel and anybody innovative. Its meaning has been watered-down as disruption is bandied about rather recklessly to denote originality, however faint.

Today, Mr Christensen cautions against the tendency to broadly apply his concept. He even refuses to brand ride-hailing service Uber disruptive, though it threatens to make taxi drivers redundant. In a follow-up to the original 1995 article, Mr Christensen last year dismissed Uber as a disruptor. In order to qualify for the epithet, a start-up needs to create a market where none existed or gain a foothold in the low-end, underserved segment of an existing market – and work its way up.

An example of the latter cited by Mr Christensen is the market for photocopiers. Xerox, the king of that particular hill, used to exclusively focus on high-end customers by keeping prices inflated and, thus, repressing demand from small-scale users. Photocopiers remained the preserve of governments and large corporations. The advent of the personal photocopier, according to Mr Christensen a textbook example of a disruptive event, added a new segment to an existing market. From this foothold, disruptors were able to claw their way up the food chain and knock Xerox off its throne.

Über-Disruptive?

Uber did none of that. While hugely innovative, the company – now valued at close to $50bn – does not serve the lower end of an existing market. Uber’s rides are by no means inferior to existing taxis. Uber also did not create new customers; it merely offered existing riders an improved and much more convenient alternative. Hence, Uber does not qualify as a true disruptor when the term is applied in the sense meant by its creator.

Disruption, as Mr Christensen sees it, often takes time; it is rarely an event that turns the world upside down. Correctly identifying disruptors is, while surprisingly tricky, of crucial importance to market incumbents – the corporates that dominate their industry through efficiency and by virtue of a competitively priced superior product. Since true disruptors start with a tiny foothold in an existing market – or create one from scratch – they are often overlooked or dismissed as irrelevant. Mr Christensen argues that successful disruptors maintain a twin focus on the product or service and the business model that will move it from the fringe to the mainstream.

Netflix is a prime example of what Mr Christensen means. Founded in 1997, the movie rental service boasted a catalogue significantly larger than Blockbuster, established in 1985, could offer its millions of customers via a network of over 9,000 brick-and-mortar retail stores. By contrast, Netflix existed only on the Internet and dispatched its movies via snail-mail. As such, it could not match the instant gratification offered by Blockbuster. Languishing in a decidedly esoteric segment of the market – mostly the preserve of movie buffs willing to have their patience tried – Netflix served its niche well without affecting Blockbuster in the least.

However, as soon as streaming technology came of age and more households gained access to broadband Internet, Netflix broke out of its niche and never looked back. The company tore into Blockbuster with an almost savage vengeance, offering all-you-can-watch deals on a vast catalogue at rock-bottom prices. Had Netflix targeted its competitor’s core business from the start, instead of sneaking up on it, the company would have been crushed by the incumbent’s might. As it happened, Blockbuster simply didn’t see the assault coming; when it did, the battle was already over.

KYD: Know Your Disruptor

Mr Christensen’s original theory of disruption holds that whenever a newcomer faces off an incumbent head-on, established companies will leverage both in-house knowledge and capital to improve products or services and accelerate innovation in order to defend their turf. Incumbents will either drive the pesky start-up out of business or acquire it. That is precisely what Microsoft has done time and again to fend off competitors such as Netscape, Stac Electronics, and more recently Skype Technologies – crush them or buy them, whichever one is most convenient.

The correct application of Mr Christensen’s still evolving theory of disruption is of paramount importance to corporate leaders who must grapple with change and gauge the relevance – or not – of new entrants to their markets. Applying the concept loosely only muddles the waters and does little to help incumbents defend market share – or assist innovators in finding sustainable business models.

The mantra – repeated in boardrooms the world over – of “disrupt or be disrupted” is rather unhelpful and may lead corporations to replace profitable lines of business with unproven new ones just for the sake of disruption. It is what last year’s Fortune Global Forum in San Francisco preached – Winning in the Disruptive Century. The forum’s organisers recognise that they pushed the envelope on Clay Christensen’s concept, but say they did so with good reason: businesses operate in a world subject to fast and profound change; a new industrial revolution – powered by big data, artificial intelligence, and robotics – is being unleashed; and the distance between winners and laggards is increasing with the average lifespan of enterprises shrinking. In business economics, a new winner-takes-all reality is now prevalent.

At the event – touted as the American counterpart of the World Economic Forum in Davos – it transpired, rather unsurprisingly, that US corporates are now in the business of disrupting. IBM CEO Ginni Rometty assured all present that her company has been a disruptor for over a century and fully intends to remain a trendsetter and innovator. Siemens CEO Joe Kaeser boasted that his company had replaced half of its product line over the last decade in order to keep its leading edge, while JP Morgan CEO Jamie Dimon delivered a rather passionate plea for more risk-taking: “Don’t be so depressed. We’ve all become risk experts afraid of our own shadow. Move on. The world is going to be fine.”

The forum’s participants, including a full roster of US corporate bigwigs, agreed that all companies are now in the technology business – regardless of the products or services offered. Cisco chairperson John Chambers warned that nobody should underestimate the Internet of Things and predicted that within under a decade well over 500 billion smart devices will be online – twenty times more than the number currently projected.

The consensus in San Francisco was that, whilst technology will drive the future, success is reserved for those corporations that invest in people – the weakest link. How to disrupt the workplace, it turns out, is the larger challenge as people usually do not willingly embrace change – or, indeed, adapt easily to it.

Disruption Rules

In his 2014 book The Road to Reinvention, venture capitalist, jazz musician, and writer Josh Linkner takes a decidedly brave-new-world view of a future shaped by fickle consumers, friction-free markets, political upheaval, and mind-boggling technological advances that arrive with “dizzying speed” and are of “exponential complexity.” Mr Linkner essentially advises everybody to panic in the face of change too dense for human comprehension. As such, Mr Linkner is not quite unlike Lance Corporal Jack Jones – the out-of-step butcher of Dad’s Army – who frequently appeals to all present “Don’t Panic! DON’T PANIC!” and does so at the most inopportune moments – such as when holding a live bomb.

Meanwhile, Forbes Magazine, always eager to join the chorus, started reporting extensively on the coming of Big Bang Disruption – innovation that is not merely disruptive, but devastatingly so. It’s Corporal Jones dropping the bomb while prancing about panic-stricken. For those wishing to make a career out of upsetting corporate apple carts, the University of California now offers a graduate degree in Disruption.

Or Does It?

For all the hoo-ha, there is in fact little truly new under the sun. Since history became secular – sometime in the eighteenth century – the idea gained currency that today’s events may be explained by yesterday’s. Historicism allows for the tabulation of a neat course of successive events and, as such, provides a handy narrative of progress – the hallmark of the eighteenth century. The following century saw evolution – an understanding of the place of man in the grand order of things – burst onto the scene while the twentieth century – after violent mishaps – brought steady growth and innovation.

The current era places disruption centre stage from where it may not be dislodged on pain of being branded fogyish or – even worse – a luddite. Yet for all its futuristic appeal, disruption is atavistic, responding as it does to fears concerning financial turmoil, apocalyptic visions of environmental collapse, and other cataclysmic events predicted by the hurried perusal of incomplete and rather disputable evidence.

Disruption lacks vocal critics. It is now universally hailed as a power for good. However, innovation does not necessarily equate to progress – or vice versa. Disruption may bring the world improved gadgets that talk to each other over the Internet of Things; this digital wizardry does not automatically signify a betterment of the quality of life.

Throughout most of history, innovation and disruption were neither pursued nor appreciated. George Washington warned, reportedly from his deathbed, against innovation in politics; the American Founding Fathers, Federalists most of them, were quite unapologetic in their enmity of innovation, while Edmund Burke, the British statesman philosopher, considered the French revolution a “revolt of innovation” and was famously indisposed to embrace the new-fangled.

Not Since The Invention of The Wheel…

Disruption as Salvation

Whilst contemporary businesspeople may consider anything before the present era of disruption to belong to the Dark Ages, philosophers are less sure of that. Innovation may indeed constitute nothing more than progress without the benefits of the Enlightenment applied and a phenomenon beyond the purview of critical thought. Disruptive innovation, as it is now understood, takes this the idea a few steps further still and generates hope for salvation from the horrible fate it describes: disrupt or be doomed.

Electrical cars are welcomed as an innovative disruptor that will presumably help save the world from carbon-induced global warming. Indeed, the electrical car generates hope for ultimate salvation. To criticise it – or the premise of global warming – is a one-way ticket to the ostracised fringes of society or, put more succinctly: the looney bin. In many Western countries, greening the earth has replaced orthodox religion to provide a framework for a collective belief system with nature elevated to the status of deity to whom are offered all spoils. The truly pious drive a Prius.

Innovation lost its negative connotations only in 1939 when Austrian/American economist and political scientist Joseph Schumpeter used the concept to describe new products coming onto the marketplace. Three years later, Mr Schumpeter took a cue from Karl Marx1 and floated the concept of creative destruction (schöpferische Zerstörung, aka Schumpeter’s Gale). In Grundrisse: Outlines of the Critique of Political Economy, the unfinished precursor to Das Kapital, Karl Marx argued that the violent destruction of capital [means of production] is a condition of its self-preservation.

Joseph Schumpeter codified an economic dimension to the paradoxical Hindu god Shiva who represents both destroyer and creator. In fact, long before Mr Schumpeter wrote Capitalism, Socialism, and Democracy (1942), philosophers such as Arthur Schopenhauer and Friedrich Nietzsche2 had been pondering and expounding on the usefulness of creative destruction.

Ingrained Disruption

Schumpeter’s particular insight was that capitalism, by its very nature, cannot be stationary. Rather, it entails a process of continuous change: “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates.”

From this Schumpeter deduced that start-up businesses represent the “disruptive force” that sustains economic growth, even as it destroys the value of established companies that may have enjoyed a degree of monopoly power derived from “previous technological, organisational, regulatory, and economic paradigms.” Following a now largely disproved Marxist line of thought, Joseph Schumpeter was none too optimistic about the sustainability of the process, musing that it could eventually undermine the very premise of capitalism since it contained the seed of destruction.

Examples abound of the creative destruction described by Mr Schumpeter: the 8-track was replaced by the cassette tape, which in turn got superseded by the compact disc that made way for the MP3, now being substituted for online streaming. Or, take Polaroid which allowed for instant photographs and, in its time, was seen as quite disruptive. However, the company failed to identify the advent of digital cameras as an existential threat and was duly obliterated by new entrants.

What Clay Christensen says is that while Polaroid was a disruptive company for creating a new market where none had existed before – instant pictures – its later corporate executioners merely provided added convenience and superior quality at a lower price. While they bankrupted Polaroid by doing so, these newcomers did not create a new market nor gained a foothold at the lower end of an existing market. As such, they were not disruptors in the classic academic sense of the concept.

Ditch Academia

Then again, why tune in to the loudhailers propagating moderation from academia’s ivory towers? As a buzzword, business stratagem, next big thing, or whatnot, disruption has much going for it. Disruptors and their tales offer a contemporary twist on the “sketches of men of progress” that were in vogue at the turn of the nineteenth century – it’s progress in action: exhilarating, dangerous, and – why not? – sexy.

Indeed, Mr Christensen has been chastised both for his narrow interpretation of disruption, and – paradoxically and perhaps more importantly – for allowing his advocacy of creative destruction to run wild and take over the corporate world. Fellow scholars have tried – and repeatedly failed – to discredit Mr Christensen’s academic research, writing it off as empirical at best.

A fund manager who in the 1990s tried to apply the principles of disruption theory in order to build a stock portfolio ended up significantly underperforming the broader market. When in 2000 the first dotcom bubble burst, the fund lost more than NASDAQ did – and that is saying something: between March 2000 and October 2002, the tech-heavy index saw nearly 78% of its value evaporate.

Disruptive Craze

To licensed cabbies who are being pushed out of the market by Uber drivers, the ride-hailing company seems pretty disruptive as it undermines their very livelihood. The same applies to Kodak and Polaroid whose business model were fatally disrupted by digital photography. However, the elevation of disruption to a corporate creed is unnecessary and may even be unhelpful: any company worth its salt has disruption as a silent partner. Disruptive processes and technology are inherent in free markets driven by competition – they bring consumers ever-improving products and services at ever-decreasing prices.

Disruption, thus, is the hallmark of free enterprise, and lies at the basis of the dog-eat-dog reality of competition. To welcome disruption as a new force in business is to deny that it existed all along, albeit perhaps by a different name. Disruptive innovation, another of the buzzwords gaining corporate traction and essentially the same thing on steroids, represents nothing more than a disruptive practice with a faux conscience – offering salvation where none is actually called for.

In a sign of the times, business schools and corporations feel an irrepressible urge to reinvent, or repackage, the proverbial wheel. Whilst there is ample value in Mr Christensen thorough analysis of disruptive businesses – their growth trajectories, failing rates, and marketing strategies – it is a fallacy to consider disruption a holy grail to be pursued at all cost.

The Internet of Things and other exciting novelties indeed add wonderful new dimensions to life, making previously dreary tasks more pleasurable, doing away with mind-numbingly repetitive work, and providing multiple layers of convenience – besides all sorts of things few people can fathom today. Revolutionary as all this is, the brave new world of technology unfolding at present is but a continuation – in the purest tradition of historicism – of the one now being left behind.

As such, disruption, let alone disruptive innovation, brings nothing out of the ordinary – it merely (and excitingly) – represents the inexorable and accelerating march of human progress. It is wise to keep questioning the true value of the advances as they take place and refrain from unquestioningly celebrating all forms of disruption as amazing breakthroughs that improve the quality of life. As with everything, some disruptions are meaningful and helpful – others are perhaps a little bit less so.

Footnotes

1. From the Communist Manifesto (1948) by Karl Marx and Friedrich Engels: “Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. […] It is enough to mention the commercial crises that by their periodical return put the existence of the whole of bourgeois society on trial, each time more threateningly. In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed.”
2. In The Birth of Tragedy (From the Spirit of Music, 1872), Nietzsche considers, at length, the “creative destruction of modernity” through the eyes of Dionysus, the extravagant character from Greek mythology who represents ecstasy, madness, drunkenness, and other irrational pursuits and whom Nietzsche saw as both “destructively creative” and “creatively destructive.”