Monday, May 17, 2004

Clayton Christensen and Disruption

by Asim Jalis

DISRUPTION Here is the essense of Christensen's theory of disruption: To succeed in the market target the group of customers that no one else wants. Take on the jobs that the other players run away from. Don't compete against established players because either you will lose or you will win at great cost, possibly more than you can afford. If you notice that someone else already owns the market exit gracefully. Instead of going after the attractive lucrative segment of the market go after the segment that is pathetic, unattractive, that everyone else runs away from. Over time your product will improve and you will move up-market. As you move up-market the down-market will be your beach-head from which you cannot be displaced. While you have the option to improve and move up, the players in the up-market cannot move down. First the margins are too thin to support their cost structures. Second, this market lives in their cognitive blind-spot. They will mock you and laugh at you for being pathetic enough to care about this market, and they will keep ignoring it even as they watch you mint money from it. And there is almost no deadline for you to move up. The players in the up-market can never move down to compete against you. So you can take your time to gradually inch your way up. This is hardly theoretical stuff. In fact this happens all around us, and is one of the most effective strategies to enter a new market. EXAMPLES This is a strategy that companies have used to enter seemingly sealed markets. For example, Hyundai can never go against Lexus or BMW. It would be horrendously expensive and possibly fatal if Hyundai tried. The marketing and product development expenses to compete effectively would sink the company. So instead they are forced to target the segment that does not want to pay more than $7,000 for a car. It's a pathetic and undesirable segment. So pathetic that no one else wants it. In fact the other companies are glad to give it away. Over time Hyundai will get better at the game and gradually inch up-market. Each time they steal a sliver from the bottom of Toyota's market Toyota will gladly give it away. It will free up Toyota's resources to target its Lexus segment more effectively. WHY IMMIGRANTS PROSPER This idea applies in a lot of places. For example it explains why immigrants are frequently prosperous. I'll ignore all the qualifications I should make (that this might be a false stereotype, or that there might be a selection bias: immigrants are self-selected by desire to change themselves; we'll ignore all these reasonable but distracting alternative explanations) The reason they prosper is that they take on jobs that no one else wants. And then gradually over time they move up-market. Immigrants are desperate and have no self-respect. And this is precisely what enables them to disrupt. They work as janitors or work in dangerous convenience stores that are open 24 hours. Then over time they build capital and move up-market. The up-market stores don't have the option of moving down-market. Wal-Mart is a similar story. While they can challenge K-Mart in the suburbs, K-Mart cannot take the battle to Bentonville, Arkansas, or in other tiny towns that they have captured. Linux is in a similar position today. It sucks as a desktop system compared to Windows, but it is good-enough for a lot of other applications. And while it can inch its way up into the mainstream, Microsoft is incapable of capturing its core market, the people who are addicted to free software. HOW TO CREATE A BUSINESS How can we apply this idea to create a business? The idea is that you almost have to ignore the size of the market or the cash flow that you might generate from it. Find a pathetic market that you can sustainably serve, and then hope serendipity kicks in and you will be able to grow from there.