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Thursday, May 26, 2005

Incumbents & Top Down Disruptions

Nicholas Carr writes, about the winning ways of top down disrupters and options for incumbents to stand the competition. excerpts with edits and comments added:
Clayton Christensen draws an important distinction between innovations that sustain the competitive status quo of a market (by enhancing existing products according to the traditional measures of performance known to be valued by customers) and those that upset the status quo (by fundamentally altering the way customers think about product performance). Whereas sustaining innovations are often pioneered by established companies, disruptive ones usually come from newcomers - and thus can pose a mortal threat to even the most dominant of industry leaders. Christensen argues that, when initially introduced, a disruptive product or service generally “underperform[s] established products in mainstream markets,” “almost always takes root in a very undemanding application,” and “sells for less money” than current offerings. It tends to be ignored by the majority of buyers, who view it as falling short of their needs, and shunned by traditional suppliers, who see little to gain by selling a cheap product to a niche market. Because of these characteristics, the innovation initially gains a foothold in the lower reaches of the market, among less discriminating customers. Then, as its performance steadily improves, it rises to redefine the entire market, displacing industry incumbents in the process.

A good example, is the triumph of steel minimills over integrated producers during the 1970s and 1980s.In stark contrast to the bottom-up variety, top-down disruptive innovations actually outperform existing products when they’re introduced, and they sell for a premium price rather than at a discount. They’re initially purchased by the most discriminating and least price-sensitive buyers, and then they move steadily downward, into the mainstream, to recast the entire market in their own image. A top-down disruption is as revolutionary as a bottom-up one. But the good news for incumbents is that they have a much better chance of surviving, or even spearheading, the former than the latter.
The traditional radio industry, for instance, is facing a major threat from the top-down disruption of satellite radio.
- First, there are no commercials.
- Second, there’s a much broader menu of programming choices, from punk to bluegrass to swing.
- Third, anywhere lisening to the same station — no faded signals with distance.
- Fourth, the quality of the digital audio is higher than that of airwaves.
As is typical with top-down innovations, satellite radio costs customers.
Another recent top-down disruptive innovation - Apple Computer’s iPod - has shaken up the market for portable music players, until recently dominated by Sony. In the past,most popular portable devices held a limited number of songs and sold for fairly low prices as was seen with sony's walkman, portable CD players and the first wave of flash-memory-based MP3 players. The iPod was not an immediate mass-market hit.But Apple steadily introduced attractive new features while also driving the iPod’s price down with new models, such as the $249 iPod mini and the $99 flash-memory iPod shuffle. Such moves have enabled the company to expand its reach steadily into less demanding and more frugal market segments. Now both fashionable and more affordable, the iPod has captured the lion’s share of the market for portable music players — and fundamentally changed the way customers think about the products.
Clearly, entrepreneurs and other new entrants have advantages in instigating top-down disruptions. With less baggage and fewer internal conflicts, they can often act more quickly, more creatively, and with greater focus. The playing field, in short, is much more level for top-down disruptions than for bottom-up ones. Simply by recognizing that disruptive innovations can take two very different forms, managers will expand their options, both defensive and offensive. As a result, they’ll be more likely to lead their companies successfully through tumultuous times. Way to protect yourself incumbents : look both up and down - it is not easy to ignore either and hope to be successful.

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