Startups & Supply- vs. Demand-Side Disruption
Disruption is credited as a core element of all successful startups. Although I generally hesitate to use words as definitive as “all” unless discussing topics that are a matter of fact (e.g. the existence of gravity, or that ), I do so in this case to emphasize the degree to which this belief has become gospel among industry observers. Of course, the impetus of this phenomenon is in part due to the fact that disruption does not have a single, accepted definition.
“Disruption is the process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses”
So, to help shape this discussion, let’s begin by defining disruption. I’ll borrow the definition offered by Clayton Christensen, the “godfather” of disruption. Christensen defines disruption, or what he calls “disruptive innovation”, as the process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. This aspect of the definition seems straight-forward enough, and indeed I would posit that this is more or less how most people would define disruption.
But, Christensen goes further, noting that disruption occurs when an incumbent firm is displaced not because of any particular mistake, but rather because it continues to operate with the same activities that made it successful, while failing to change its activities in response to the source of disruption. This also involves an inherent trade-off wherein the disruptor offers an inferior product along the primary feature, but superior along a secondary feature, or a superior product along the primary feature of a minority customer segment. The disruptor then aims to improve the product along the primary feature of the majority customer segment until it reaches a point, the “good enough” point, where the trade-offs become tolerable and even attractive.
The “good enough” point occurs where the disruptive technology meets the line of utilization
This implies why disruption is so often credited as the mechanism by which successful startups flourish; when these younger, more nimble, and technologically-focused firms are able to improve their product to a point of attractive utility, they inevitably displace the incumbent. Or, at least that is the belief held by many.
But, let’s consider more precisely the means by which disruption can occur.
Types of Disruption
Two fundamental types of disruption exist, demand-side disruption, championed by Christensen, and supply-side disruption, put forth by Rebecca Henderson, among others. Demand-side disruption is what most people describe when portraying disruption, and is characterized by two core elements:
Disruptive technology typically presents a different package of performance attributes, which are not valued by existing customers
The performance attributes that existing customers value improve so rapidly in the disruptive technology that it can eventually invade established markets
Tesla is an excellent example of this type of disruption. At its outset, the company’s vehicles could not match the range, reliability, price, or the other key features valued by car-buyers, when compared to industry incumbents (e.g. Ford or Toyota). Tesla could, however, compete and exceed those firms along other attributes that were not as valued by the mainstream consumer, but were valued by a minority segment; this included features such as environmental friendliness, short-range performance, and superior design. Of course, over the years, Tesla worked to improve the performance attributes valued by mainstream customers, until it cross the aforementioned “good enough” point, becoming an attractive option to the majority of customers.
The combination of battery efficiency and availability of charging stations allowed Tesla to drastically expand the range of its vehicles
Whereas demand-side disruption describes how incremental improvements in technology displace incumbents through improved performance of a component of the rising firm, supply-side disruption describes how the high-level architecture of the firm can enable it to overthrow a powerful incumbent. This is a Gestalt approach to considering disruption wherein the sum of a firm’s parts (i.e. the complementary assets and activities) is more valuable than the parts individually.
Uber, the leader in on-demand transportation and delivery, aimed to disrupt the taxi and limousine industries by offering consumers a superior experience made possible by the near-universal adoption of smart phones. This was a prime example of supply-side disruption wherein the source of disruption did not come from the improved performance of a specific technology, or a key innovation that delivered a superior product. Instead, Uber’s strategy relied upon its unique portfolio of valuable assets and activities to displace its target incumbents and earn a significant share in the multibillion dollar sector. This portfolio included:
A user-friendly mobile application that leveraged existing geo-location technology to match drivers with prospective passengers, offering a more convenient customer experience
The marketplace approach to the service wherein drivers are contractors and not employees of the company, greatly reducing fixed costs
Diminished regulatory burden, allowing for more efficient operations and freedom of choice by company leadership
The growing comfortability of customers entering personal and financial information into a mobile app
It was this combination of valuable assets and activities, which were difficult to imitate or acquire by the historically low-tech taxi and limousine incumbents, that enabled Uber to disrupt, and eventually largely replace these established industries.
Disruption strategy & Startups
This brings us to the core concern of this discussion: a startup must understand the nature of its disruption opportunity and build a strategy that addresses it appropriately.
The natural first question is of course, given the nature of our startup is one, both, or neither form of disruption possible? For some ventures, you may decide that both forms could be viable, depending on the executional plan that would follow. More than likely, however, only one of the two will be viable, or at the very least, clearly preferable over the other.
Could Tesla have pursued a supply-side strategy of disruption? It is hard to imagine that would be the case - the battery technology powering the vehicles was likely not powerful enough to displace the industry incumbents, regardless of however many other valuable assets and activities the firm might have enjoyed.
Similarly, could Uber have pursued a demand-side strategy of disruption? Once again this seems a dubious notion. The incremental improvement of any one piece of technology was not along ever going to disrupt the taxi industry; had Ubers’ engineers found a way to make geo-location accurate to the millimeter, rather than a few yards, that alone would not cause consumers to abandon the comparative comfort and reliability of the old guard.
So, if only one form of disruption is more viable, or more efficient, then it’s is critical for leadership to recognize it as such and design a strategy that adheres to that path.