Disruption theory may be wrong and why it should matter to the Fortune 500

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Gianni Giacomelli

Business Leader, Digital Solutions

October 5, 2015 - A recent article on MIT Sloan Management Review took potshots at one of the most influential management frameworks of all times - Clayton M. Christensen's theory of disruptive innovation. With the help of extensive research, the authors argue that disruption does not work the way Christensen laid out. But what happens then?

From Amazon to Xerox, the theory by and large indicates that (1) incumbents in a market are improving along a trajectory of sustaining (little, incremental) innovation, (2) they overshoot customer needs (offering them stuff they don't care about), (3) they possess the capability to respond to disruptive threats but fail to respond due to organizational idiosyncrasies, and (4) incumbents end up floundering as a result of the disruption.

The critical review of the theory shows that these things don't necessarily happen that way. Three factors emerged from the analysis – and their implications are intriguing for business transforming in a world of digital:

  • Legacy structures and related costs and rigidities killed many. Physical book retail stores for example, with their massive and sticky bookstore costs, needed ALL their clients to cover those costs. And when Amazon started taking out a bunch of those clients, the bookstore boat started to tank. Literally, many companies are “cemented in the wrong place”. It is not just stores – their systems, and their way of doing things, are expensive to run and complex to change. Legacy systems and processes kill companies.
  • It's a numbers' game and irrespective of how big they are, most incumbents acts as one entity. Many competitors enter markets, and some of them at some point – even if serendipitously – find and exploit good ideas and start hurting the bigger players who can't defend on all fronts. Many incumbents could do a much better job at scouting for the best ideas outside of their boundaries, and running controlled experiments hence replicating some of the Darwinian, evolutionary chaos that might end in radical improvements. But many reasons, from hubris to wrong leaders, often prevent that.
  • Changing economies of scale. Big has been beautiful in many industries, and vertical integration has been helpful to many in volatile conditions. But technology, combined with better functioning marketplaces of suppliers (increasingly including crowdsourcing) give many emerging players the ability to replicate the cost structure of bigger companies, and often use better, more specialized and certainly more agile resourcing. Outsourcing takes a whole new meaning in this context.

Take the disruptors' greenhouse par excellence, Silicon Valley. Beyond its mystique, Silicon Valley benefits from those factors. Bay area startups typically carry limited legacy, especially in B2C replacement markets (think smartphones unceremoniously thrown away after two years), or in product B2B markets where the onus of implementation is left to someone else. The tremendous venture and other capital flow props up a host of new well-resourced competitors who, by trial and error, often get to radical breakthroughs. And they capture economies of scale by either harnessing technology (How many payroll people will Uber need when they are 10 times bigger? Answer: Probably just a few more than today) or sourcing externally everything that's not at their core – from facilities to computing power.

What is the fate of incumbents? Navigating legacy systems and processes require the usage of Lean management principles combined with a deeper understanding of their clients (internal and external) motives, so that the interventions are targeted where they matter as opposed to concentrating to the most intuitive areas – such as the front office user interface. At the same time, this isn't our grandparents's lean – it requires dispensing of many incrementally minded and technology un-savvy lean practitioners, and calls for extensive use of design thinking principles that dig deeper into the sources of ultimate value for all key stakeholders. What is needed is, in other words, a Lean DigitalSM approach.