Why industries and companies are caught up in the maelstrom of disruption!

Disruption is one of the buzzwords of our time. In the business context, it refers to the complete upheaval of an industry through new solutions that better meet the needs of customers. Disruption is feared by long-established industries and is the declared goal of start-ups. Since I published the explanatory model for digital transformation, I have been asked time and again how this interaction between technological progress and its adaptation by society and companies affects individual industries. One prominent question is whether I think industry XY will also be affected by digitalization. Predictable answer: “Absolutely.” Here’s why, explained using the “Industry Disruption Model”

(Micro-essay – reading text: 7 minutes – understanding: 15 minutes)

The ultimate purpose of an industry is to solve a user problem

The task of the economy is always to solve human tasks. People as a whole strive to achieve as much as possible with as little effort as possible. This applies at all levels. There are major tasks such as the elimination of previously incurable diseases (not yet comprehensively solved) but also banal tasks such as the elimination of the tedious switching of a television channel on the device itself (comprehensively solved by the remote control). As sarcastic as this may sound, the driver for the solution is the same: to make people feel better – on a large and small scale.

The solution to the problems follows a logical hierarchy

There is a simple rule for solving problems: a partial solution leads to the realization of a new problem. An example: Before the washing machine was introduced, drying laundry was not perceived as a major problem. Simply because manual washing was a big, grueling job and manual drying was comparatively easy. Once the washing problem was solved, drying was the next thing that mattered. This is why we will not run out of challenges and problems any time soon, even in a high-tech society.

Summary of smaller user problems into user stories

To stay with washing: These smaller user problems, i.e. collecting the laundry, the actual washing, drying, ironing and storing the clean laundry, can be combined into one user story: As a person, I want to have clean laundry with as little effort as possible. In a business context, we would speak of the lowest possible costs that the individual would like to spend on such a user story. In this context, costs are anything that involves effort, regardless of whether this effort is of a monetary nature or not.

In this context, an industry usually takes care of various user problems along this user story. It does this because it results in synergies. To stay with the previous example, it is easier for washing machine suppliers to also introduce a tumble dryer to the market, for suppliers who offer printers, it makes sense to also sell paper and so on.

How do industries form? How do they go under?

The following graphic is intended to show how industries develop and how they are reformed or destroyed by disruption.

Let me explain:

On the y-axis we find the costs of the user problem for the customer, on the x-axis we find the period in which the costs are reduced.

The orange straight line represents the user’s expectations. They expect the problem to become easier and easier to solve. However, they do not expect it to be solved overnight from the outset. Rather, he assumes a linear, continuous improvement.

The green straight line reflects the ability of the providers to offer commercial solutions that can be accepted by the majority. I outline the following phases:

1. Recognition of the problem and initial solution approaches

A provider recognizes that a solution can be developed for a problem. People generally talk about gaps in the market, but this is rather misleading because it is a solution gap. In the early days, products come onto the market, some of which already have good approaches but are unable to meet customer expectations.

You know the situation. For example, you buy your first robot vacuum cleaner and gradually realize that these devices will soon be fully usable, but that this first model is not yet ready for practical use. This phase is therefore important because society is gradually accepting the new technology. It has to get used to it.

2. Product(s) meet user expectations

If the capabilities of the providers enable the fulfillment of user expectations, a relevant market is created. The improvement of products slows down automatically, as producers want to amortize the investment in product development. This works well until the customers’ expectations are once again much higher than the providers can afford.

3. Disruption

What is happening now is the actual disruption: on the one hand, a provider field has formed that has lost innovation motivation and momentum due to continuous revenue. At the same time, however, customers are once again expecting solutions that can solve the problem at a much lower cost.

This environment is the ideal breeding ground for new providers who adopt new or greatly improved technologies to solve user problems much better. Since, unlike existing market players, they are not tied to slow-growing and entrenched structures, they can generally enter the market with much less effort and much faster.

In addition, genuine innovation is usually pursued. Instead of an evolution of the existing, a general paradigm shift is implemented to solve the problem. This usually results in a completely new business model for the industry.

The consequences of this process are well known. The existing players and their tried-and-tested business models are coming under pressure, while new players are enjoying a sometimes meteoric rise. The digital revolution is, so to speak, a showcase effect of this background.

4. Overinnovation

This disruption will continue for as long as it is worthwhile. Investments are accumulated, which sooner or later have to be repaid by the market. The impressive success of the new players generally attracts new investors in large numbers. They invest until they no longer see any chance of amortization. This is why there are these ripple effects in the venture capital world. An area is hip and investments are made, and then suddenly many VCs let go of it again.

5. Iterations

This process usually takes place in iterations over several decades. The curves can be flatter or steeper. Only one iteration is shown in the chart.

6. Process completed

These iterations are repeated until the customer’s expectations are lowered. When this state occurs, a problem can be described as solved for the time being. This does not mean that there are no better and simpler technological solutions. However, the ecosystem no longer sees the value of an improvement. In other words, the risk of not being able to achieve an adequate return on investment from further investments in new products appears too high.

One example of such a solved problem is “lighting a fire”: the problem was solved with the introduction of handy, small and very inexpensive lighters. It is not worth improving the solution, even if it would be possible from a technological point of view.

Slow technological progress vs. rapid technological progress

What I have not yet mentioned in this article is the underlying technological progress. As I have already explained several times, this progress is exponential in nature. Although it does not completely change the general laws, it favors new, unconventional providers to an above-average extent. Let me explain why here too:

On the orange straight line, I again depict the user’s expectation.

The red straight line represents the adaptation of the offering to customer expectations under the influence of small, slow technological progress. The blue straight line shows the adaptation of the offering to customer expectations under the influence of rapidly accelerating technological progress.

a) Proven companies master small and rapid technology adaptations

This is mainly because smaller technological leaps can be easily handled within the same business model. The product can be improved and thus meet user expectations without turning fundamental aspects such as the business model upside down.

b) Exponentially growing technological progress changes everything

However, if the potential technological leaps are much greater, the industry is thrown off balance. This is because the new providers can come up with radically improved solutions (read products and services). Instead of merely meeting users’ expectations, they massively exceed them. The faster new products are adapted by users, the more successful these providers are on the market.

On the one hand, they create a shortcut in market development. Secondly, and this is devastating for traditional suppliers, it massively increases expectations of new products. That’s why it seems so ridiculous to us when Volvo advertises its “V60 Twin Engine” model as being able to drive up to 50 km purely electrically, while the innovation leaders in the market can manage 450+ km. Our expectations are simply already much higher.

c) Competitive advantages

This creates competitive advantages between the different levels of technological adaptation for those providers who can take advantage of rapid technological progress. Another competitive advantage is that the cost level is high due to the long-standing, comfortable existing market leaders. New market players can therefore usually launch new products at much lower costs and thus break even faster with a better product. Both faster time-to-market and lower basic costs are poison for existing providers.

d) Transformational gap

I have called this the “transformational gap”. A gap that existing providers can only overcome through a comprehensive transformation. When I call it comprehensive, I mean at the levels of corporate culture, organization, financing, marketing and product development.

Where is it now, this perpetual disruption?

The underlying driver of these changes is the accelerating growth of technological progress. This is the core of the perpetual disruption thesis:

We have to assume that these “transformational gaps” will become ever larger and occur at ever shorter intervals.

Market participants are therefore called upon to make dealing with these “transformational gaps” as much of their core competence as possible. In future, more than ever, a company will be defined by how well it can deal with this change. I see so-called “pop-up business models” as a possible concept for this: short-term concepts that combine the components of product development, revenue stream generation and marketing. More on this in a follow-up article.