Disrupting Disruption Theory

Ben Bajarin / September 22nd, 2013

Let’s file this under the open for discussion category. I have been having discussions of late around disruption theory as it relates to many different parts of the market. There are a number of very important general rules of thumb within disruption theory that are applicable to many markets. The problem is that there are exceptions and more importantly there are situations where it is not applicable.

History in a Vacuum

I’ve read all of what Clayton Christensen has published on the subject. And many of the things he offers in the Innovators Solution point out generally sound observations. This particular one should be of interest.

“The competitive advantage from vertical integration is strongest in tiers of the market where customers are under-served by the functionality or performance available from products in the market. Vertical integration tends to be a disadvantage when customers are over-served by the functionality available from products in the market.

There are a great deal of examples historically to justify this observation. That is why disruption theory works in a very general sense. I would argue, however, that the underlying necessary assumption is that the purchaser of these products is purchasing them with a pragmatic mindset.

In many of the examples always cited within disruption theory the underlying common denominator was a buyer mostly interested in cost using a pragmatic approach to the purchasing cycle, a.k.a trying to find the best deal in order to justify the cost.

I’ll return to this in a moment, but what I’ve concluded my issue with disruption theory is, is that when it was formed there was not a true pure consumer market for personal technology. A failure to understand the incredibly emotional behaviors of mass-market consumers is the common trap most who love to quote disruption theory fall into.

Consumers are Predictably Irrational

I love Dan Ariely’s book Predictably Irrational. I’ve read dozens of behavioral science themed books like it as well. Getting inside the mass market consumer psyche is truly an art form. It is one most companies truly fail to grasp. It is also something most disruption theory fundamentalists have a hard time comprehending.

The idea of a product being “good enough” is a very nuanced discussion. With regard to appliances in consumer markets it is perfectly applicable. When I shop for a refrigerator or a toaster oven, I do so with a very pragmatic approach. I try to find the best deal to meet my needs. Appliances, however, are not personal decisions. The kind of clothes I buy, the kind of food I eat, the kind of car I drive, these are all personal decisions and ones where price often falls lower on the totem pole of priorities. The more personal the the product, meaning one wrought with personal preference, the greater the challenge to use traditional disruption theory is to apply.

Products that are more personal by nature actually disrupt disruption theory. Smartphones, and tablets to a degree, are personal decisions and for the masses the common understanding of a pragmatic approach needed to justify disruption theory are flipped on its head. Personal decisions turn ‘good enough’ into a relative and entirely subjective term.

This mindset of personal choice and personal preference has not been present until recently in computing

This mindset of personal choice and personal preference has not been present until recently in computing. And I would argue no device in the market today or for the foreseeable future is more wrought with personal preference than the smartphone. When personal preference exists value becomes subjective. When value becomes subjective it presents a great challenge to predict when or if something is good enough.

But there is one common denominator in the markets where personal preference and behavioral quirks influence consumer decisions significantly more than just price–differentiation.

The Value of Differentiation

It seems hard to put a value on differentiation. In fact, it seems hard to put a value on many intangible benefits. For example, how much is a product worth over a competitors that comes with superior customer service? The root of that question is actually how much is peace of mind worth? I’ve long argued that familiarity is a feature. How much is familiarity worth? How much is ease of use worth? How much is convenience worth? How much is an experience worth?

All of these things are hard to place a distinct value on. But how the mass market consumer perceives value varies. They simply don’t all value the same thing and in many segments, in every consumer segment, you can find examples where price is not the driving factor.

This is what stumps so many disruption theorists with regards to Apple. Apple is the poster child for disruption theorists who are convinced their future is in jeopardy.

Disruption theorists have a hard time understanding Apple in the same way they have a hard time understanding how the mass market perceives value. When I discuss this with behavioral scientists they have a much more holistic understanding of what value means to the mass market and have many of the same issues with disruption theory and how it seems to be applied to the mass market.

The mass market values differentiation. Apple can differentiate its hardware. It does so all the way from inside out. Apple can also differentiate its software. iOS can be found on no competing products. iOS is found valuable enough by the mass market to nearly crash Apple’s servers and driving downloading the update to become more than 15% of total peak time North American traffic from one provider. iOS is found valuable enough to become the industries fastest operating system transition in our history. The Apple experience is unique and it stands out from the sea of sameness.

The simple and foundational truth is that it is much easier to understand when a product is ‘over-serving’ or ‘under-serving’ when all buyers approach the process from a pragmatic standpoint. Consumers are not pragmatic. They more often than not enter the buying process with a much more emotional driven mindset than a pragmatic one. Disruption theory was never designed to address pure consumer markets with highly emotional buyers.

“Value”, as defined by markets is hugely influenced by behavioral quirks. Any definition of “over-served” that does not take this into account does not actually know the true meaning of “served” and therefore cannot know the true meaning of over serving a market.1

A lot has changed since Adam Smith proposed the theory of supply and demand. Just because alterations have been made doesn’t mean it is any less valid. Disruption theory is valid and useful in the market. However to be relevant to speak to and apply to consumer markets, it needs to be refined to include the practices of behavioral economics.

If this subject is of interest. I strongly recommend also reading Ben Thompsons article on Stratechery called ‘What Clayton Christensen Got Wrong.’ It will come as no surprise that I agree with him 100%.

Computing is no longer generic. It has shifted to personal in a way unseen before in this industry. This is key to understand where personal computing goes from here and who the winners and losers will be.

  1. John Kirk gave me this line []

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio
  • Kizedek

    When I hear “disruption theorist” I guess I normally think of Horace Dediu of Asymco, since that is where I first heard about it and continue to read about it. But I guess Horace also has his differences with his mentor Christiansen (I believe that is how he views him in some ways).

    “This is what stumps so many disruption theorists with regards to Apple. Apple is the poster child for disruption theorists who are convinced their future is in jeopardy.”

    OK, so am I right that both you and Horace seem to disagree with “disruption theorists who who are convinced their future is in jeopardy”? — that neither of you think Apple’s future is particularly in jeopardy?
    Apparently “classic disruption theory” views Apple as being in a very tenuous position even though we always think of Apple as the “great disruptor”?

    Perhaps you are both coming at this from different angles, but with similar conclusions (about Apple’s future not being particularly in jeopardy). Horace is presenting Apple as the “serial disruptor” as a company that is somewhat (perhaps uniquely) immune to the “natural forces of disruption” that Apple should be facing whenever its products begin to “overserve”; rather, Apple at that point begins to somehow consciously disrupt itself. While you think that the whole notion of “overserving” needs to be looked at in the light of irrational consumers making highly personal decisions?

    The interesting thing to me is that Disruption Theory seems to (be used to) explain both Apple’s success, and the very reason that Wallstreet and pundits have no confidence in Apple whatsoever — they somehow think that Apple’s businesses are perpetually at risk of disruption by others along every line of its business disproportionately more than Apple’s competitors are at risk from any form of disruption! Somehow, being innovative and creating the best product you possibly can is a sure-fire recipe for getting disrupted; and everyone else’s strategy somehow puts them in the driver’s seat.

    Thanks for making it even more interesting by bringing the consumer mindset into it. All this, and Horace’s quest to quantify Apple’s traits and playbook, makes this subject extremely fascinating.

  • Anders CT

    1) I have little faith in anyone predicting company X to be disrupted for sure. If disruption could be so easily predicted by a theory, there would be a lot less of it, because measures could and would be taken against it.

    2) I agree, that even if mobile hardware becomes a commoditized, low margin affair like with PCs, it fails to take into account the intangibles that Apple is monetizing, and that users are clearly willing to pay for.

    There are many aspects to this. One of the many things that I find Apple does better than its competitors, is simple and consistent product-naming: Apple would never name a laptop the “HP Pavilion TouchSmart 14z-f000 Sleekbook”, and have fifteen different (and confusingly named) versions of comparable products. When you use the words “MacBook Air” and “iPad” you use words that are part of the language, and that conveys meaningful information to other people. You don’t need a HP Procuct guide to translate the code into human language.

    That is simply an amazing advantage: When Apple invests in improving a product, it not only invests in said product, it invests in the name of all future iterations of that product line. HP has no such advantage because of their own opaque product naming scheme.

    Asus and Google is doing some af the same with the Nexus line of tablets. When they made the second revision of the Nexus 7 tablet, they improved on the product without renaming it. And if they do that a couple of times, maybe the sentence “it’s a Nexus” will have the same high signal-to-noise ratio as the sentence “it’s an iPad”. Nexus could then be to small tablets what Nescafe is to instant coffee or Xerox used to be to photocopiers.

    3) A counter-argument could be that Apple has already been disrupted by Android outside of the US, and that Apple could slide to 15-20% market-share in the US if carrier subsidization schemes were be rolled back. Apples products intangibles are valuable to consumers. But it appears that with more transparent pricing only around one fifth of buyers are willing to pay the full markup that Apple is demanding. At least outside the US, where the mean purchasing power is often less.

    • FalKirk

      “If disruption could be so easily predicted by a theory, there would be a lot less of it, because measures could and would be taken against it.” – Anders CT

      Well, Disruption is a Dilemma, not a simple diagnosis. The problem is that there is no solution to the problem – It’s a dilemma, not a simple error in a CEO’s reasoning.

      • Anders CT

        Uhm, like Microsoft having to choose between OS-license fees or market-share? Knowing that forgoing either one would harm its bottom line?

        • FalKirk

          Yes, the obvious solution is to go for the money, but then you cut off your future avenues of growth. If you focus on long-term growth, you leave money on the table which is anathema to investors and runs counter to common sense.

          All companies are, and should be, subject to disruption. That’s the beauty of capitalism. There is always a challenge ready to overthrow the incumbent.

          But if you’re the incumbent, you want to survive. And in order to survive, you need to do things that may appear crazy – such as cannibalizing, instead of defending, your existing successful products.

          • James King

            “If you focus on long-term growth, you leave money on the table which is anathema to investors and runs counter to common sense.” – John Kirk

            Survival is the ultimate rational decision. I’d posit that any decision that places short-term benefit over long-term health is irrational, which is why I view “disruption” as a false dilemma. This isn’t like evolution in which an organism is limited by its genetics. Companies are comprised of systems which should be adaptable.

            That being stated, I do think true disruption happens, just much more rarely than most people think.

            “But if you’re the incumbent, you want to survive. And in order to
            survive, you need to do things that may appear crazy – such as
            cannibalizing, instead of defending, your existing successful products.”

            Exactly, and there is nothing crazy about that. Change is inevitable. What’s irrational is any expectation that people shouldn’t alter when that change is apparent. If you aren’t changing, you’re dying.

          • FalKirk

            “I’d posit that any decision that places short-term benefit over long-term health is irrational”

            I’d posit that experience has demonstrated that very few people or companies can think past the short term pain to long-term gain.

          • James King

            Your statement is absolutely true. But is it rational? Definitely not from a logical sense.

          • jfutral

            What is part of the dilemma is to assume that logic is somehow solely rational. Or put another way, it is illogical to assume people will act “rationally”, or sans irrational proclivities.

            Joe

          • James King

            Then, in the end, we still have to attribute “disruption” largely as a failure of competence or character rather than a simple inevitability. That was basically my point.

          • jfutral

            Except this, “I’d posit that any decision that places short-term benefit over long-term health is irrational”, is now totally rational.

            Joe

          • James King

            Actually not. The point to which I agreed was that logic may not be solely rational. That is, a person can make a logical decision that isn’t rational. Your statement isn’t related to my original premise. It is still very much irrational to place short-term benefit over long-term health. Whether it is based on logic is moot. It still represents a failure of judgment.

          • FalKirk

            “is it rational?” – James King

            No, it’s not rational. And that’s the whole point. People are emotional beings, not rational beings, their human beings, not robots.

          • James King

            I don’t think I denied that. My point is that a lot of what analysts are attributing to “disruption” is actually failures in judgment. Whether a CEO is fallible or not isn’t the point, I think that goes without saying. But CEOs are paid to exhibit good judgment when running a company. When their companies fail, the failure should rightfully fall squarely on their shoulders. They are the ultimate authorities in organizations; they set the tone at all levels, from competence to corporate culture. Most importantly, many of them are compensated extremely large sums of money for the privilege. To attribute failures in judgment simply to disruption absolves CEOs of accountability. Much of the times (I’d say MOST of the times) companies are destroyed through arrogance and greed. I think the CEO holds much of that responsibility.

            Is this debatable? Absolutely. I understand we don’t live in an ideal world. But actions have consequences. A person who commits a cold-blooded murder isn’t absolved just because he may have had a traumatic childhood. To claim that CEOs face extenuating circumstances is a circular position.

            To clarify and reiterate, I do believe that “disruption” is a real phenomenon. But I think it happens very rarely in actuality. Much of the corporate failure I see, especially in technology, comes from people who have more than enough information and resources to make better decisions yet do not. It’s a simplification to state that we have no idea what these CEOs face… that’s the case with ANYONE. We can’t absolve people of their responsibilities simply because we may not understand their particular circumstances. Most people are not paid large sums of money to deal with their challenges. CEOs generally are. They have a privileged position in society. The should be held in the most account, not the least.

          • jfutral

            Right? Just look at how many people avoid the dentist.

            Joe

          • DarwinPhish

            “Companies are comprised of systems which should be adaptable.”

            I assume you do not work for a big company. Many are in fact comprised of systems which are inherently not adaptable. Many of the failures given to illustrate disruption theory can also be explained by a company’s inability to adapt quickly.

          • jfutral

            Right. The very notion of a system steeped in Modernity is not to adapt, but enforce. So much so that the system becomes more important than what it was created to support.

            Joe

          • James King

            I don’t see how this changes my point. It’s like blaming the problem for the problem.

          • DarwinPhish

            Some companies simpy do not have what it takes to adapt or to adapt quickly enough. Going back to your statement about short term benefit vs long term health, the problem is that it is not always possible to know what is best long term when you are making decisions. Look at Nokia: they stuck with keyboards and did not heavily pursue full screen touch devices because all of their research and polling told them to stick with keyboards. By time the market shifted and preferences changed, they were able to adapt quickly enough.

          • James King

            “… it is not always possible to know what is best long term when you are making decisions.” – DarwinPhish

            I can only agree with this point on principle. But the facts don’t support this in the case of Apple’s competitors.

            “Look at Nokia: they stuck with keyboards and did not heavily pursue full screen touch devices…” – DarwinPhish

            Nokia had a working prototype of a phone very similar to the iPhone in its labs before the iPhone was introduced. Even if you make the argument that Symbian was no match for iOS, there were various Linux-based mobile operating systems that could have served as the foundation for a more robust operating system. For that matter, Nokia could have purchased Palm. Nokia could have acted as a fast follower and been one of the first to adopt Android. The iPhone pretty much took off immediately; it was obvious within the first two years that it was a viable product, more than enough time to develop a strategy to counter. Android was originally started as a Blackberry competitor and was revamped to compete with the iPhone in about a year.

            In my opinion, Nokia was a victim of Confirmation Bias. That’s a flaw in reasoning, not an insurmountable circumstance.

          • DarwinPhish

            I had to edit my last point to say “not able to adapt”.

            “Nokia could have acted as a fast follower”. Yes, but they did not. Neither did Blackberry, Microsoft nor HP (with Palm). Changing course quickly is not easy and their actions only really appear to be slow in hindsight. Going back to Nokia, they had a plan to move from Symbian to MeeGo and they had plans to introduce touch only devices. But the timing of their plans were upset by Apple, Google and Samsung. If the iPhone had flopped because Apple rushed the product and Nokia had more time, Nokia would probably have been lauded for taking a more more time.

            Finally, the idea that “two years… [is]…more than enough time to develop a strategy to counter” is ludicrous. Coming up with a new strategy AND implementing it can take a long time and is very company specific. Hence my original statement, “Many of the failures given to illustrate disruption theory can also be explained by a company’s inability to adapt quickly.” Adapting quickly is very, very hard and very, very rare. At best, if you are lucky or resources in reserve, you can get more time.

          • James King

            “”Nokia could have acted as a fast follower”. Yes, but they did not.” – DarwinPhish

            That doesn’t change the fact that they could have. As I stated before, none faced insurmountable circumstances. All had the benefit of knowledge, time, resources and opportunity. That isn’t “disruption,” that is failure, plain and simple.

            “Finally, the idea that “two years… [is]…more than enough time to develop a strategy to counter” is ludicrous. Coming up with a new strategy AND implementing it can take a long time and is very company specific.” – DarwinPhish

            Or it cannot. So you are back to blaming the problem for the problem.

            “Hence my original statement, “Many of the failures given to illustrate disruption theory can also be explained by a company’s inability to adapt quickly.” Adapting quickly is very, very hard and very, very rare. At best, if you are lucky or resources in reserve, you can get more time.” – DarwinPhish

            This is a circular statement. Adaption is part of life and part of business. If an inability to adapt is structural, who is responsible? These systems don’t build themselves. They are generally failures of judgment and failures of implementation. “Disruption” is being used as a catch-all excuse. What is “ludicrous” is giving the people responsible for making the tough decisions a pass when they don’t have the competence or courage to make them. Then “disruption” becomes a self-fulfilling prophecy.

          • DarwinPhish

            Read everything I wrote, especially the word “quickly” after “adapting”. Never do I say companies can not adapt. I am simply stating that when markets change, companies need to adapt QUICKLY. If they do not, they will most very likely fail.

            Disruption Theory, or more specifically the Innovators Dilemma, gives one possible explanation why companies do not act quickly enough.To some extent , I agree with you — some do use the Innovators Dilemma as an excuse for why head’s of companies failed to react quickly. However, there are other explanations for why companies move slowly, many of which are not very complimentary to CEO’s. My point was to focus on the fact these companies acted too slowly not that they were Disrupted.

          • James King

            “My point was to focus on the fact these companies acted too slowly not that they were Disrupted.” – DarwinPhish

            Agree.

  • FalKirk

    Ben and I had a long discussion on this before he posted this article. Where we disagree is that I don’t think that the theory is incorrect, I think it is being applied incorrectly.

    The idea is that when one company is over-serving the market, a low-end disruptor will come in with a product that 1) Doesn’t meet the needs of the high-end customers of the incumbent, 2) Does meet the unmet needs of a new, previously undiscovered customer base, and 3) is a “good enough” solution for the vast majority of the incumbent’s current clients.

    The key here is determining what is “good enough”. Many people view that term from a business perspective or a from purely logical perspective. In the end, many people simply reduce it to a matter of cost. If Product X is doing 80% of what product Y is doing for half the cost, then that’s clearly good enough, right?

    Wrong. Cost is only a part of value. Thus, Oscar Wilde’s famous quote that cynics know the price of everything and the value of nothing. As Ben said in his article, people are “Predictably Irrational.” We must not judge “good enough” by purely rational or business reasons because that’s not how consumers think. “Good Enough” contains a huge emotional component too.

    The term “low-end disruptor” has become synonymous with “low-COST disruptor.” This is a grievous mistake. A “low-end disruptor” must have low cost AND high value – and value is defined by the emotional needs of the consumer, not by the dictates of investors, analysts, pundits and blog writers like me. 🙂

    • Glaurung-Quena

      I think it was Ben Thompson on Stratechery who pointed out that the unique thing about Apple is that they are focused primarily on user satisfaction and delight, on making technology easy and fun to use. And there is no such thing as “overserving” in the realm of customer satisfaction.

      • benbajarin

        It should come at no surprise that Ben and I agree entirely on this one 😉

  • James King

    Assuming Ben Bajarin is accurate in his assessment, wouldn’t Apple actually be in a VERY precarious position?

    “It seems hard to put a value on differentiation. In fact, it seems hard to put a value on many intangible benefits.” – Ben Bajarin

    Then what exactly is Apple selling and why do consumers place such high value on it? If it is all a matter of perception, then what advantages does Apple bring to the table that couldn’t be duplicated by a competitor? I don’t think it is reasonable to think Apple won’t be disrupted just because it is Apple.

    “The simple and foundational truth is that it is much easier to understand when a product is ‘over-serving’ or ‘under-serving’ when all buyers approach the process from a pragmatic standpoint. Consumers are not pragmatic. They more often than not enter the buying process with a much more emotional driven mindset than a pragmatic one. Disruption theory was never designed to address pure consumer markets with highly emotional buyers.” – Ben Bajarin

    I think this is the VERY reason financial (and some tech) analysts believe Apple is “doomed.” How can you sustain growth on the capriciousness of an irrational public? That type of reality should leave Apple’s corporate leadership in a state of terror.

    The reality is that Apple has mastered the science of creating that “emotional” reaction in consumers. If I had to guess, Apple’s research in human factors is probably far and away more sophisticated than any of its competitors. The reality is that, for all we value our unique perception, we all process information via our senses in pretty much the same way. For instance, the color “red” uniformly inspires more assertiveness and aggression, “blue” inspires more calm and thoughfulness. In other words, with rare exception, our brains work very much in the same way. Apple designs its products literally to “please” us, in the sense that pretty much every aspect of them is designed to either be completely predictable or actually inspire positive emotion through sensory data. We are actually being “brainwashed,” which can either a positive or negative from your point of view.

    • benbajarin

      This point is exactly the paradox. Wall St. can not comprehend the value the mass market puts on the Apple experience. Since they themselves can’t comprehend the value they have a hard time using that as a measurement. They will always be surprised in this regard, all the while the consumer is not. It makes sense to consumers but not to Wall St.

      But the point I make is that consumers do value these things and the entirety of the experience. It is not measurable but that is what makes it sticky and desirable.

      • James King

        I’d argue that consumers don’t really understand it either, it is just easier for them to accept because they can’t make a fortune betting against it. I don’t think consumers really understand what it is about Apple products that make them so pleasant to use. They don’t get that they are designed for how our brains and senses actually work.

        As for Wall Street and some tech analysts, the focus is on quantitative data because it is easier to understand. I can’t blame them in that regard but it won’t help them understand Apple.

        “But the point I make is that consumers do value these things and the entirety of the experience. It is not measurable but that is what makes it sticky and desirable.” Ben Bajarin

        It is the very fact that it IS measurable that gives Apple its unique advantage. Apple’s institutional knowledge of the science related to human factors is probably unparalleled in the tech industry.

        • FalKirk

          “I’d argue that consumers don’t really understand it either”

          I’d argue that consumers are VERY good at knowing what they want – they’re just not good at articulating their true reasons for wanting it.

          • James King

            Little bit of a straw man here. I don’t question whether people know what they want, I state that they may not understand why that is the case.

          • Guest

            Yes, he tried to sneak in a straw man. Well spotted.

          • The Silver Fox

            James King, yes Falkirk tried to sneak in a straw man, well spotted.

          • FalKirk

            ” I state that they may not understand why that is the case.”

            I thought I said the same and if I didn’t, I apologize for that is exactly what I meant.

  • stefnagel

    Same day as Thompson’s article.

  • vatdoro

    Low end disruption and orthogonal businesses/products are often very hard to identify correctly. Christensen later admitted he was wrong about the iPhone because he thought it was a high end phone. It was really a low end mobile computer.

    http://daringfireball.net/2012/07/iphone_disruption_five_years_in

  • Matang_Lawin

    Disruption works best if it is employed with great marketing design, impeccable timing and a growing distaste to the status quo. Plain and simple.
    For years past, Microsoft has been tinkering with touch and tablets long before Steve launched the idevices but failed because 1. They did not have a a great marketing design 2. Timing was not good enough and 3. Everyone was growing distasteful with MS monopoly – End result of which was failure to disrupt for Microsoft.

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