Disrupting Disruption Theory

on September 22, 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. [pullquote]This mindset of personal choice and personal preference has not been present until recently in computing[/pullquote]

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. ((John Kirk gave me this line))

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.