Classic disruption occurs successfully because an industry’s incumbents facing a disruptive attack from new entrants make a rational decision to commit their resources to serving their top end customers, gladly leaving the disruptive entrants to serve the incumbents’ low end customers. In the archetypal disruption case, incumbents are faced with fight or flight options when threatened by a new entrant introducing a disruption, that is, a more affordable and less complex solution. Incumbents have almost always chosen the flight option.
The case of the US’s newspaper industry ushered in a counter-intuitive novel dimension to disruptive innovation — the US newspaper industry’s executives and strategists divined on the potentially disruptive effect of online publishing technology as an opportunity, rather than a threat. They chose to fight. Few won.
Clark Gilbert, a former Harvard Business School professor who did his doctoral studies focusing on disruption in the US’s newspaper industry, examined approximately 100 newspaper businesses with a daily circulation of at least 100 000 copies. Gilbert assessed the patterns of success and failure exhibited by these newspapers in deploying online publishing technology as a business. His findings, surprisingly, revealed that a very tiny proportion of the newspapers successfully harnessed online publishing into a profitable business.
One key differentiator separated the winning newspapers from the losers — winners established a completely separate and independent business unit for online publishing. Taught by Clayton Christensen, one of the most thorough and highly respected practitioners of the management research craft, Gilbert would go on to unearth the causal mechanism, explaining why detaching online publishing from the mainstream newspaper organisational structure brought success.
Researchers of substance do not confuse correlation with causation. Separating online publishing from the mother newspaper is not what caused success — it just happened to be a trait shared by the newspapers that were successful in harnessing online disruption. To understand the causal mechanism behind the successful adoption of online publishing, we shall tease out and contrast the strategic responses of the newspapers that failed with those that succeeded in leveraging on disruption.
Principally, unsuccessful newspapers were guilty of what is called cramming — they simply superimposed the old newspaper business model onto the new technology.
Put graphically, if online technology were a David and traditional newspaper publishing were a Goliath, newspaper executives were trying to make David fight using Goliath’s munitions and methods. The traditional newspaper business model is anchored on selling advertising space as a major source of revenue. It is this business model that executives tried to shoehorn into online publishing. This model failed dismally and newspapers missed the potentially lucrative profits carried by the disruptive wave. The point that was missed was that disruptive innovation consists of both a technological enabler and an appropriate business model. Adopting a disruptive technology without a proper business model leads to frustratingly drab business results.
In sharp contradistinction, newspapers that succeeded in turning online publishing into thriving revenue-generators established new business models to harness the new technological enabler. By cutting the ‘umbilical cord’ of the new online business from the parent newspaper, discerning strategists managed to shield the fledgling business from the cultural influences of the parent.
The New York Times (NYT) is one of the few newspapers that successfully launched a profitable online business. Instead of cramming the traditional advertising model into their online publication, NYT used targeted advertising. NYT required online readers to first register by first filling in a simple online questionnaire that collected basic data such as age, gender, email address, just to mention a few. Leveraging on basic demographic and sociographic data, NYT could provide potential advertisers with targeted customers from its database.
For instance, if an advertiser is targeting young females interested in sports, NYT can peruse its database, permute the relevant customer segmentation data to support targeted marketing communications. Other newspapers came up with specialised online notice boards such as job vacancies. By staffing the new online business with executives who thought outside the confines of the old established business, newspapers such as NYT were able to successfully harness the disruptive online technology.
There are two salient lessons that incumbents can glean to successfully harness disruptive technologies.
Separate business units
First, an incumbent should establish an independent business unit to harness a potentially disruptive technology. This allows an incumbent to continue serving high value segments while positioning strategically to profit from the eventual improvements in profit margins when the disruptive technology finds its way upmarket. This solves the business dilemma associated with disruptive innovations and technologies — because if an incumbent decides to abandon low margin market segments, they risk being exposed the spectre of the new entrant eventually driving them out of the entire market.
To solve this business conundrum, smart companies self-disrupt. Metaphorically, self-disruption is deliberately nurturing a David who will in future kill you (business Goliath).
Self-disruption is the strategy IBM successfully employed in the past to survive disruptive innovations and technologies. Each time a new disruptive computer innovation emerged, IBM would establish a completely independent new business unit separated from its core business to adopt and develop the new disruption. That’s how IBM survived disruption first by the minicomputer and later the PC.
Apple Inc. employ self-disruption as a signature strategy — they develop innovations that eat into their established products. Apple’s iPad is effectively cannibalising its iMac personal computer (PC) business. It can also be argued that its iPhone is cannibalising the iPod.
New management thinking
There is a caveat to the suggestion that incumbents should separate their established business from the new disruptive venture. Successfully quarantining the new disruptive product from the parent business’s normative pressures is primarily intellectual. A completely new way of thinking and running the new business underwrites the successful harnessing of disruptive technologies by incumbents. Thus a new management staffed with talent either from outside the company or from internal talent mandated to manage the new venture using a culture and business model at odds with the parent’s, is a strategic human resources enabler.
The case of Econet’s EcoCash product illustrates the need for embracing new thinking when deploying a potentially disruptive innovation. EcoCash promotionals use banking language — allusion to deposits and withdrawals are referenced to.
Econet’s EcoCash product, with more than 1,2 million registered subscribers, makes it the ‘biggest bank’ on the basis of clientele base. It is my considered opinion that Econet’s EcoCash product would be more potent than it is now if it were run as an independent business unit employing a new business model. To a large extent, the EcoCash product suffers from the cramming challenge identified by Clark Gilbert in his doctoral studies. Fees charged for using EcoCash do not differ markedly from those levied by mainstream banks. Though EcoCash is built on a disruptive technological enabler, its business model is arguably not disruptive.
Zimbabwean incumbent firms seeking to harness emerging disruptive opportunities may fail to chart new profitable business growth paths if they try to stuff their current business models onto new disruptive technologies.
By Brett Chulu
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