The man who introduced the idea of disruption, Harvard Business School professor Clayton Christensen, passed away on January 23. He was an innovative thinker, an insightful analyst, and an outstanding teacher whose ideas continue to have tremendous global influence.
But what is disruption and what should business leaders do about it? Disruption happens when established companies ignore new technologies that gobble up customers at the low end of a market until it is too late to stop the disrupters from moving upmarket and winning the incuments' best customers.
Disruption is not only a threat for large, slower-moving companies. It can also be a bigger threat to small and medium-sized firms because they are likely to have less capital to shield them from losing customers if they are the targets of disruption.
Your best defense against disruption is to anticipate the future and cannibalize your core business faster than your rivals. Read on for a case study of how Netflix followed this playbook, and how you can do the same in your business.
How Netflix Disrupted Itself
Netflix encouraged new and existing DVD-by-mail customers to sign up for a disruptive technology -- online streaming. As CEO Reed Hastings said in Netflix's 2007 annual report, "We know [DVD-by-mail] will be a source of growth for many years, [and] we know that long term our subscribers will increasingly want the immediate response of online video instantly streamed..."
Netflix's move to online streaming was not glitch-free. In September 2011, Netflix announced it would force customers to use its DVD-by-mail service through a separate subsidiary, Qwikster, while making them purchase online streaming through Netflix. The move also included a 60% price increase and quickly led 800,000 subscribers to bolt -- contributing to a 25% plunge in its stock. Netflix reversed the policy a few weeks later.
By Christensen's definition -- a technology serving different customers, offering a different value proposition, with different partners -- online streaming was disruptive. Here's why:
- Different customer set. When Netflix started offering online streaming -- the year Apple introduced the iPhone -- people could not watch DVDs on their smartphones. Thus many of the initial consumers of Netflix's online streaming service -- via personal computers, TVs, TiVo, and gaming consoles -- were different from the ones that used its DVD-by-mail service, because in 2007 the image quality of the online streaming experience was not as high as that of DVDs, according to Quartz.
- Different value proposition. Instead of ordering a DVD, waiting for it to arrive, walking to your mailbox, and putting it into your DVD player, online streaming enabled consumers to watch movies on their iPhones within a minute or two by swiping its screen a few times without having to get off the couch. This was nearly as big of a value leap as DVD-by-mail was for Blockbuster customers.
- Different partners. The partners needed for DVD-by-mail were DVD wholesalers and the postal service - whereas online streaming demanded different partners like the content creators who came up with new shows like Netflix original House of Cards and broadband service providers like Comcast and Verizon.
Netflix's self-disruption has been a colossal success. Since 2007, Netflix's revenues have increased 1,567 percent from $1.2 billion to over $20 billion. While the number of DVD-by-Mail subscribers has declined by 64 percent from 7.5 million in 2007 to 2.7 million in April 2019, Netflix boasted a whopping 167 million paid global subscribers to its online streaming service at the end of 2019, according to its most recent financial report.
How to Disrupt Yourself Ahead of the Competition
Here are seven steps you should take to cannibalize your business ahead of your rivals:
- Maintain a healthy paranoia
- Form a team of independent thinkers
- Charge the team with tracking new technologies, different customers, and upstart rivals
- Envision your next product
- Build, partner, or acquire to get the product ready to sell
- Manage the transition from the old to the new product
Disruption remains a powerful force that could either sink your company or propel it to the next level. These seven steps can turn disruption from a headwind to a tailwind for your business.