Disruption from the top and adjacent competition

Having read Jerry Neumanns excellent piece on the cargo-cult that “disruption” has become, I was wondering about what Jerry seemingly missed, and a lot of critics and defendants of capital-D Disruption seem to neglect or disavow: That disruption very seldomly happens from the bottom of a market.

To illustrate what I mean let’s take Jerry’s example of Intel’s market entry as a starting point:

Intel, after all, did not enter the microprocessor market by intentionally introducing a cheaper general purpose computer, they entered it by introducing a much more expensive slide rule…the 4004 was developed to power electronic calculators. The market for electronic calculators was small, allowing Intel the room to build expertise in CPUs, but Intel’s entry can’t be described by Christensen’s attack from below process unless you take into account facts not then in evidence: that CPUs would be used to build general purpose computers.

This is a strategy that we see implemented time and time again, and it’s staggering that it doesn’t receive more attention. I’ve taken to call this strategy »take rich people’s money to build your business.« And it often works. Jerry again:

Finding a foothold market for a new technology gave Intel the time and space to explore other potential markets for the technology, and even though the strategy itself was not disruption, Intel was successful.

To attack and change a well-developed market, your business needs time and experience to start competing in the market. Oftentimes this can be found in the relatively remote confines of adjacent market that incumbents don’t even realize are touching upon their core businesses until it’s too late.

Tesla comes to mind in this regard. Often claimed not to fall within the Disruption paradigm, the effects the firm has on sales numbers of other higher-end car manufacturers is staggering. True, this is not canonical disruption in that it serves novel user needs at a lower cost. It serves novel user needs at a significant premium. Nonetheless, that technology trickles down, and already changes the face of the auto industry to the point of classic big auto manufacturers trying to either partner with Tesla or cargo-cult what they perceive to be Tesla’s secret sauce. 1 All the while Mr. Musk made Tesla’s strategy plenty clear, giving a playbook for this “disruption from the top”:

Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
Don’t tell anyone.

The adjacent component of Tesla’s strategy is the secondary use of the vehicle tech, namely the batteries. With the Power Wall (to complement SolarCity’s products) a notional car manufacturer suddenly walked into the market of energy firms and changed the rules. This is adjacent competition in action.

Another example is the case of the Nest Smart Thermostat. Often, industry analysts purely focus on device sales of the product, missing a significant revenue stream that Nest has uncovered adapting their product to adjacent markets. What did they do? They started offering Demand Response services to local utilities companies, contracting out what in the industry is called Negawatts, reducing electricity consumption during times of peak demand, and filled those contracts with their Rush Hour Rewards program, into which customers served by participating utilities can opt in. In essence, Nest then reduces the energy consumption of a customer’s AC during peak load, in turn helping stabilize the grid and reduce the need for utilities to fire up back-up plants.

So your fancy gizmo of a thermostat suddenly becomes a crucial instrument in energy policy, something that Power Companies have been trying to implement for ages, albeit unsuccessfully.

And while Jerry describes Disruption as a warning to the managers of incumbents, disruption and adjacent competition can serve as both, a warning to incumbents and a potential strategy for new entrants.

  1. VW just announced their intent to build out their own battery production facility, in essence viewing Tesla’s ”Gigafactory” as the cornerstone of that company’s relative success, neglecting the infrastructure buildout, for one.