I have attended numerous investment pitches in my career and one of the most overused word used by entrepreneurs is “disruption”. Everyone claims that their idea disrupts the market status quo and hence automatically qualifies to make a lot of money for its backers. Isn’t disruption an overblown prerequisite for a blockbuster entrepreneurial success?
Disruptive innovation is a term of art coined by Clayton Christensen. He describes it as follows:
A process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.
The following chart captures the essence of the idea of disruption quite succinctly. A graduating disruptive technology infiltrates the bastion held by an incumbent technology at the bottom of the “value chart”, at which time the incumbent fails to take notice of it. However, unless the incumbent technology reacts to counter the disruption, the disruptive technology betters itself over a period to climb up above the prevailing technology’s best application.
Obviously, such a disruptive technology can capture all the value so far cornered by the incumbent technology and the backers of the new technology are rewarded with enormous returns! But, do we need a business to be disruptive to achieve spectacular entrepreneurial success?
I think not! There are so many glittering examples of entrepreneurial success based on such disruption (Microsoft, Amazon, AirB&B to quote a few) that we mistakenly take it to be an absolute prerequisite for a winning entrepreneurial play. But, in reality, what one needs is to have a positive value-price quotient. If the differential value you offer is higher than the price differential you demand, you are in business! I view value as being three dimensional – Quality, Ease (of use or access), and the Breadth (of customer experience offered). We will talk about these three dimensions at some other time & place. But, let us talk why a positive value-price quotient is more critical to a business success than having a disruptive idea …
A positive value-price quotient: [Value(m) – V] – [Price(m) – P] > 0
where, Value(m) & Price(m) refer to value and price of a significant (not necessarily the best) market alternative and V & P refer to value and price offered by you.
Market disruption allows you to (eventually) offer value (“V”) better than the value offered by the best alternative (“V(b)”) in the market and hence, gain the most. But, you can build a successful business without beating the best.
Firstly, you can win smaller battles by having a positive value-price quotient compared to a significant alternative (rather than the best) and begin gaining the market momentum. Secondly, value is just one part of the equation. You may also win (at least temporarily) by offering lower prices instead of offering a higher value! Numerous entrepreneurs succeed in commodity businesses, where there is no incremental value to offer, by focusing on the price. Volume plays a big role in getting the price low enough to generate a positive value-price quotient. Sourcing from a low cost economy or building competitive barriers too can give you a price advantage. And, it’s not just the commodity business owners who use pricing to get to a positive value-price quotient. Even, some of the trailblazing disruptive startups like Uber and Amazon eat up large losses to make a price play till such time that value play is clearly evident to their customers!
So, next time people talk about being the harbinger of the disruption, ask them how their business propositions create a positive value-price quotient – answer to that question is even more fundamental to an entrepreneurial success than being disruptive!