firms approached the market being created by disruption as simply an exten
sion of the established market. After all, what is the difference between the low end of the airline market and the established market? Aren’t they simply two segments of the same market? We found that firms that started their thinking in this way approached market entry as a lateral move from their established market. Thus, rather than attempt entry like an entrepreneur with a clean slate, they became pre-occupied with how to leverage their existing assets in the new market. Rather than start out with the realities of the new market and work backwards to design a strategy appropriate for it, they started out with what they had in the established market and attempted to transfer it in the new market. As a result, they often imitated their disruptors’ successful business model and tried to out-compete them using their existing strengths.
By contrast, the successful firms were alert enough to appreciate that even though the new market appeared similar to the established market, this was nothing but an illusion. They therefore approached the new market like entrepreneurs by asking themselves: “If I were to enter this new market, what strategy should I adopt?” Rather than focus on defending their existing market, their goal was to attack the new market. And since we know from past research that new market entry almost always ends up in failure unless the attacker adopts an innovative business model, the successful established firms entered the new markets by adopting a radical new strategy.
arrival of Microsoft’s Xbox in May 2001, which effectively pushed Nintendo into third position.
The three-way battle focused the manufacturers on a continual and seem- ingly unending battle for technological advancement and superiority of hard- ware. Consoles had to have faster processing speeds and higher definition graphics. The games became more and more complex, requiring gamers to invest time learning how to play. An entire allied industry sprang up with websites and magazines that offered gamers tips on strategies to win as well as how to actually use the games controllers with their combinations of buttons and joysticks. Gamers themselves were seduced into immersing themselves ever deeper into these increasingly sophisticated fantasy worlds.
Tipped by industry analysts to withdraw altogether from the console mar- ketplace, Nintendo had other ideas. In 2002, it appointed Satoru Iwata as fourth President and CEO of Nintendo. He came to believe that the relent- less pursuit of technology by Sony and Microsoft was counterproductive—
customers were driven away and the market was shrinking because of the complexity of the games and the time required to learn and also to play them.
This “barrier to entry” was a big disincentive for novice gamers and an effec- tive deterrent for non-gamers to start playing. Even occasional gamers had stopped playing due to other priorities in their busy lives.
Rather than follow Sony and Microsoft, Iwata took a different tack with Nintendo.2 He recognized that there was a huge potential market of people who wanted to play simple, fun games for a few minutes at a time and poten
tially with family members and friends. These same people might currently be playing games on their PCs in their odd moments of free time but wouldn’t dream of buying a games console. Nintendo’s strategy was essentially to expand the market by developing consoles that would support simple, real- life games that could be learnt quickly and played by all members of the fam- ily including the very youngest and the very oldest.
Nintendo’s engineers decided they would neither re-create a console based on the popular DS nor follow the joystick/button consoles of Sony and Microsoft. The developers looked beyond technical specifications, creating instead a console that was quiet, used less electricity, and that enabled house- holds to play every Nintendo game ever made, rather than having to keep old consoles. Pricing was key, capped at approximately $200. What resulted from the ‘back-to-scratch’ approach was the Nintendo Wii. Launched in November 2006, the Wii targeted working women with families.3 Nintendo emphasized the Wii’s family-friendly advantages: encouraging family members of all ages to play together, helping children (and adults) get physical through the body movements allowed by the motion sensors. The women who got to try out the Wii at a marketing event often left saying they wanted one for themselves, as much to play with their girlfriends as with their families (Nuttal, 2006)!
2 “Playing a Different Game.” The Economist (print edition), October 26, 2006.
3 N.a. 2008. “Survival Through Innovation.” Strategic Direction, 24 (1): pp. 21–24.
The strategy seems to have paid off. By 2007, the launch of the Wii led to household penetration of consoles rising for the first time in twenty-five years. The console outsold the PS3 three to one in the Japanese market and five to one in the United States. It has also been crowned the fastest selling console in history in the United Kingdom after one million units were sold in just eight months (Fildes, 2007). Nintendo, the dominant giant brought to its knees, has now re-emerged as a dominant player in the videogames industry.
This example highlights the importance of attacking a competitor by emphasizing a different value proposition. Doing so attracts a different cus- tomer, something that delays retaliation. Sony did this against Nintendo in the mid-1990s with the launch of the Playstation that targeted young adults rather than teenagers. Nintendo is now doing it against Sony (and Microsoft) with the launch of the Wii, targeting mothers and families rather than young adults. But to be able to do this requires that the established firm does not look at the new market as just an extension of the established market and treat it, like an entrepreneur, as a brand new market.
Attitudes Matter
One of the questions on our questionnaire survey asked the firms to specify the reasons why they decided to enter the new market. The majority of those firms classified as “successful” replied that they did it so as to defend their existing market, but also to attract new customers. By contrast, more than 60 percent of those firms classified as “unsuccessful” replied that they decided to enter the new market primarily as a defensive move so as to prevent the loss of existing customers. Thus, an important determinant of success appears to be the attitude with which the new market was approached.
These survey results found strong support in our field research. Consider, for example, the following two quotes from senior managers at two US firms.
The first is VP at a major office supplies firm, whose company was rated as very successful in adopting internet distribution (Markides and Charitou, 2004: 28):
We got onto the Internet long before anybody else knew what the Internet was. In fact, our biggest problem for the first two years was persuading our customers to use it! But we persisted because I knew in my bones that the Internet was it. This new technology was going to be the future. It would be the medium that would allow us to do great new things.
The second quote is from the CEO of a major bookseller whose company was rated as unsuccessful in adopting online distribution of books (Markides and Charitou, 2004: 28):
We were late in implementing [it] but not in evaluating it. And our evaluation was that this thing did not make sense. Yet, every time I tried to explain our reasons why we wouldn’t do it to Wall Street, my share price went down! Even
in 1997 when online distribution of books went from zero to 6%, superstores increased their share from 10% to 22%—yet our stock price dropped by 40%.
So in the end, we decided we had to do something.
Thus, it appears that unsuccessful firms look at the invading disruptive busi- ness model more as a threat to their established business than as an opportu- nity to exploit (Gilbert, 2003). As a result, they approach it with a defensive attitude and they set about defending against it. More often than not, they do so by adopting the same disruptive business model (usually in a separate unit) and then use it to compete with the disruptors head-on. They believe that this will be enough to make them successful because they assume that they will be better than the disruptors. What gives them confidence that they can beat the disruptors is the fact that they are much bigger than them (i.e., have more resources) plus the fact that they already have certain skills and competences (from their main market) that they can leverage in the new market and so start out with an advantage over the disruptors. As already pointed out, the strategy of being “better” rarely succeeds when it comes to new market entry.
Not only do established firms make the mistake of utilizing the wrong busi- ness model, but they also bring the wrong attitudes into the battle. Their goal and emphasis is to defend and protect their main market rather than exploit the new market that the disruptors have created. Inevitably, this defensive attitude leads them to short-term-oriented actions and behaviors that compromise the viabil- ity of their chosen strategy. More often than not, their response ends in failure.
In short, the companies that fail in their response make four fundamental mistakes:
• They assume that the new market created by the disruption is similar to their core market.
• They adopt the same business model as the disruptors (usually in a sepa- rate unit) and compete head-on with them, hoping to win by being better than them.
• They view the disruptive business model as a threat to their market, an attitude that leads them into a defensive mindset.
• They display short-term behaviors and limited commitment to the new market, probably as a direct result of their defensive mindset.
By contrast, the firms that tend to succeed in their forays into the new mar- kets accept that the disruption is damaging to their main market but they also recognize that the new business model has created a new market adjacent to their main market. They therefore attack the new market in an effort to attract new customers.
In short, the companies that succeed in their entry do four things right:
• They approach the new market created by the disruption as fundamen- tally different market from their core market.
• They enter the new market by adopting a business model that is funda- mentally different from the one that the disruptors are using.
• They view the disruption not only as a threat to their existing business but also as an opportunity to develop a brand new market.
• They approach the new market with commitment and longterm orientation.
Summary and Discussion
A basic insight that emerged from our study is that established players cannot rely on adopting the winning business model of their disruptors to exploit the new markets created by disruptive innovation. Instead, they need to develop a business model which is different from the one they currently employ in the established market but also different from the one that disruptors use. Doing so does not guarantee success but it does increase the probability that they will successfully attack the disruptors in the markets that they created.
The following quote about Microsoft’s attempts to exploit the huge market that Google’s disruption has created captures the essence of this finding well:4
For several years now, Microsoft has spent hundreds of millions (and likely close to billions) trying to out-do Google at search. Now, the folks in Redmond have something new up their pale blue Oxfords. Microsoft is debuting a search engine, code-named “Kumo.” Chief executive Steve Ballmer is likely to show it off at a conference next week. If it’s anything like Google, no one will care.
There are lots of good-enough search alternatives out there. Yahoo! ranks second with 20% market share. Little Ask.com is still eeking out a meagre 3.8%
share. Would-be Google killers have come and gone . . . These rivals’ strategies seem to be: Search is a big market so all we need is just a sliver to make a nice business. So they aim to be just a little different . . . To unseat Google, Microsoft has to be sly. Building a “more robust search experience” won’t do. Microsoft will have to shock and awe. This might be about rethinking where we do our searching or how we come up with search queries . . .
The idea sounds simple but in reality, established firms face formidable obstacles in carrying it out. First, there is the issue of actually coming up with an innovative business model capable of disrupting the disruptors—
Microsoft’s inability to do so in the search business should be an indication of how difficult such a task is. But even when an established company succeeds in designing an innovative strategy, serious problems with implementation inevitably surface. Prominent among them is the fact that success in the new market often requires sacrifices in the main market of the established firm.
For example, if Sony decides to go after the new market that the Nintento Wii
4 Victoria Barret, “Disrupting the Disruptor.” Forbes.com, May 20, 2009. Retrieved November 2014 at: <http://www.forbes.com/2009/05/20/google-microsoft-search-intelligent-technology-bar- ret.html>.
has created, what happens to Sony’s Playstation market and the value propo- sition that Sony is promoting in that market (i.e., more complex and graphic games)? Similarly, if BA decides to go into the low-cost market aggressively, what would be the effect on its brand image and the margins in its established high-margin market? It is conflicts like these that undermine a firm’s ability to compete in the new markets aggressively and forces the managers of the established business to abandon any attempts to exploit the new markets after just a few years.
Obviously these organizational challenges are not insurmountable and this chapter has suggested that the firm can make the task more manageable by housing the new business model in a separate unit and then putting in place integrating mechanisms to exploit any synergies between the unit and the parent. But even then, managing two conflicting business models at the same time requires strong leadership, ambidextrous mindsets, and the ability to continuously juggle ever-changing balances between conflicting demands and priorities. Recent work by O’Reilly and Tushman (2011) suggests that the task is quite formidable and the probability of failure high.
This chapter has examined only one possible strategy that established firms can use to exploit the market created by business model innovation—and that is the strategy of entering the new market using a different business model.
We don’t want to give the impression that this is the only way to exploit the new market. Under certain circumstances, the established firm is better off using its existing business model to exploit the new market. In fact, there were twenty-six firms in our questionnaire sample that chose this strategy.
Of those, seventeen were successful and nine failed. What explained the different fortunes of these firms?
We found that a key variable determining the outcome was the relative suc- cess that firms had in achieving two things simultaneously: (a) matching the disruptors in whatever value proposition they were offering; and (b) improv- ing their own value proposition to such an extent that consumers stopped considering the disruptor’s offering as “good enough.” Companies that suc- ceeded in doing these two things were able to make the following claim to customers: “I am good enough in whatever the disruptors are offering and I am far superior to them in my own value proposition.”
Consider for example the well-known case of Swatch. In the early 1980s, the Swiss watch manufacturers responded to Seiko’s low-cost disruption by introducing the Swatch. This proved to be a tremendous success and allowed the Swiss to recapture lost market share. What were the ingredients of the successful Swatch strategy? The new watch did not pretend to be better than Seiko (or Timex) in price or features. Instead, it emphasized different prod- uct attributes—style and variety—where it could claim that it was superior to its competitors. But it did not ignore the requirement to achieve prox- imity in what the disruptors were emphasizing (i.e., price). By eliminating many product attributes that they thought were unnecessary, by automating manufacturing, and by reducing the number of components that went into
the watch (thus reducing complexity and materials used), they were able to reduce the cost of making the Swatch and thus its price. This allowed the Swiss to make the claim that: “We are good enough in price and superior in style and design.” By being good enough in price, they achieved proximity in what the disruptors were offering; and by being superior in style and design, they achieved competitive advantage over their disruptors. In addition, by utilizing a business model that delivered low cost and differentiation at the same time, they were able to delay any response from the disruptors. Since its launch in 1983, Swatch has become the world’s most popular time piece, with more than 100 million sold in over thirty countries.
For this strategy to work, the established firms must not only match the disruptors in their value proposition (such as price) but must also find ways to improve their own value proposition in a radical way. In our interviews with sample firms we explored in depth how they could do this. We identified two possible strategies.
The first was to shift the basis of competition altogether away from their original value proposition (which was targeted by the disruptors) onto another product benefit. This is what Swatch did to perfection. The second was by focusing on the product’s existing value proposition and improving that in a radical way. By doing this, they kept raising the bar on what was good enough and thus made life difficult for disruptors.
Consider, for example, how Gillette responded to Bic’s low-cost disruption.
After seeing a quarter of the market being won over by Bic (in less than ten years), Gillette set about changing people’s perceptions on what to expect from their razor. Through a series of innovative product introductions (such as the Sensor, the Mach 3, and the Fusion), Gillette redefined what “performance”
meant in this market. They also innovated in the disposable space—for exam- ple, in 1994 they introduced the Custom Plus line that was a disposable with a lubricating strip. In late 2002, they announced the introduction of a new line of disposable razors with proprietary technology (rumored to be a disposable version of a triple-blade razor, its premier product in refillables.) By successfully raising the bar in this market, Gillette managed to convince consumers that they should expect more from their razors and that Bic was not really “good enough” for them. In the process, they succeeded in maintaining their leader- ship position in refillables while capturing a 45-percent market share in dis- posables. The Swatch and Gillette examples highlight a simple point: the more successful the incumbents are in changing consumers’ expectations of what is
“good enough” in their markets, the less successful would the disruptors be in disrupting them.
Whether companies choose to exploit the markets created by disruption through their existing business model or through a different business model depends on their specific circumstances. But the ingredients of success for whatever strategy they choose are the same: innovation (in developing inno- vative business models to face up to the disruptors’ own innovative busi- ness models) and leadership (in managing the conflicting demands that the