One might wonder why the established players cannot rely on adopting the disruptors’ winning business model or cannot win by simply being better than them in the new markets. After all, they are not just adopting any busi- ness model—they are embracing the business model that made the disruptors a success in the first place. On top of this, they bring into the battle distinct advantages over the disruptors: resources, knowledge, and assets from the established market. Why isn’t this enough?
The answer to this becomes obvious when we consider the academic evi- dence on new market entry (e.g., Geroski, 1995). One of the most robust
findings from academic studies on new market entry is that most new entrants fail. For example, several studies of market entry in the United States, Canada, and the United Kingdom have reported that about 5–10 per- cent of new entrants disappear within a year of entry, 20–30 percent disap- pear within two years and some 50 percent disappear within five years of entry (Geroski, 1991). These results are consistent with a study by Dunne, Roberts, and Samuelson (1989), which found that 64 percent of their sample of new US firms had exited within five years of entry while a full 79 percent had ceased trading ten years after commencing operations. The failure rate of new entrants is so high that economists have come up with the “revolv- ing door” analogy to describe the entry process: new entrants are like people going through a revolving door, exiting the room as soon as they enter it (Audretsch, 1995).
Another robust finding on new market entry is that most entrants imitate the incumbents when they enter. Imitative entry has been estimated to be 90 percent of all entry, with the remaining 10 percent being taken over by entrants that utilize innovative strategies (Geroski, 1991). Yet another find- ing is that it takes between ten and twelve years for the profitability (ROI) of the entrant to be equal to that of the mature business, a fact that has seri- ous implications on how patient new entrants ought to be before giving up (Biggadike, 1979).
The high failure rate of new entrants should not be a surprise. When they enter a new market, entrants are in effect attacking the established players there. By virtue of being in the market before the entrants, these established firms enjoy first-mover advantages, such as economies of scale, knowledge of the market, control of scarce assets, and consumer inertia. In addition, the mar- ket under attack is their home, which implies that incumbents will fight to the death before giving it up. This suggests that unless the entrants have some seri- ous advantages over the established firms (such as superior and patented tech- nology) or unless they utilize an innovative strategy to attack, the established firms will most likely win out. Since we know that 90 percent of all entrants use imitative entry to attack, it should not come as a surprise to know that most of them fail, and they do so fairly regularly and fairly quickly (Geroski, 1991).
Looking at market entry from the entrants’ perspective, these same facts carry a serious implication: the probability of success in attacking established competitors through market entry is increased if the entrant adopts an inno- vative strategy, one that avoids imitation and instead disrupts the established players. As proposed by Porter (1985): “The cardinal rule in offensive strategy is not to attack head-on with an imitative strategy, regardless of the challen- ger’s resources or staying power.” Adopting such strategy does not guarantee success but it improves the odds of success for the entrants.
Consider, now, the new markets created by disruptive innovation. Who are the incumbents in these markets who enjoy the first-mover advantages? They are none other than the disruptors themselves. And who are the new entrants in these markets? They are the firms that are currently incumbents in the
established market. By entering the new markets on the back of the disrup- tors’ business model, the established players are trying to beat the disruptors at their own game by trying to be better than them. As the academic research on market entry suggests, this is not enough. To succeed, they need to enter the new markets using a different business model—just like the disruptors did when they entered the established market in the first place.
An Entrepreneurship Mindset is Important
The need to not imitate the disruptor’s business model should be obvious enough. But our research has also uncovered another less obvious key to success: the need to avoid wholesale “exporting” of the established business model and the established firm’s existing competences into the new market.
While the desire to transfer the firm’s strengths and competences into the new market is understandable, our results suggest that this should be under- taken with great care and in moderation.
Table 7.4 compares the successful firms to the unsuccessful ones on a spe- cific issue—how different is the product offering in the new market compared to the product offering in the established market? The one consistent result that emerges from this comparison is that compared to their established business, successful firms develop a fundamentally different product with a different value proposition that targets a different customer base in the new market. By contrast, unsuccessful firms try to “export” their existing prod- ucts and services into the new market.
The difference in approach toward the new market was obviously impor- tant but what was the source of this difference? Our field research unearthed a possible explanation, one that highlights the importance of developing an entrepreneurial mindset within the established firm. Many of the unsuccessful
Table 7.4 How different is the new product/service to the established one?
Product Characteristic Successful Firms (10) Unsuccessful Firms (32)
Targeted customer segment 5.2 3.5
Level of personal service provided 4.8 2.9
Price 5.4 3.1
Overall product/service characteristics 4.6 3.0
Quality 4.8 3.9
Expressed value proposition 5.2 3.6
Advertising message 5.1 4.2
(The question asked was: “Compare the products or services you offer in the new business with those you offer in your established business.” Answers were provided on the following scale: 1 = Same; 2 = Similar; 3 = Somewhat similar; 4 = Somewhat different; 5 = Different; and 6 = Very different.)
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.