Disruption Theory

New startups have four strategies for attacking existing incumbents: using the classic bottoms-up disruption strategy, attacking a specific cross-section, just building a better product, and the vertical integration attack strategy.

The CLASSIC DISRUPTION STRATEGY

Big companies have obligations to the stock market and can not perform actions that disrupt it. Companies primarily focus on their high margin customers and will not go downstream as this upsets them financials. They are also unlikely to take any action that cannibalizes their existing financials. Furthermore, they are slow to act in small market or markets that do not exist because they will not help provide meaningful growth in the short-term.

Consequently, disruption strategy dictates finding a niche of the competitor’s customers and building tools specific for it. This niche needs to be a segment that the competitor doesn’t really care about. The disruptor’s product should be better than the incumbents product in a certain quality but can be inferior to the competitor in numerous other metrics as long as the small niche likes it. This small niche helps the disruptor reach short term targets and gain expertise in this new differentiated quality. Eventually, the entire market grows to desire this quality and the disruptor maintains its advantage in this differentiated quality and catches up to the competitor in other necessary qualities and wins the market.

ATTACKING A SPECIFIC CROSS-SECTION

This strategy is similar to the classic disruption strategy in that it initially focuses on an initial segment. However, this segment is usually a specific vertical of the market, rather than focusing on a low margin part of the market. For instance, many companies such as Uber and Airbnb have carved out specific subsections of Craigslist. First, by focusing on a specific subsection, the user interface and clarity of message to the customers is much clearer. Furthermore, these startups can build tools and communities that are very specific for a niche. It would be very difficult for Craigslist to build tools and communities for every single category of its listings.

ATTACKING A MARKET HEAD ON

A new startup may think it can be more formidable and attack a competitor head on. Structural inefficiencies, low R&D budgets, and poor management may make the competitors susceptible to an attack. Furthermore, the company may not have the required technology for the next generation of technology such as self-driving. The key difference in this case is that the company will actively try to compete but in the previous cases the company decides not to compete.

VERTICAL INTEGRATION DISRUPTION STRATEGY

As mentioned in a previous article, the disruptor can compete on a different layer and than vertically integrate to take out the competition.