Following my interview with Clayton Christensen in December 2015 about his evolving thinking on disruptive innovation, I met recently with John Hagel, Director of
The Center for the Edge has been conducting a series of case studies on Patterns of Disruption, which include (1) Expanding market reach; (2) Converging products and (3) Distributed product development. Deloitte’s thesis is that disruption doesn't just happen at random. History shows that it’s possible to identify specific patterns of disruption—disruptive strategies that, when combined with certain marketplace trends, can topple industry incumbents.
An Outcome-Based Definition Of “Disruption”
Steve Denning: I see you have gotten very interested in the topic of disruption.
John Hagel: Yes, very interested. We have some reservations about the term “disruption,” which is one of the most overused terms in business. The focus that we have taken is first to have a relatively high threshold for something to be called disruption. The way we have approached it is this: for it to be a true disruption, it has to unseat the leading incumbents in a particular market or industry. It’s not just a challenge. It’s not just adding pressure. It has to be capable unseating the leaders in the industry.
Denning: Your approach seems to have some differences from Clayton Christensen’s approach, starting with the definition of the term, “disruption.” So it doesn’t have come from below, as Clayton suggests for “disruptive innovation”?
Hagel: No. That’s the interesting thing. It differs a bit from some theories of disruption, which focus more on the specific approach needed to achieve the outcome. Our focus is on the outcome. At the end of the day, did it unseat the incumbents? If it did, it meets our criterion.
Denning: So you would see Uber as a disrupter of the taxi companies?
Hagel: Yes. Most of the discussions around disruption focus on what we would describe as universal disruptions that play out across all business and change the way business is done. Or they are one-off stories, like a particular attacker came into a particular market and caused disruption. It’s a great story but it’s just one story.
What we have focused on is whether there are certain types of disruption that will hit more than one market, but not all markets. So what would that type of disruption be? And more importantly, what are the characteristics of markets that would make them vulnerable to that particular type of disruption?
What we find is that executives tend to be overwhelmed when they get to the subject of disruption. They are worried that disruption could come from anywhere and it could be anything. As a result, they don’t know what to do. Our approach is to say, “Without excluding other possibilities, here are two or three possible patterns of disruption that your market is particularly vulnerable to. So you might want to figure out and anticipate what you are going to do to deal with that, rather than simply waiting for whatever happens.”
Nine Patterns Of Disruption
Denning: How many overall patterns are you seeing?
Hagel: Potentially it’s infinite. After six months of research, we have identified nine patterns that meet our criteria. We are open to the possibility that there are more patterns. But we came up with at least nine.
Denning: If you take Clay Christensen’s theory of “disruptive innovation from the bottom,” is that one of your patterns?
Hagel: Not really. His work is more focused on the entry approach which could be pursued in many, if not all, of our patterns of disruption. We are more focused on: what is it about the way of doing business that is so disruptive relative to existing players? And what are the characteristics of markets that would be vulnerable to that particular pattern?
Unlocking Assets
Hagel: One of the patterns of disruption that fits the most well-known stories today is the notion of that of unlocking adjacent assets and making them available to a particular market or industry. So you have Airbnb and Uber: they took assets that weren’t previously considered part of the market or industry and mobilized them in a much more leveraged way so as to disrupt the incumbents. That would be one example of a pattern of disruption. It doesn’t have to do with coming from below, or from above. You could argue that Uber came in from above, not from below, by providing a higher quality of service.
Denning: Like Whole Foods, which came in from above?
Hagel: Yes, exactly.
Denning: What’s the reaction to your work?
Hagel: It’s gotten a lot of interest because executives are often overwhelmed by the phenomenon of disruption. We find that they want more ability to focus on the things that they are most vulnerable to. Again, it’s not to exclude the more universal patterns of disruption that you have written about in terms of the Creative Economy and we have written about in terms of the The Big Shift. These are fundamental changes in the way we do business, driven by the way the broader global economy is evolving.
Denning: Continuing with obsolete management practices is a pretty quick way to get yourself disrupted.
Hagel. Exactly. Focusing on shareholder value as reflected in the current stock price is a really good way to get yourself disrupted.
Turning Products Into Platforms
Denning: What are some of the other patterns?
Hagel. Another key pattern is turning products into platforms. This means taking something that was previously a standalone product and creating a platform with shared infrastructure and base level of functionality, and inviting people to innovate and create with extensions and adaptions on top of that platform.
Denning: Like
Hagel: Yes, that would be another example.
Denning: Do executives have to master nine patterns? Is that also overwhelming?
Two Broad Categories
Hagel: We have ended up categorizing them into two broad categories. Some of the patterns fit into what we call, “harness network effects.” A number of the patterns have to do with creating network effects that grow so quickly they become hard to cope with, if you are not already situated in the marketplace.
Another set of the patterns focus more on fundamentally transforming the value-cost equation, but without network effects. We think that the patterns with network effects are ultimately going to be much more sustained in their impact than merely redefining the economics of value and cost.
The Case Of The Health Sector
Denning: Could you give me an example? Can you say: while there are these nine patterns, in your sector, you should be really worrying about these two?
Hagel: Right now, we are focusing on: what are the characteristics of each market, which make them particularly vulnerable to these patterns. For instance, if you take health care, that industry or market is very vulnerable to the pattern involving expanded market reach. This is the notion of creating platforms that can connect fragmented players with diverse customer needs, and tend to undermine the notion of “one size fits all” mass-market approach to the marketplace.
We would say health care is interesting as a central target for that pattern. The whole focus of health care over the past several decades has been to get bigger and more uniform in the way that it deals with disease and patients. Our sense is that this is creating opportunities for much more specialized expertise and capability, and potentially reverse the trend in which doctors are becoming part of larger and larger institutions. This will create opportunities to go back to much more focused and specialized medical practices.
Denning: What about the idea “of patients becoming their own doctors” and acquiring understanding of the issues and in a sense providing their own health care? Is that something on the horizon as an opportunity and a disrupting force?
Hagel: Yes. In fact, Robin Farmanfarmaian just wrote a book entitled, The Patient as CEO: How Technology Empowers the Healthcare Consumer (2015). But I would characterize that as one of the universal patterns of disruption. One of the impacts of The Big Shift is that customers are gaining more and more power. They have more information, more choice and more ability to move from one option to another. Every market and industry is going to have to deal with that challenge. It gets to your point about the need to focus on the customer and viewing the customer as the boss.
Denning: So you have been working on this for six months? Is this is a kind of a business line for Deloitte?
Hagel: We want to develop the research that we do into services we deliver to clients. At a minimal level, the notion of being able to analyze the market or industry, given the particular characteristics, this is what you should be thinking about.
One of the challenges is appropriately defining the market or industry. Conventional definitions may not be as useful as more refined definitions. For instance, in health care: is it providers of routine kinds of procedures? Or is it providers of diagnostics? They may be different kinds of markets and therefore vulnerable to different kinds of patterns.
So having a service that can look at a particular market or industry can be valuable. We can say to an executive, “This is where you are positioned today and here are the two or three patterns that you should be most worried about.” That in itself can be valuable. Our next wave of research will be: what are the most effective responses to each of these patterns?
Driverless Cars
Denning: I really liked your work on the coming disruption in driverless cars, and the analogy to personal computers, where one firm will emerge as providing a superior platform for all driverless cars and then the game will be over.
Hagel: That has to do with the risk and danger of pursuing conventional views of a market or industry. If you just think about driverless cars as the auto industry, you are never going to see this coming. By contrast, if you think about it as mobility, then you can see a whole bunch of other players.
Denning: Any ideas on who will be the winner?
Hagel: What I see are white spaces that no company is effectively targeting. These white space are open to be occupied and whoever gets there will be able to capture enormous value.
Specific Studies
Denning: Which studies have been completed?
Hagel: They include:
Unlock assets from adjacent markets: Today, a business can be a major transportation-for-hire company without owning any vehicles, or offer travelers accommodations worldwide without owning...
Align price with use: Today, pay-per-view isn’t the only thing you buy on a per-use basis. Companies are now offering usage-based pricing on everything from cars to car…
Turn products into product platforms: Rather than focus solely on guarding information, creators of product platforms balance the need to protect intellectual property with the value that can…
Shorten the value chain: The changed economics of value delivery can challenge the viability of incumbents with long, complex value chains. New technologies are allowing…
Unbundle products and services: Products like newspapers and pop-music albums—once thought to be the smallest viable unit of sale—are now being disaggregated into their component…
Expand market reach: By making more products available to a larger audience, technologies such as the Internet are making it possible for organizations to fulfill the “long…
Converge products: “Bundling” functions from formerly distinct products into a single offering can give customers a more economical and convenient way to access those…
Distributed product development: Using collaboration and information-sharing technology, organizations today can mobilize a multitude of third parties to help develop products and…
Unlock assets from adjacent markets: Today, a business can be a major transportation-for-hire company without owning any vehicles, or offer travelers accommodations worldwide without owning any hotels. How are companies like these using adjacent markets—and are they making traditional, capital-intensive business models obsolete?
Shorten the value chain: The changed economics of value delivery can challenge the viability of incumbents with long, complex value chains. New technologies are allowing marketplace entrants to eliminate whole stages of the value chain, often dramatically reducing capital and infrastructure costs.
And read also:
Fresh Insights From Christensen on Disruptive Innovation
How Useful Is Christensen's Disruptive Innovation?
Learning Consortium for the Creative Economy
The Big Shift & The Shift Index
New Yorker: Battle Of The Strategy Titans
And follow Steve Denning on Twitter @stevedenning
