Monday, 4 November 2019

ARTICLE 8: Disruption

NOTE: In order to better understand all the ideas presented within this blog, I encourage you to first read the book: Renegades of Disruption: How To Overcome Humanity's Overwhelming Resistance To Change & New Ideas. 

You can download a free PDF version with this link:
Renegades of Disruption

You can also order a physical copy of the book here: 
Renegades of Disruption (Paper Copy)


Disruption

NOTE: this blog was initially used as a working manuscript for Renegades of Disruption. The material found here was edited, built upon, and published in the book. 



At its core, disruption is a business innovation that initially targets a separate market than the market it eventually disrupts. We will explore this in more detail using recent examples of streaming services.


Terminology

We have discussed the perils of relying on strict terminology at some length already. When terminology moves from one field of study to another, it needs to be simplified and effectively communicated to those who expertise is not in the field of origin. There is often some dispute over the use of the term ‘disruption’ in the Field of Business.

For instance, Uber, the ride share company, is not thought of as true disruption to the taxi market, since it is targeting the exact same market. For true disruption to occur, the innovative technology or process cannot initially target an existing market. It targets a new market. For more info on this, check out the book: "The Innovator’s Dilemma" by Clayton Christensen.


The Four ‘Levels’ of Disruptive Change

In order to clear up this confusion on the terminology of ‘Disruption,’ we can plot different severities of disruptive change to better represent what exactly is occurring. The four different levels of disruptive change are as follows (examples are provided afterwards):

1) Incremental Disruptive Change: These are minor changes that a business utilizes in order to gain a stronger Competitive Advantage over its competitors. An example of this was Netflix introducing the ability to skip intros while binge-watching TV shows on Netflix. This may appear quite trivial, which is why it is an incremental change, but it adds to the addictive nature of binge-watching and changes the viewing experience for its customers. This style of change is cumulative. Other such ideas form Netflix are the viewing algorithms that suggest content based on a customers viewing history.

2) Transitional Disruptive Change: This is change that can quite drastically disrupt an industry, but typically competes for existing market share. A good example is companies like Uber and AirBnb. Although they are in direct competition for existing markets, they still disrupted the existing industry quite drastically, and often forces existing companies to re-evaluate its business operations.

3) True Disruptive Change: This style of disruption is the conventional use of the term, as outlined by Clayton Christensen’s research in his books, “The Innovator’s Dilemma” and “Disrupting Class.” This style of disruption initially targets a completely new market until it hits a critical mass of its own market and eventually disrupts established markets. We will explore this in more detail with the case of Netflix and Blockbuster Video.

4) Fundamental Disruptive Change: This style of disruptive change sends shockwaves throughout the world, and often spreads from the originating role to the other 4 roles of the world’s organizational structure. The Internet is a terrific example of this: Laws can barely keep up to address legal issues pertaining to Internet issues of things like copyright or online bullying, the Role of Information has been compromised due to issues like the Fall of Journalism, and the increased ability to effectively communicate on a large scale individual level makes it possible for record-breaking protests in places like Hong Kong, 2019.


Blockbuster Video & Netflix

We have discussed this to some degree in both the book and podcast, but today, we’re going to dive a little deeper into just what exactly happened.

Blockbuster Video was a retail chain that rented movies and video games, and a significant portion of its profits stemmed from late fees (SOURCE). When Netflix entered the movie rental business, it did not need to rely on late fees as a source of profits since it had far less overhead costs than retail stores like Blockbuster Video did. Netflix allowed customers to order and DVDs via mail, and these customers could keep the movies as long as they wanted, but they had to return them in order to rent more movies.

Had Netflix not entered the streaming services industry, then its business model likely would not have disrupted the movie rental business to such a severe degree. The reason is that Netflix and Blockbuster video were competing for the same market: people that wanted to rent physical copies of movies. This style of ‘transitional’ disruption is similar to what happened to many retail outlets that compete with companies that deal exclusively with online stores.

If Netflix had continued to solely focus on the rental DVD market, then Blockbuster could have simply copied the business model and directly competed for the same customers. Most retail companies have an online component to their business strategy. The important thing to remember is this style of transitional disruption does not typically result in a new market. It changes the market slightly since customers now have more options: they can go to a physical store for the experience / faster service, or they can choose the online option, which is seen as more convenient for those that prefer it.


Disruptional Change

However, Netflix pursued a new emerging technological innovation: streaming services. Today, in 2019, the streaming market is quite different than when Netflix started out. It may be difficult to remember but the streaming component of Netflix’s overall strategy was not initially targeting the rental market. It was targeting a brand new market: Those that simply wanted something to watch, but were not too picky what they were watching. The majority of the movies and TV shows Netflix had the right to stream were quite old or obscure, which makes sense because until they had a larger market share, it would not have been profitable if they had initially tried to target new and popular movies and TV shows (like they do in 2019).

Once Netflix gained a larger market share, it now became more profitable to stream the same types of new movies and TV shows that rental businesses like Blockbuster Video offered. At this point , the streaming component of Netflix’s business came into direct competition with the rental video market, and the rental market didn’t stand a chance due to the now overwhelming list of advantages of streaming services over rental businesses like Blockbuster Video:

  • no late fees
  • significantly lower costs
  • binge watching (which is addictive - see book)
  • much more viewing options than any single retail store could offer
  • the convenience of not needing to leave the house
  • etc.


Rogers Adoption Curve

In terms of Netflix, I was an Early Adopter (See book and podcast for more info on the Rogers Adoption Curve, or you can also Google it - even if something isn’t referenced, I assure you I didn’t just pull it out my butt), so I remember when Netflix was still considered a niche idea, and Blockbuster Video still had most of its locations open since the movie rental business had not yet been disrupted.

Once more customers opted to switch their primary source of video watching from movie rentals to streaming services like Netflix, the Adoption Curve accelerated in speed as the early and late majority joined the streaming party, and then the disruption occurred.


The Innovators Dilemma

You can read more about disruption (with different examples than streaming services) in books written by Clayton Christensen. The Innovator’s Dilemma, and Disrupting Class. In it, Christensen really drives the point home that the initial market of the innovation is not the same market that is going to be disrupted. Streaming services like Netflix were not initially in competition with rental business. It creates its own initial market, which can be plotted along the Rogers Adoption Curve.


Mass Disruptional Change on a Fundamental level

Streaming services did not exactly disrupt the viewing experience on a fundamental level, at least initially. For the customer, not much really had changed. They instead now got their movies online and instantly, rather than thru or a store or thru mail service, but did something eventually change in terms of the experience that carried with it unintended consequences?

Binge-watching could be argued as a mass disruptional change on a fundamental level since the level of consumption rose dramatically. Do I really need to provide a source for this? I already discussed this in the book, so I won’t expand on it further here. And I certainly don’t want to sound like a hypocrite. I also binge-watch shows. Most things are fine in moderation. Feel free to research the problems associated with binge-watching on your own if you’re curious.


Fundamental Mass Disruption of Journalism

Do I sound like a broken record yet with the amount I refer back to this? There’s good reason. The fall of Journalism has sent global shockwaves throughout our world. So much so to the point that the other four roles have had to take over the role of Journalism in our world. We are witnessing this disruption occur before our very eyes:

The United Nations’ website offers a lot of different info on various global matters, as part of the Role of Government (https://www.un.org/en/sections/news-and-media/).

The Vatican’s website does the same as part of the Role of Religion (https://www.vaticannews.va/en.html)- as a side note, I’m not trying to be biased towards the Vatican - they just represent the religion I am most familiar with since its the religion I have had the most exposure to in Canada. However, I am slowly learning a few things about other religions and systems of belief.

The Role of Business also shares different stories. You can check out some pretty neat ‘news’ stories on management consulting websites like Mckinsey and Company (https://www.mckinsey.com/).

The Role of Individuals: responsible and informed individuals, such as yours truly, are attempting to take over the role of journalists, as part of the Role of Information. After all, the podcast is basically a crisis message made by one entity in the Role of individuals…



#YouBuying?
#ViableUnderdogs

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References

This article was explored in much greater in the book, Renegades of Disruption, so I encourage you to go read it there. To learn more about the business term, Disruption, check out the following book:

Christensen, C., (1997). The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press.  

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