What is driving the age of disruption today? Why are more disruptive events taking place more often and at a faster speed? Has the world really changed that much and if yes what is behind it?
Three major drivers of disruption are ushering in the age of disruption. First, network based economic models. Second, internet as a great leveler. Third, increasing wealth inequality.
Network Economics based business models:
When you buy a product such as a toothpaste, the value you derive from it is entirely from the toothpaste. But when you buy a telephone you derive a lot more value from how many other people are using a telephone. If you had the most sophisticated telephone in the world but you were the only user, it would be worthless to you. In other words, the total value of a product consists of the value from the product and the value from the user base.
This segregation of value tells you whether network economics is in play or not. Greater the value from the user base as a part of the total value from a product, greater the network economics. As a result, the toothpaste business has no network economics. But the telephone business has high network economics.
Consider businesses like Ebay, Facebook, Google, and WhatsApp. The common theme among them is the extent of network economics at play. Many new business models have high network economics. These forces are at play in Uber, Airbnb and WhatsApp. If 50 users used Uber it is almost worthless to either drivers or riders. But as an increasing number of people use it, it becomes more valuable to both the drivers and riders.
Research has shown that ‘winner takes all’ in a network economics environment. It is like a virtuous cycle where more people using a product makes the product more valuable.
In network economics, the speed of adoption increases as more people adopt a product because it becomes more valuable. This explains why Uber became ubiquitous in just 7 years from birth in 2009.
This explains how ‘network economics’ business models are driving the age of disruption.
Internet as a great leveler
Internet has democratized access to markets, supply base and technology to a great extent. It has driven down marginal cost of communication to zero – a message to one person or a million costs the same. It has also enabled enormous interconnectedness. These have quashed the old entry barriers across industries.
In the previous century if a new entrant had to enter the shave care business, it was pretty much impossible. Shelf space and access to a distribution network was a major barrier. But today, Dollar Shave Club has taken over 8% of the shave care market in a few years. It developed a creative message, a new business model and reached millions. It did this without a distribution network. The internet allowed it to access millions of users at a low cost. Social media, built upon enormous interconnectedness, has enabled market access at viral speeds.
Today, one can access skilled freelancers on the internet irrespective of where one is based. The world has shrunk here too. It is now possible to hire a designer in UK, or a coder in India, or a video producer in New York within a few hours while sitting anywhere in the world. Information asymmetry and access asymmetry are things of the past.
Today technology is being democratized. Where in the past, one needed an expensive studio to produce content, one only needs an iPhone today. Instead of an expensive darkroom, one needs adobe photoshop for a few dollars a month today.
In short, the Internet has leveled the business world to a great extent. A startup can access million of consumers fast and at low costs. It can access superior skills fast and without upfront investment. It can also access superior technologies at low costs. The advantage of large established firms are dwindling.
As a result, a small company such as Dollar Shave Club can become an overnight sensation now.
Increasing Wealth Inequality
The fact that wealth inequality is increasing is common knowledge. This has led to concentrated wealth with a few. Such wealth seeks sophisticated investment strategies undertaken by venture capital and private equity. Venture capital and private equity seeks higher risk ventures for significant payoff.
Such investment managers are more likely to fund major disruptive ideas than safe ideas. This burgeoning wealth has been increasingly chasing disruptive business ideas. This also explains the increasing prevalence of disruptive ideas in so many industries.
It is ironic that senior managers investing in venture capital are funding disruptive ideas. These same ideas are coming back to haunt their own businesses.
As a result, the age of disruption is being driven by three key factors – network economics based business models, internet as a great leveler, and wealth inequality.
How many of these three factors do you recognize at play in your industry?