Why are some business models disruptive whereas others are not? Why did Netflix disrupt Blockbuster but Zipcar did not disrupt the car rental industry? Why did Airbnb not disrupt the hotel industry? The answer to this question can help you assess the threat of new business models in your industry. You can then respond in a much better and thoughtful manner.

What is Disruption?

Disruption is the displacement of an incumbent. It often refers to a massive displacement and not a minor loss of share. Losing 5% market share is not disruption but falling from 70% share to 15% is a disruption. Often disruption involves the exit of the incumbent.

Losing 5% market share is not disruption but falling from 70% share to 15% is a disruption

How does disruption play out in an industry? Something changes in the environment which requires the incumbent to respond. It could be a change in technology, product, or just what is important to the customers. The incumbent reacts but the response is ineffective. What the incumbent offers somehow does not match up with competing offerings. It tries many things but it keeps losing share and in the end, is just unable to compete. At that time it has already lost massive market share and profits.

The question is why does this happen?

The Mechanism of Business Model Disruption

For a business model to become disruptive, it must do two things.

A. Replace Existing demand

First, the new business model has to substitute an existing business model in the market. When Netflix offered video rental by mail, it didn’t create a new market or segment the old market. Customers began to replace renting at the local store with renting online. On the other hand, Zipcar did not substitute the car rental market. Instead, it created a new market of rent by the hour which did not exist earlier. it did take a small share from the traditional car rental firms, but did not disrupt.

A new model substitutes an old model usually because it provides the same value but does it better. As a result, it places a new comer at an advantage over incumbents.

Netflix business model replaced the traditional model. By centralizing the inventory, it increased movie choices and eliminated the cost of stores. This placed Netflix at a major advantage over Blockbuster.

B. Prevent Incumbents from embracing new models

If an incumbent can easily embrace the new business model, it would not suffer a disruption. But this does not always happen.

When Apple brought apps to mobile devices, it threatened Google’s search business. Google embraced the mobile paradigm with its Android platform and enhanced mobile search. It became more dominant in mobile search.

But often a new business model prevents companies from embracing it. That is when disruption takes place

Similarly, Netflix and Hulu began selling video content on subscription over the Internet. Consumers could watch shows on any device at home or on the go. The viewers valued this feature and lower costs and began cutting the cord. Cable companies emulated some of the benefits such as streaming ability. There has been no disruption of incumbents due to these new models.

But often a new business model prevents companies from embracing it. That is when disruption takes place. Three critical reasons contribute to the inability of incumbents to embrace new models:

1. Rigidities

Sometimes existing activity systems prevent incumbents from embracing new models. Blockbuster could not adopt the new business model in a costless manner. It would have had to sell its stores and lay off thousands of people. It was not easy to do that.

At other times, existing contracts and reliance on partners create rigidities. When Dell created a direct to consumer model in the PC industry, the incumbents could not embrace it.  The incumbents relied on their resellers for all sales. By embracing the new model, they would have started competing with their resellers. This could have resulted in boycotts by resellers. As a result, resellers created rigidity for the incumbents.

2. Competitive Advantage

If an incumbent loses its competitive advantage by adopting a  new model, it will hesitate to do so. Walmart has a strong competitive advantage from the rural presence of its stores. If it embraces the online platform, it will dilute its competitive advantage. At the same time it will compete in an area where Amazon has a stronger competitive advantage. In such situations, an existing competitive advantage prevents firms from embracing new models.

[easy-tweet tweet=”The reason why some business models become disurptive is that incumbents cannot embrace them”]

3. Economics

Sometimes, there is just not enough profit in the new model and thus it makes no sense to adopt it. Index funds heralded a business model where profits were lower than in previous models. It made it harder for incumbents to embrace the new business model.

Conclusion

If you see new models emerge you must ask these two questions to assess whether they will become disruptive or not. First, will the new model substitute the existing model? Second, will you find some major rigidity which will prevent you from embracing the new model? If the answer to both the questions is a yes, you are looking at a potentially disruptive business model.

These two questions help you assess whether emerging business models will become disruptive or not

Are emergining new business models in your industry disruptive or benign?