For eight years I’ve visited leading companies in more than 20 industries around the world that claimed to be in the process of being disrupted. Each time, I’d ask the executives of these incumbent companies the same question: “What is disrupting your business?” No matter who I talked to, I would always get one of two answers: “Technology X is disrupting our business” or “Startup Y is disrupting our business.” But my latest research and analysis reveals flaws in that thinking. It is customers who are driving the disruption.
In the common scenario that executives think technology is trying to disrupt their business, they try to find a way to develop that technology internally or buy it from others. Major auto companies like GM and Ford are a good example: they have spent billions to buy and then build electric and autonomous driving technologies.
If the disruption threat is coming from a startup, then the incumbent often tries to acquire it — if the valuation is low enough. They can also try to compete with the startup on price, as a means to block their advance. In most cases I have seen, neither of these responses worked as intended.
For an example of the acquisition route, consider Yahoo. It was once the leader in the nascent search engine space, but lost the top position to Google and then lost the second position to Microsoft’s Bing. In response, then CEO Marissa Mayer went on a shopping spree to acquire technologies and startups in an attempt to regain the crown. As of 2016, Mayer had acquired 53 tech startups, spending between $2.3 and $2.8 billion, and countless hours of her top executives’ time with M&A due diligence. Yahoo eventually shut down 33 of these start-ups, discontinued the products of 11 start-ups, and left five to their own devices, failing to assimilate them. In all, Yahoo only fully integrated two of these companies: Tumblr and BrightRoll. In 2017, unable to grow, Yahoo was acquired by Verizon for $4.8 billion, a far cry from its peak valuation of $100 billion. (Verizon is now reportedly looking to sell Tumblr.)
What these companies seem to have missed is that the most common and pervasive pattern of disruption is driven by customers. They are the ones behind the decisions to adopt or reject new technologies or new products. When large companies decide to focus on changing customer needs and wants, they end up responding more effectively to digital disruption.
My analysis has grown from visiting or talking to executives of established companies and then having similar conversations with their challengers. In my book, Unlocking the Customer Value Chain, I talk about the incumbent-disruptor pairs in the list below. Based on the interviews and analyses of these industries I uncovered a common underlying pattern of customer-driven digital disruption. Disruptive startups enter markets not by stealing customers from incumbents, but by stealing a select few customer activities. And the activities disruptors choose to take away from incumbents are precisely the ones that customers are not satisfied with. Birchbox stole sampling of beauty products from Sephora. Trov stole turning insurance on and off from State Farm. PillPack stole fulfilling prescriptions from CVS.
When Customers Drive Disruption
Many of the standard ways of thinking about which new growth markets large conglomerate companies should enter revolves around the idea of “adjacencies” and “synergies,” at the firm-side. For instance, by manufacturing motorcycles and lawnmowers, two seemingly unrelated categories, Honda has gained production synergies that allowed it to become better and more cost-effective in both markets.
But if customers are at the center of disruption, companies need to understand how to offer customer-side synergies. Successful growth is dictated by benefits accrued to the customer, not to the company. After all, it is they who choose whether to adopt or acquire your new products or not. This is where a coupling strategy comes into play — it’s the concept of creating new products that create meaningful synergies with your original product. In other words, it makes it cheaper, easier or faster for customers to fulfill their needs as compared to using two products from different companies. One of the clearest ways to couple is to launch new products or services that are immediately adjacent to (i.e., occur before or after) the activities that consumers already undertake with the business.
Airbnb is an example. It started in the hospitality and travel industry by offering home-sharing. After considerable growth with the original offering, it moved into offering its users an online discussion forum and planning tool for travel—an activity travelers often perform before booking an Airbnb home—and then it moved into offering local leisure experiences for guests during their Airbnb stays. According to Brian Chesky, one of Airbnb’s founders, the goal is to eventually cover all the key stages of the customer value chain (CVC).
Alibaba’s customer side focus
Alibaba offers an excellent example of this type of customer-focused growth. By 2018, the company had become one of the world’s largest by market capitalization, with more than ten multibillion-dollar businesses in wide ranging sectors such as retailing, ecommerce, online cloud services, mobile phones, logistics, payments, content, and more. Between 2011 and 2016, the company’s revenues grew at an average compound annual rate of 87%. Profits jumped by 94% and cash flow by 120%. Such rapid growth was quite unique for such a large and established digital company.
So how did Alibaba do it? Founded as an online business-to-business marketplace, in 2003 the company moved into consumer-to-consumer ecommerce and in 2004 built both Aliwangwang, a text message service, and Alipay, an online payments service. The next year, it went on to acquire Yahoo China in an effort to provide consumers with content and web services. In 2008, it launched TMall, a business-to-consumer online retailer, followed in 2009 by Alibaba Cloud Computing, a cloud storage company. Other new business launches proceeded in turn: a search engine company named eTao (2010), a start-up called Aliyin that created mobile operating systems (2011), and a logistics consortium named Cainiao (2013). In 2015, Alibaba took a majority stake in smartphone maker Meizu. Note how many of these companies operated in non-adjacent industries. The synergies between retailing, cloud computing, payments, and electronics manufacturing are not immediately clear. Businesses in these industries require different resources and employees with widely varying skillsets in order to compete. So why didn’t the company stick with its original, business-to-business online marketplace and focus growth there in order to dominate the market and achieve competitive advantage by traditional economies of scale?
Alibaba’s expansion strategy focused squarely on customer-side synergies and CVC adjacencies. In 2016, around 50% of online shopping took place via mobile phones, with the rest occurring on laptops, desktops, and tablets. To shop online, consumers first had to decide which device to use to access the internet, and implicitly, which operating system and browser combination. After that, most consumers opened browsers and pointed at websites, accessing their communication services, email, social networks, chat apps, and so on. At some point, they identified a need to make a purchase and performed searches either outside ecommerce websites (for instance, on Google or Baidu) or inside them. From there, consumers arrived at the most appropriate ecommerce sites. In China, business customers went to Alibaba, while consumers went to Taobao to shop for products from other consumers or to Tmall to shop products from retailers.
To obtain more product information or to negotiate prices (a common practice in China), buyers communicated with sellers, usually by chat apps. Consumers then had to pay for their purchase and wait for a logistics operator to deliver it. This represented the extent of the typical online shopper’s CVC. Analyzing this CVC, we spot a clear pattern. Alibaba began growing by focusing on a single stage of the shopper’s CVC with its Alibaba website. It then moved outwards to capture other customer activities. Instead of using the traditional industry adjacencies approach (payment, mobile phones, and logistics are not adjacent industries), the company opted to move into adjacent CVC activities. By 2018, the company’s businesses were serving most of the CVC activities. Alibaba didn’t immediately pursue firm-side synergies. Its real win lay in achieving customer-side synergies. That, in turn, convinced its customers to couple.
The main hurdle of pursuing the coupling strategy is that this may lead your company into vastly different businesses that require vastly different people, skills, and capabilities than the ones your company possesses. In the case of Alibaba, it went from ecommerce to financial services, to search tools, to logistics, to hardware and to software. There is very little firm-side synergy in these businesses.
When I present coupling as a growth strategy to my clients, I warn them of this hurdle and ask them to fill out a table of the skills they think will be required to succeed in a new adjacent activity, whether they have that skill and, if not, how they plan on obtaining those skills. This exercise is simple, but essential. I ask them to list up to four activities they want the company to accomplish. Then, they list the required skills and their available skills. Finally, to get the skills they don’t have, do they need to build, borrow, or buy? So, borrow it from others via partnerships or buy it through acquisitions or recruitment? What they cannot do is disregard the need to bridge those skills gap.
Many established companies ‘pigeonhole’ themselves too narrowly in a specific industry. As a consequence, their area for exploring new growth is limited, not by their potential or their capabilities, but by arbitrary industry definitions. The fastest way to grow is to offer something that your current customers, those most loyal to you, would gladly pay for if you provided it and that, by virtue of them acquiring this new offering, it would make your original product or service even more valuable to them. And here is the catch: the new products that are launched do not need to be better than those of the established companies to be successful. As long as new products have synergies for the customer, they will likely get adopted.
Disruption is a customer-driven phenomenon. New technologies come and go. The ones that stick around are those the consumers choose to adopt. Many of the fast-growing startups such as Uber, Airbnb, Slack, Pinterest, and Lyft don’t have access to more or better innovative technologies than the incumbents in their respective industries. What they do have is an ability to build and deliver faster and more accurately exactly what customers want. This is causing the change-of-hands of sizable amounts of market share is relatively short periods of time. That is the basis of modern disruption in a nutshell.