Competing through disruption

By Anil K. Gupta

Airbnb illustrates how a company can enter an industry and succeed against dominant incumbents by disrupting the traditional rules of the game. Founded in 2008, Airbnb enabled people to rent a spare bedroom (or even a spare couch) to another person at a price lower than what even budget hotels may charge. In the blink of an eye, Airbnb has become a global giant. Today, you can use Airbnb to also rent an apartment in Paris, a villa in Florence or even a castle in Scotland.

The latest funding round valued Airbnb at $ 25.5 billion, higher than the $ 20.5 billion market value of Marriott and close to the $ 27 billion market value of Hilton Worldwide. Airbnb has disrupted the lodging industry by redefining the concept of a hotel and a hotelier. Instead of large institutions which may directly own or control thousands of rooms globally, Airbnb uses the power of the Internet to enable almost anybody to become a hotelier. The hotel chains are now scrambling to figure out their response.

Generalising from the Airbnb story, there are three different strategies that newcomers – or existing players – can deploy to disrupt the existing dynamics of an industry. The three strategies differ in whether they disrupt one, two or all three elements of the incumbents’ business model: (i) deciding who your target customers will be, (ii) defining what products and services you will offer, and (iii) designing the value chain through which you will create and deliver these products and services.

One option, call it Disruption Strategy D-1, is to dramatically reengineer the value chain without much change in the products and services or the targeted customers. This is how Amazon got started in 1994. There was nothing different about Amazon’s customers or the books they purchased. What differed dramatically was Amazon’s value chain. Unlike Borders or Barnes & Noble, Amazon had no physical book stores. It took orders over the Internet and shipped the books directly from its warehouses. As a result, Amazon could offer a dramatically wider selection at dramatically lower prices. The rest is history.

Another option, call it Disruption Strategy D-2, is to dramatically redefine what products and services you will offer. Generally, this will also require a significant redesign of the value chain but may not call for a rethink about the targeted customers. Take Starbucks. As Howard Shultz, the company’s founder, has often said, Starbucks is not your typical cafe but a ‘third place’ (other than your home and your office) where you would hang out and meet with friends and colleagues. A Starbucks outlet offered a larger seating area and free wi-fi inviting you to linger rather than rush out. This differentiation enabled Starbucks to tap into a latent market need and expand rapidly before competitors could catch on.

The third option, call it Disruption Strategy D-3, is to radically rethink all three elements of the business model: target customers, products and services offered, and design of the value chain. This is what Steve Jobs and Steve Wozniak did when they launched the first Apple computer in the late 1970s. Instead of large corporations, Apple targeted individuals and small businesses. Its computers were small, could sit on a desktop, cost only $ 2,000, and did not need much hand-holding. 

Last but not least, they were sold through retail shops rather than by dedicated salespeople sent by the company directly to the customer’s office. The result has been a complete transformation of the entire computer industry.

Building on the ideas discussed in this segment, I’d now like you to think about the following questions:

In your current industry, or an industry that you’d like to enter, how might you dramatically disrupt one or more elements of the traditional business model: (a) choice of targeted customers, (b) definition of products and services, and/or (c) design of the value chain.

How might you be able to quickly experiment and test whether your strategy would work?